Indian developer ReNew Power last week concluded the biggest deal in the Indian renewable energy market to date. It agreed to acquire Ostro Energy from emerging market investor Actis in the country’s largest renewables M&A transaction, which is reportedly valued at INR100bn (€1.2bn).

This deal will help establish ReNew as India’s largest renewables player: it enables the developer to add Ostro’s 1.1GW renewables portfolio to its own, which is now over 5.6GW, of which 2.2GW is wind farms. This gives ReNew a 9% share of India’s wind market.

And the transaction is the most high-profile in an ongoing wave of consolidation in the Indian renewable energy sector. In the last two years, we’ve seen Tata Power buy Welspun’s 1.1GW renewables arm; Greenko acquire the 500MW Indian portfolio of SunEdison; and Greenko is also now looking at a $1bn acquisition of Orange Renewables too. This is set to continue in the next few years.

This consolidation activity is a result of wider changes in India, including falling prices of wind energy and the consequent reduction in profit margins.

For example, in an auction in December, tariffs fell to a record-low of INR2,430/MWh (€30.38/MWh). Lower tariffs have cut returns and forced smaller developers to exit the market. Meanwhile, bigger players, which have been able to attract foreign money, have started a way of consolidations to strengthen their positions. Foreign capital is proving crucial.

The ReNew-Ostro deal in particular shows how foreign investors are contributing to reshape the renewable energy market in India.

ReNew has been able to pursue its consolidation strategy thanks to strong funding from overseas investors. The developer is backed, among others, by Goldman Sachs, Japan’s Jera and Canada Pension Plan Investment Board.

The latter, pension fund CPPIB, backed ReNew for the first time in January as it bought a 6.3% stake in the company from the Asian Development Bank for $144m. It has now invested a further $247m in ReNew to support its acquisition of Ostro.

And ReNew is not CPPIB’s only target in India. The Canadian fund set up an office in the country in 2015 and has so far invested around $3.7bn. Last year, it also allocated a further $1bn for public market investments in the country.

Other investment funds are looking at India too. For example, Canadian investment manager Brookfield’s chief executive Sachin Shah said its acquisition of TerraForm Global provided a platform for further growth in the Indian market and it is now reportedly looking to buy renewables assets in India, including wind farms.

Foreign investment has been key to the development of the Indian renewables market. In total, the renewable energy sector in India attracted investment totalling $11bn last year, according to a report published by the United Nations Environment Programme last week. Of this, $7bn went to solar and $4bn to wind.

However, this was down 20% compared to 2016. The country’s renewables sector needs to attract much more capital, if it is to achieve its ambitious renewables goal. Prime Minister Narendra Modi is planning to reach 175GW of installed renewable energy, including 60GW of wind, by 2022. This would require investments totalling up to $125bn in four years, with is triple its current annual, investment by 2022.

But there are some challenges to overcome.

Foreign investors have been focusing their attention on India because its economics and the support showed to the sector by the government are attractive, if compared to other emerging markets. However, the wind sector also faces challenges including policy uncertainty and falling energy demand.

Government policies and auctions have driven up growth and pushed down prices, but they have also increased risks. For example, aggressive bidding and competition have been forcing to bid without adequate financial buffers, embracing higher risks. This has brought smaller developers with little liquidity to exit the market, while foreign investors have focused their attention on bigger and more reliable players.

Foreign investors are helping to reshape the country’s renewable energy market and the ReNew-Ostro deal is an example of it. The government has now to work hard to attract more overseas investment to really make a difference.