Long term prospects for Renewables remain in-tact; Near term headwinds amid the COVID impact on discoms’ finances

The same has been mainly in the utility IPP segment, which has been driven by significant project award activity both under National Solar Mission as well as State Solar policies across the key states. With this, the share of solar segment in renewable energy capacity as on June 2020 remains the highest i.e. at 43%, followed by 40% by wind energy and rest by other renewable energy sources (such as biomass, bagasse & waste to energy). The wind power sector has however witnessed a subdued capacity addition over the last 3 year period since FY 2018, following a change in tariff route for the project awards i.e. from feed-in tariff to bid driven coupled with the execution headwinds as well. Going forward, the renewable energy-based capacity is estimated to reach to 120-125 GW by December-2022, with the solar capacity constituting 50% of the overall capacity followed by 38% from wind power segment and the balance 15% from other sources.

While this is lower than the capacity target of 175 GW set by the Government of India (GoI), the incremental capacity addition is estimated to be healthy at 35-38 GW with investment outlay of more than Rs. 2 lakh crore over the next two and half years. Within the renewable segment, the utility scale solar segment is expected to be very close to the 60 GW capacity target set by GoI, though there is likely to be shortfall in the rooftop solar and the wind power segments. The tariff competitiveness both for solar and wind energy in utility scale projects also remains superior from the ultimate off-takers being state owned distribution utilities. Bid tariffs in auction route for award of solar and wind energy projects have continued to remain well below Rs. 3/kwh for last 3 year period. On the contrary, average power purchase cost for state owned distribution utilities remains well above Rs. 4/kwh in most of the states.

Further, there has been an increasing focus by MNRE through Solar Energy Corporation of India Ltd (SECI) to award hybrid renewable projects, solar projects with peak & off-peak tariff as well as round-the-clock (RTC) availability based renewable projects recently in last six month period. Tariff discovery in auction rounds for such projects also remains favourable for the off-takers both in terms of competitiveness of tariff as well as mitigating the concern w.r.t. intermittency / variability of renewable generation to a large extent. From the viability perspective for IPPs, tariff viability will be critically dependent upon a)capital cost, b) PLF level, and c) long tenure debt availability at cost competitive rate. For utility scale renewable projects both in wind and solar segment, long tenure availability of debt with maturity of 17/18 year post CoD over the last 2-3-year period has also support ed bid tariff discovery to some extent. While module price behaviour has been declining the past period (although showed an upward trend in CY 2017 in between), the same remains a key variable which affects the project viability. This is also reflected from the fact that a 20% increase in the module price level is estimated to negatively affect the DSCR by 0.10 times from the base case DSCR level of 1.2-1.25 times.

Further, debt coverage metrics also remain exposed to variation in INR-USD rate (in case of imported modules) and interest rate, besides the exposure to PLF variation risk due to climatic conditions. Moreover, the risk w.r.t. sourcing of solar PV modules for under-construction solar projects as well as procurement of raw materials for domestic solar module manufacturing OEMs, especially from China and consequent cost implications would be a monitorable, given the backdrop of increasing geo-political risks between India and China. For wind energy project, PLF level remains a critical monitorable, given the requirement of PLF well above 35% for many of the projects bid out with tariffs below Rs. 3/unit. The PLF expectation is also supported by MW class wind turbines with higher hub height & selection of location having rich wind energy potential. While few wind energy projects (based on bid tariff PPAs) which have been commissioned in last 1 year have demonstrated PLF levels within 34-36%, sustained track record of such PLF levels remains to be seen and remains critical from viability & financing perspective. Nonetheless, the capacity addition in the renewable energy sector is expected to remain subdued at about 8.0 GW in FY2021 given the continued execution challenges amid Covid-19, because of disruption of supply chain as well as labour availability issues.

This has added to the woes of the sector which continues to remain plagued by issues such as delays in land acquisition and receipt of evacuation approvals, regulatory delays in tariff adoption and obtaining financial closure in a tight financing environment over the last 15-18 month period. The renewable IPPs have also been facing significant delays in receiving payments, especially from discoms in the states of Andhra Pradesh, Rajasthan, Tamil Nadu and Telangana. The discoms’ finances have been further constrained by the adverse impact of the lockdown imposed to control the Covid-19 pandemic. With likely energy demand decline at 5% during the current FY, the revenue gap for the discoms is estimated at Rs. 43,000 crore and this in turn is likely to increase counterparty credit risk for the renewable IPPs. The GoI’s announced liquidity support scheme in May 2020 for Rs. 900 billion for the discoms, in the form of loans against government receivables, from the Power Financial Corporation (PFC) and the Rural Electrification Corporation (REC) has been a short-term positive measure.

On the positive front, the discoms in states like Andhra Pradesh and Telangana have now started clearing past dues to the renewable IPPs, using the proceeds from the liquidity support scheme. Nonetheless, the sustainable improvement in discoms’ finances remains crucial for future investments in the RE sector, which is linked to improvement in operating efficiency of the discoms and aligning the tariffs in line with the cost of supply for the discoms by the respective state electricity regulators. This apart, a favourable resolution of the tariff issue for wind and solar power projects in Andhra Pradesh remains important for sustaining investments in the RE sector.

- Girish Kumar Kadam, Vice President, Sector Head - Corporate Ratings, ICRA Ltd