Indian Renewable Energy Sector and COVID-19: An Overview and Road Ahead

The government’s response in COVID-19 situation to address the issues related to supply chain disruptions, RE curtailment, and cash-flow crunches has been timely. However, the current situation should also be viewed as an opportunity for course correction to bring about structural changes involving financing, manufacturing, and contract enforcement in the RE sector. Going forward, this will pave the way for a smoother and more effective energy transition

May 27, 2020. By News Bureau

The renewable energy (RE) sector in India has gained significant momentum in the last five years, mainly driven by the Paris climate commitments and an ambitious target of setting up 175 GW of RE capacity by 2022. As per the Ministry of New and Renewable Energy (MNRE), India has 87 GW of RE capacity installed and 34 GW under construction, with another 30 GW in the process of bidding and tendering, as of April 2020. Many policy initiatives have been taken in the recent past to promote growth in the sector—these include removal of tariff caps, support for the KUSUM scheme in the budget, and the launch of Phase-II of the Grid Connected Rooftop Solar Programme. It was expected that these policy measures would boost RE deployment in the coming years. However, the COVID-19 pandemic has significantly impacted the growth in the RE sector in India.

Amid the global crisis followed by an extended national lockdown, it is crucial to take stock of how the current situation is affecting both the operational and under-development projects and how it would impact the landscape of the sector in the medium term.

Impact on existing and upcoming projects and short-term fixes

Around 21 GW of solar capacity, that was in various stages of implementation as of February 2020, would be impacted by the pandemic. This is on account of complete disruption in the supply chain due to unavailability of imported modules, inverters, labour, and other domestic materials such as cable trays and electrical parts. To address this issue, the MNRE has now directed respective implementing agencies to treat this epidemic as a force majeure event. It has granted a blanket extension for all projects under construction, without project-to-project scrutiny, thus relieving the agencies of administrative burden and avoiding the chances of future litigations.

Despite a prolonged lockdown, operational projects including utility-scale solar and wind, totalling ~70 GW, are allowed to operate, although with limited O&M staff. But given the fall in demand from commercial and industrial consumers and deferral of offline payments, discoms’ revenues are disappearing. There are concerns over their ability to pay for renewable energy generation, considering payments were being delayed to generators even before the pandemic.  This has been a legacy for the power sector and requires long-term fixes.

Rooftop solar (RTS) and open access projects are the most affected in the RE sector, owing to a complete breakdown of their revenue streams. This is especially evident for project developers in the operational expenditure (OPEX) segment. The deemed generation is not being off-taken by the consumers as their factories and offices are closed. In addition, state regulators have either retained tariff rates of the previous financial year (such as in the case of Gujarat) or have reduced retail tariff rates for all consumer categories (such as in the case of Maharashtra), which is likely to dampen the sentiment of consumers willing to opt for rooftop solar and open access, at least in the short term.

Given the small risk appetite of the industry, the legacy of under-achievement of targets, and the potential for local job creation, it is important to pay more attention to the RTS industry. Some of the immediate fixes could include waiving off banking charges or carrying forward banked energy from RTS and open access projects beyond the settlement period, which would otherwise lapse at the end of the financial year. In fact, the MNRE has directed three states – Gujarat, Karnataka, and Tamil Nadu to permit roll-over of banking arrangements beyond the settlement period, and is expected to extend it to other states as well.

Sectorial support in the medium term

Considering the foreseen downfall of the economy, both fiscal and monetary stimuli are anticipated in the coming months with an increase in government expenditure (and hence government borrowings) to boost the economic growth. This would likely reduce the pool available to be lent or invested in other businesses/projects, including in the RE sector. As a result, project developers might witness the cost of capital, which typically accounts for more than half of the bid tariff, going up.

Swift recovery of the economy and ensuring sustained development of the RE sector are essential for generating employment and meeting long term climate commitments. The government could consider setting up a fund to provide low-cost finance to greenfield projects and act as a payment guarantee from the discoms. The CEEW Centre for Energy Finance recommends several financial interventions such as the issuance of tax-free bonds, interest subvention, and subsidising the cost of credit enhancement to projects. There are considerable funds available for such government-driven interventions. For instance, according to a joint study by the International Institute of Sustainable Development (IISD) and the Council on Energy, Environment and Water (CEEW), coal subsidies by the government are estimated to be to the tune of INR 15,500 crores for FY-19. Diversion of such subsidies would help the Indian RE sector ride through the tide of uncertainty and progress towards meeting national commitments. This will either reduce the cost of projects and/or reduce exposure to risks associated with payment delays.

This epidemic has again brought to light India’s dependence on China for critical components. Imports from China have been rising continuously over the last five years. Export-Import data bank by the Ministry of Commerce and Industry shows that India imported cells and modules from China worth ~INR 12,000 crores in FY 18-19, which was 78 per cent of the total import value of cells and modules. The Indian currency has depreciated by ~10 per cent, over the last year, and is feared to deteriorate further on account of foreign capital outflow.

Such heavy reliance on imports, especially from China, could have long-term implications on energy security, trade deficits, and employment generation. It is therefore imperative that for the long run, boosting domestic manufacturing, diversifying import portfolios, promoting research and development and deploying strategic reserves for key components and resources should be key points on the agenda of policymakers.

The government’s response to address the issues related to supply chain disruptions, RE curtailment and cash-flow crunches has been timely. However, the current situation should also be viewed as an opportunity for course correction to bring about structural changes involving financing, manufacturing, and contract enforcement in the RE sector. Going forward, this will pave the way for a smoother and more effective energy transition.

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