Road to paving new business models in India's Renewable sector

10 MIN READApril 28, 2020

MNRE’s COVID-19 Measures

  • MNRE took an early initiative to declare Renewable Energy (RE) as an essential service, and avoided any disruption in the operational Plants.
  • MNRE took an initiative to inform the states to ensure that RE projects will have MUST Run Status unless prevented by a Technical Constraint in the transmission system. Most of the RE projects are operational.
  • The billing processes are to be carried out as usual with minimal manual intervention and soft copy bills to be accepted.
  • It recognised the COVID-19 lockdown as a Force Majeure event and provided an add-on period of 30 days to remobilise the works on ground. This add-on period will be re-evaluated at the behest of industry participants.
  • Requested RBI to make RE as a beneficiary of the benefits announced by the Ministry of Finance to provide additional liquidity in the RE segment. Has initiated the process of Injecting additional equity in to IREDA and SECI.
  • MNRE is trying to understand the total outstanding amount to generate funds through IREDA, so that the old DISCOM dues can be cleared.

MNRE Initiatives to Boost the Renewable Energy Sector

  • Bids are taking place as per the agreed due dates and additional tenders are underway (for various technologies including Hybrids).
  • Developing measures to create a RE exchange platform similar to that of conventional energy.
  • Tabled the draft Electricity Amendment Bill 2020 which now focuses on a national renewable energy policy and various other initiatives.
  • “Make in India’ i s a prime consideration to reduce import dependency for wind, solar and any other RE Technology. Starting from ground level and manufacturing end-to-end facilities to support the domestic demand and explore options for exporting.
  • Plans being formulated to increase RE generation beyond the 175-gigawatt mark and to bring firmness in RE through battery storage or fuel cells to increase flexibility.
  • Keen to bring i n Hydrogen (green hydrogen) as an additional source into the renewables space.

Challenges discussed by industry experts

PPA disputes here to stay?

The ministry assured that Every PPA will be honoured. In the past there have been delays but no defaults – be it a State PPA or Central PPA. The ministry is aware of the concerns shared by investors. The past couple of years has had more Central PPA rather that the State PPA as the business has moved from state to centre.

Currently each consumer and DISCOM have their own rating mechanism in place which creates a different perception in the market while evaluating the State and Central PPA. There needs to be one rating mechanism used by everyone.

The ministry is trying to bring in an intervention where there will be a financial instrument guarantee contracts (akin to LC aspect seen in the Central PPA). The Andhra case has made the scene a little risky for business in India for the investors but MNRE has intervened at suitable junctures so that PPA’s are sacrosanct.

Expected timelines on the debt packages and liquidity stimulus – When and what shape and form?

The discussions by the ministry are at an advanced stage with possible solutions in sight within the coming months. Aid from the ministry of finance is sought to provide immediate measures to the RE segment. However, given the primary concern of the government is towards health, it may take time before the funds flow to the RE segment as well.

Force Majeure Release – possibility of looking at a monetary relief?

The current clauses on the Force Majeure provide a relief in terms of a time extension and is not sophisticated in terms of configuring both a time extension and monetary relief like in the case of change i n law. Cases of time extension warrants an escalation in cost. Most of the companies, be it a developer or investors are going to be facing monetary losses due to the lockdown. One would have to take a call and evaluate the business model accordingly.

There is anticipation of counterparties in rescinding or getting out of contracts. The EPC, O&M parties will be making claims for relief on account of lockdown and cost escalation as the relevant contracts will have monetary relief in addition to time extensions provided i n the PPA. As an outcome the developers will be expected to cough up the money to acknowledge the counterparty claims which will squeeze the equity returns. While the PPAs are becoming robust to fix difficulties, the ministry is currently looking at only a day-for-day time extension and the mobilization period to get back on track, which will not be enough.

Coordination on aligning movement

There is a need for direction for ease of movement of labour, material to the sites to facilitate ease i n restarting the work. Advisory from the ministry of home affairs does address RE and the ministry has written to the State secretaries to follow directions issued. The ministry has been conducting periodic meetings with the developers, investors, to understand the problems faced. An RE facilitation board is being created which will address the concerns and grievances and directly attend to them not only with COVID related measures but the segment as a whole.

Push to domestic manufacturing – What policies would be implemented?

The ministry is keen to encourage manufacturing in India as a part of “Make in India” strategy. The question that crops up is what policy framework & incentives are required to encourage manufacturing going forward. The immediate concern to kick start “Make in India” initiative is to get land from the states. The ministry would appreciate inputs from the industry regarding expected incentives or policy framework. The ministry i s looking for 100% value add in manufacturing and support the India growth story as well as export to other countries. The ministry will provide land and any other support that the government has control over, but fiscal benefit or incentives will be deliberated through plans.

Downside protection

The sector has a cap on the upside returns, however the downside risk is uncapped, while the participants are comfortable with the cap on the upside returns it favors a downside protection to the risks and shocks as well. This would increase the prospects of investments in the RE segment. With the upper cap being removed, the ministry is of the view that it would provide a better confidence to the developers. However, it is essential to increase the demand by the states.

Open Access

Open Access i s a means of business provided by the electricity act & supported by the ministry. New amendments which the ministry is working on will give more impetus to open access. The fear by DISCOMS of their cash customers being taken away by Open Access shall persist; however there are states like Maharashtra, Karnataka, Tamil Nadu where open access has been a success story. In the long-term basis open access is a good model to work on to get more stable returns though it is not immune to certain short-term hiccups.

Suggestions by the Industry Participants

Channels of funding – To bring back liquidity
  • Alleviating the difference perceived between a State and Central PPA
  • Explore ‘ Gas’ as an alternate mode of power generation (look to formulate policies and tender 24x7 gas as a business model)
  • Nudge the Public sector banks to support provide liquidity i n the segment through funding RE projects
  • Request the RBI for a specific TLTRO for the RE segment or power sector in general
  • Credit enhancement scheme for bonds by the IREDA, PFC, and RFC
  • Schemes by PFC and RFC to provide a loan to the DISCOMs which are given as grants to developers in exchange for reduction in tariff ‘Loan for grant’ scheme
  • Specific monetary relief to developers out of the Force Majeure clauses
  • Policy and incentives to encourage local manufacturing
  • Provide Downside risk protection
  • Resolve the difficulties faced in execution of PSAs with DISCOMs
  • Address the negative perception of the DISCOMS to open access model
  • To explore ways to mitigate the risk perception by banks to invest in RE sector
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