Credit: Karsten Würth / UnsplashAre India’s Renewable Energy Targets Still Achievable Post-COVID?
August 18, 2020Infrastructure
India’s renewable sector has been growing in the last few years and prior to COVID-19, India’s renewable’s target stood at 175 GW by 2022 and 450GW by 2030, of which 88 GWs have already been commissioned. But given the economic and social impacts of the pandemic, industry players are questioning if this goal will be truly achievable or not.
COVID-19 has raised several questions on the possible delay in target achievement, the temporary or permanent changes in demand and its expected impact on various stakeholders. Some believe that COVID-19 has not impacted the renewable sector as much as the other infrastructure sectors. The few wrinkles being initially faced by distribution companies (DISCOMs) on payments have been ironed out by the ministry and Solar Energy Corporation of India (SECI) in the initial stages itself. The Ministry has been proactive during COVID-19 with weekly meetings of stakeholders with the secretary and has been resolving the issues in real time which has helped in tiding over various challenges arising during COVID-19. As the demand has picked up significantly over the past few weeks with levels reaching almost close to pre-COVID-19 levels, it is comforting to the industry players.
Energy Consumption and Transmission
During the COVID-19 pandemic, industrial demand has dropped while that of households has gone up which is quite logical. However, this has impacted the already fragile finances of DISCOMs as higher-value power is consumed by industries and households usually have a lower power price with gross subsidization playing a big role.
Given the huge land requirements of the sectors, there has been constant positive changes to land policies. SECI’s recent successful solar park development has been appreciated by all. The sector being invigorated with more such creative initiatives will help inching towards this target.
The transmission infrastructure is bursting at the seams as it is already exhausted and warranting the need for planning to move to the next stage with clear disclosure of long-term plans. The sector does not have many international experiences yet comparable to India given the kind of capacity and challenges nascent to the Indian market.
The sector has not been all negative, recently the sector has had fewer defaults. If this continues for a period of time, lenders will see the sector favorably. It is expected that the mutual funds are likely to view the sector with a kinder eye and start lending, while insurance agencies will increase the rating to RE projects shifting them from A- to A or A+ rating.
Health of DISCOMs
The losses raked in by the DISCOMs last year were over INR 38000 crores (US$5 billion) and the number is likely to increase to INR 58000 crores+ (US$7.7 billion) this year. The total debt of the DISCOMs is at about INR 4.5 lakh crores (US$60 billion) with a widening gap between ARR and ACS of 35-37 paise that is likely to double. DISCOMs are requesting for waivers on overdues. These numbers reflect a critical need for regulator focus to help tide things over.
Regardless of the partners of a Renewable Energy Project, ultimately power has to be purchased by the DISCOMs. This flow of supply is being hindered by the backlog on execution of power purchase agreements (PPAs). The industry would like to receive some clarity on when it would be signed. The time of signing and execution of the PPA will determine the future trajectory of the bids expected to come. A PPA is very critical as it creates a counterparty risk, as seen in Andhra Pradesh. States like Tamil Nadu and Telegana are facing a backlog of payments, Punjab is nibbling on the payments stating to pay 5-10% less.
The Government is undertaking the right steps with the privatization of DISCOMs however there is a need for faster and firmer steps. Unless the financial health of the DISCOMs are managed the possibility of achieving the targets will be dismal.
Financing Challenges
The sector has a penchant for large capital requirements; obtaining the same are met with many hurdles due to the requirement for seamless capital flows. Lending by domestic capital agencies is shut. Private sector is not very keen apart from the banks focusing on large project finance the focus of the banks is being shifted to retail.
There are a lot of restrictions on foreign borrowings, with the ECB guidelines restricting the amount borrowed, controlling the pricing and imposing end-use restrictions. So many restrictions are not welcoming for sourcing capital that is to be used for green energy projects which help India move towards a sustainable energy which ties in well with the self-reliant programme of India.
The late downgrade of projects by rating agencies has put them under a lot of pressure, posing a great systemic risk, specifically in case of mutual funds where the unitholder can take out the capital with paying an exit load but the paper held by the mutual fund is not liquid enough to meet the capital requirement.
Capital market investors have a negative outlook due to the lower ratings, while on-ground most of the projects are doing well. There is a sentiment issue impacting the ratings due to (i) DISCOMs’ poor health (ii) political risk and increasing streamlining measures by the government. Correcting this would help boost ratings but it would be a medium-term effort.
The payments security mechanism was a step in the right direction towards resolving the issues. This was however not fully implemented to the older projects; this should be extended, and payment period should be increased to at least 1 month. This will help get a better rating and resolve the finance.
Renewable InvITs
The list of renewable energy infrastructure investment trusts (InvITs) is not very long. InvIT as a product is looked at to achieve stable cash flows and returns with some capital appreciation and are primarily already operational assets. Unlisted InvITs can be a better story for the renewables sector.
The IRR provided by an InvIT is fairly higher than risk free returns making it a more attractive product. InvITs attract global wholesale investors. To make InvIT a better product, there is a need for more state projects with better track records to manage scalability.
Inculcation of ESG principles
Generally, ESG issues do get deliberated on in hindsight but never on forefront. The regulations do not yet require an environmental impact assessment or risk assessments or any clearances to be undertaken. The few of the concerned areas with ESG are (i) biodiversity related matters such as conducting habitat studies addressing critical impact on the migratory route in case of a wind energy project, (ii) social issues connected in acquiring land requiring assessment of vulnerable groups, taking consent from people involved, resource sharing within the project boundaries and evaluating compensation to non-title holder (iii) Managing the footprint specifically quantum of water used and vulnerability of the project over the period. Configuring these studies in the project cycle and timelines pose another issue. With renewable energy projects attracting more foreign capital, the focus on ESG is becoming more relevant with many international frameworks making integration from ESG perspective.
Future Outlook
There is a need for recalibration and although 19 PPAs have are in place for the 2017-2030 horizon, the actual generation has been lower than what the PPAs had anticipated. It is important that recalibration is done at these times to understand and forecast actual demand, as well as ascertaining the implication on the system and renewable energy sector, cognizance of which is essential. Recalibration is also needed due to the significant amount of debt in the sector.
Renewable energy is replacing the base load as we move along which is good. It is important to ascertain the level of base load that could be adhered to over the next 4-6 years. The ability of the financial system to support the sector is not comforting. With the RBI’s concern on implementing the credits, the sector needs to look at new kinds of financial products that could work for the sector.
To address the financial health of the DISCOMS, a very critical requirement is to bring in the amendment of the electricity act. Privatizations will be beneficial for the DISCOMs, one may even ponder to go to fundamental change of moving electricity from the concurrent lists to central lists. What the market needs is continuous ongoing measures and not interim efforts every 1-3 years.
COVID-19 has raised several questions on the possible delay in target achievement, the temporary or permanent changes in demand and its expected impact on various stakeholders. Some believe that COVID-19 has not impacted the renewable sector as much as the other infrastructure sectors. The few wrinkles being initially faced by distribution companies (DISCOMs) on payments have been ironed out by the ministry and Solar Energy Corporation of India (SECI) in the initial stages itself. The Ministry has been proactive during COVID-19 with weekly meetings of stakeholders with the secretary and has been resolving the issues in real time which has helped in tiding over various challenges arising during COVID-19. As the demand has picked up significantly over the past few weeks with levels reaching almost close to pre-COVID-19 levels, it is comforting to the industry players.
Energy Consumption and Transmission
During the COVID-19 pandemic, industrial demand has dropped while that of households has gone up which is quite logical. However, this has impacted the already fragile finances of DISCOMs as higher-value power is consumed by industries and households usually have a lower power price with gross subsidization playing a big role.
Given the huge land requirements of the sectors, there has been constant positive changes to land policies. SECI’s recent successful solar park development has been appreciated by all. The sector being invigorated with more such creative initiatives will help inching towards this target.
The transmission infrastructure is bursting at the seams as it is already exhausted and warranting the need for planning to move to the next stage with clear disclosure of long-term plans. The sector does not have many international experiences yet comparable to India given the kind of capacity and challenges nascent to the Indian market.
The sector has not been all negative, recently the sector has had fewer defaults. If this continues for a period of time, lenders will see the sector favorably. It is expected that the mutual funds are likely to view the sector with a kinder eye and start lending, while insurance agencies will increase the rating to RE projects shifting them from A- to A or A+ rating.
Health of DISCOMs
The losses raked in by the DISCOMs last year were over INR 38000 crores (US$5 billion) and the number is likely to increase to INR 58000 crores+ (US$7.7 billion) this year. The total debt of the DISCOMs is at about INR 4.5 lakh crores (US$60 billion) with a widening gap between ARR and ACS of 35-37 paise that is likely to double. DISCOMs are requesting for waivers on overdues. These numbers reflect a critical need for regulator focus to help tide things over.
Regardless of the partners of a Renewable Energy Project, ultimately power has to be purchased by the DISCOMs. This flow of supply is being hindered by the backlog on execution of power purchase agreements (PPAs). The industry would like to receive some clarity on when it would be signed. The time of signing and execution of the PPA will determine the future trajectory of the bids expected to come. A PPA is very critical as it creates a counterparty risk, as seen in Andhra Pradesh. States like Tamil Nadu and Telegana are facing a backlog of payments, Punjab is nibbling on the payments stating to pay 5-10% less.
The Government is undertaking the right steps with the privatization of DISCOMs however there is a need for faster and firmer steps. Unless the financial health of the DISCOMs are managed the possibility of achieving the targets will be dismal.
Financing Challenges
The sector has a penchant for large capital requirements; obtaining the same are met with many hurdles due to the requirement for seamless capital flows. Lending by domestic capital agencies is shut. Private sector is not very keen apart from the banks focusing on large project finance the focus of the banks is being shifted to retail.
There are a lot of restrictions on foreign borrowings, with the ECB guidelines restricting the amount borrowed, controlling the pricing and imposing end-use restrictions. So many restrictions are not welcoming for sourcing capital that is to be used for green energy projects which help India move towards a sustainable energy which ties in well with the self-reliant programme of India.
The late downgrade of projects by rating agencies has put them under a lot of pressure, posing a great systemic risk, specifically in case of mutual funds where the unitholder can take out the capital with paying an exit load but the paper held by the mutual fund is not liquid enough to meet the capital requirement.
Capital market investors have a negative outlook due to the lower ratings, while on-ground most of the projects are doing well. There is a sentiment issue impacting the ratings due to (i) DISCOMs’ poor health (ii) political risk and increasing streamlining measures by the government. Correcting this would help boost ratings but it would be a medium-term effort.
The payments security mechanism was a step in the right direction towards resolving the issues. This was however not fully implemented to the older projects; this should be extended, and payment period should be increased to at least 1 month. This will help get a better rating and resolve the finance.
Renewable InvITs
The list of renewable energy infrastructure investment trusts (InvITs) is not very long. InvIT as a product is looked at to achieve stable cash flows and returns with some capital appreciation and are primarily already operational assets. Unlisted InvITs can be a better story for the renewables sector.
The IRR provided by an InvIT is fairly higher than risk free returns making it a more attractive product. InvITs attract global wholesale investors. To make InvIT a better product, there is a need for more state projects with better track records to manage scalability.
Inculcation of ESG principles
Generally, ESG issues do get deliberated on in hindsight but never on forefront. The regulations do not yet require an environmental impact assessment or risk assessments or any clearances to be undertaken. The few of the concerned areas with ESG are (i) biodiversity related matters such as conducting habitat studies addressing critical impact on the migratory route in case of a wind energy project, (ii) social issues connected in acquiring land requiring assessment of vulnerable groups, taking consent from people involved, resource sharing within the project boundaries and evaluating compensation to non-title holder (iii) Managing the footprint specifically quantum of water used and vulnerability of the project over the period. Configuring these studies in the project cycle and timelines pose another issue. With renewable energy projects attracting more foreign capital, the focus on ESG is becoming more relevant with many international frameworks making integration from ESG perspective.
Future Outlook
There is a need for recalibration and although 19 PPAs have are in place for the 2017-2030 horizon, the actual generation has been lower than what the PPAs had anticipated. It is important that recalibration is done at these times to understand and forecast actual demand, as well as ascertaining the implication on the system and renewable energy sector, cognizance of which is essential. Recalibration is also needed due to the significant amount of debt in the sector.
Renewable energy is replacing the base load as we move along which is good. It is important to ascertain the level of base load that could be adhered to over the next 4-6 years. The ability of the financial system to support the sector is not comforting. With the RBI’s concern on implementing the credits, the sector needs to look at new kinds of financial products that could work for the sector.
To address the financial health of the DISCOMS, a very critical requirement is to bring in the amendment of the electricity act. Privatizations will be beneficial for the DISCOMs, one may even ponder to go to fundamental change of moving electricity from the concurrent lists to central lists. What the market needs is continuous ongoing measures and not interim efforts every 1-3 years.
Related Events
★ ★ ★ ★ ★ Club MeetingInfrastructureOptimizing Infrastructure Stressed Contracts in Brazil 
★ ★ ★ ★ ★ ConferenceInfrastructureLatam GRI Infra & Energy 2024 
★ ★ ★ ★ ★ ConferenceInfrastructureMexico Investors’ Forum: Building Bridges for Infrastructure Development 
★ ★ ★ ★ ★ Club MeetingInfrastructureHighways Concessions Portfolio in Brazil