The RE sector witnessed aggregate project awards of ~89 GW under the tariff-based competitive bidding route.

Girishkumar Kadam

- Vice President, Co-Group Head - Corporate Ratings, ICRA

ICRA's outlook for the renewable energy (RE) sector is stable because of factors such as continued policy support from the government of India, large growth potential, the presence of creditworthy central nodal agencies as intermediary procurers and improving tariff competitiveness, says Girishkumar Kadam, Vice President, Co-Group Head - Corporate Ratings, ICRA Limited. Excerpts from the interview…

Could you give us an overview of the solar energy sector in India?  Also brief us on the impact of the pandemic on this sector?

Overall RE-based power generation capacity increased at a CAGR of 17.1% over the past 5 years and stood at 93.0 GW as on February 2021, constituting 24.5% of the overall power generating capacity, increasing from 14.2% as of March 2016. The rising share of the RE capacity in the overall power generation capacity has been supported by strong policy support and improving tariff competitiveness of solar and wind-based generation. While the Covid-19 pandemic induced lockdown restrictions slowed down the RE capacity addition during the initial months of FY2021, the capacity addition picked up from October 2020, driven by the easing of lockdown restrictions and supply chain challenges.

The renewable energy sector added 5.9 GW in 11M FY2021 against 2.2 GW in H1 FY2021. The solar power segment however remains the key driver of capacity addition in the RE sector, with significant capacity addition over the past five years. This in turn increased its share in the overall RE mix to 42.0% as on February 28, 2021 from 15.8% as on March 31, 2016 and has surpassed the wind power capacity for the first time in January 2021. On the other hand, the execution headwinds in the wind power sector, led to subdued capacity addition over the past four-year period and lowered its share in the RE mix to 41.7% as on February 28, 2021 from 62.7% as on March 31, 2016

What is your take on the scope and potential for capacity addition in the RE space?

ICRA's outlook for the renewable energy (RE) sector is stable because of factors such as continued policy support from the government of India, large growth potential, the presence of creditworthy central nodal agencies as intermediary procurers and improving tariff competitiveness. These factors are likely to result in strong investment prospects in the RE sector. Thus, ICRA estimates an improvement in capacity addition to 11-12 GW in FY2022 from the estimated level of 7.5-8.0 GW in FY2021, backed by a healthy project pipeline of ~58 GW. There is a further upside potential for capacity addition in FY2022, given that imposition of basic customs duty (BCD) on imported photo-voltaic (PV) cells and modules from April 2022 may lead to some of the developers preponing their project commissioning to March 2022.

Considering the renewable purchase obligation (RPO) of 21.18% by FY2022 as suggested by the Ministry of Power, GoI and continuation of this level for FY2023 and with an electricity demand contraction of 2% in FY2021 amid Covid-19, a sharp improvement of 6.5% in demand growth in FY2022 and growth of 5% in FY2023, the incremental RE-based capacity requirement by March 2023 would amount to 68 GW for meeting the RPO targets. In line with this, the RE sector witnessed aggregate project awards of ~89 GW under the tariff-based competitive bidding route across wind, solar and hybrid projects so far, by the central nodal agencies and state distribution utilities. Within the awarded capacity, the project backlog remains sizeable with under-development capacity at 58 GW (including the 12-GW manufactured linked capacity tender), providing visibility on capacity addition in the near term.

What do you think the downside risks in the near terms?

The key downside risks for the solar sector in the near term arise from the delays in signing of the PPAs and power sale agreements (PSAs) for about 20 GW capacity tendered by the central intermediate procurers such as the Solar Energy Corporation of India Limited (SECI) and the NTPC Limited (NTPC). Given the expected increase in solar tariff rates amid the imposition of BCD on imported solar PV cells and modules, the risk of further delays in signing of PPAs/PSAs cannot be ruled out. Further, the progress in execution of the project pipeline has been hampered by execution related challenges related to land and evacuation infrastructure, also the extent of delays getting augmented by about 4-5 months amid lockdown restrictions in H1 FY 2021.Moreover, the prolonged payment delays from the state owned discoms towards the renewable IPPs especially in states like Andhra Pradesh, Telengana and Tamil Nadu, coupled with pending resolution of tariff renegotiation by AP discoms continue to remain the areas of concern, for the sector.

What supportive regulatory and policy reforms we need to fast track the solar energy projects?

While regulatory framework is supportive given the must run status available to wind and solar projects as well as through a presence of renewable purchase obligation (RPO) framework, the RPO norms as laid out by State Electricity Regulatory Commission (SERCs) still continue to vary widely across the states and are not in consistent with policy norms stipulated by Ministry of Power, GoI. In that context, consistency in RPO norms is required. More importantly, tariff competitiveness of solar energy has significantly improved over the last 2-3 year period, which would continue to remain a key demand driver for solar energy in the long run. Given this trend, the efforts by state owned discoms (as also being seen in few states) towards solarisation of agriculture feeders through distributed solar energy projects would remain a positive both for the solar energy sector as well as for the discoms, given that it should enable a greater penetration of cost competitive solar energy as well as reduction in marginal variable cost of power purchase - thus providing a cost relief - for the discoms.

What is your take on the financial health of discoms?

W.r.t. financial health of discoms which is a concern for the entire power sector, there is a serious need for them to improve their operational inefficiencies (i.e. to curtail aggregate technical and commercial losses in line with regulatory targets). This apart, cost reflective tariff adequacy as well adequate subsidy release from the state governments remain extremely crucial from the discoms' cash flow perspective, given the delays in tariff determination process as well as build-up of subsidy dues for discoms in many states. From the policy perspective, timely implementation of reforms proposed by GoI (such as various amendments proposed in Electricity Act w.r.t. delicensing as well as tariff reform related measures) and subsequent implementation by the state governments / distribution utilities remains critical over the near to medium term so as to ensure sustained financial turn around of the discoms in the long run.

What is your assessment on the impact of newly proposed BCD on the solar sector?

The GoI on March 9, 2021, approved a proposal to impose a BCD of 25% on imported solar PV cells and 40% on imported solar PV modules, with effect from April 1, 2022. The imposition of 40% BCD on solar modules is expected to lead to an increase of 23-24% in the capital cost of a solar power plant as modules form the major portion (~55%) of the overall capital cost. This increase in capital cost is expected to raise the solar power tariffs by 45-50 paise per unit, provided the module prices remain in line with the existing levels. However, clarity is awaited on the continuation of the SGD on imported cells and modules, which currently stands at 14.5% and is valid till July 2021.

For the projects that have been already bid out with a scheduled commissioning date post April 2022, and wherein modules may be imported post this date, the levy of BCD would be a change in law event under the PPA. In such cases, timely approval by the respective regulatory commissions and pass-through of the tariff increase to the off-takers would be critical for the project developers from the cash flow perspective. In addition, the module price trends remain a key monitorable for the solar power developers owing to the recent firmness in imported module prices.

Despite the expected increase in tariff arising from the imposition of BCD on imported cells and modules, the bid tariff trajectory is likely to remain well below Rs. 3/unit and thus would continue to remain cost competitive from the off-takers' perspective. For the state-owned utility off-takers, average power purchase cost and marginal variable cost of power purchase remain in the range of Rs. 4-5/unit and Rs. 3-3.5/unit respectively in many states.

How beneficial will this move be for the domestic manufacturers?

The imposition of BCD on imported solar cells and modules is a positive for domestic solar manufacturers as it is expected to improve the competitiveness of domestic cell / module manufacturers. However, the extent of benefit would also depend on the imported PV module prices, especially from China. Based on an imported module price level of 18 cents/watt and the prevailing INR-USD exchange rate, the domestic modules are costlier by 12-15% without the impact of BCD. The imposition of BCD would bridge this gap and make the modules from a domestic manufacturer (using imported cells) competitive against the imported modules.

The extent of benefit would be higher for manufacturers having backward integration into cell manufacturing. This apart, the stipulation to source modules from the manufacturers listed in the ALMM (currently comprising only domestic manufacturers) for projects under various government funded/assisted schemes would improve demand prospects for domestic solar cell and module manufacturers. However, the domestic manufacturers must augment their production and supplies to meet the demand from the developers, along with advancement in technology like the global peers. Also, clarity is required on the applicability of the ALMM order for projects awarded by the central nodal agencies and the state distribution utilities under the standard bidding guidelines, given that the ALMM list does not have any OEM having PV module manufacturing facility your outside India.

What is assessment on the impact of ultra low bids?

The sharp decline in the solar power tariff to about Rs. 2/ unit in few bids (as seen between November 2020 and Feb 2021) remains a positive from the off-takers' perspective, given the improved tariff competitiveness of solar energy. This decline has been mainly driven by a mix of factors including the expectation of a further decline in module price, lower cost of debt and expectations on higher energy yield aided (by the use of high-efficiency modules and/or trackers as well as relatively better radiation levels in location specific projects like in Rajasthan).Nonetheless, the viability of the competitively bid-based solar tariffs remains critically dependent upon the capital cost, the availability of long tenure debt at cost competitive rates and the PLF level. With the use of imported PV modules by most developers, the capital cost remains exposed to volatility in PV module price level and rupee - US dollar exchange rate. At the module price level of 18-19 cents per watt (for high efficiency modules) and USD-INR exchange rate of 75, the developers would have to secure debt funding at less than 9.0% and achieve AC PLFs of 27.8% (assuming DC PLF of 18.5-19.0% & AC-DC ratio of 1.5 time) for reasonable returns. Any adverse movements in the module prices would have an impact on the project viability and returns to the developers. Further, the recovery of additional cost impact due to imposition of customs duty is assumed for such bids through change in law as per PPA terms, given that BCD notification has been announced subsequent to such bids.

Hits: 25