The Standing Committee on Energy (2021-2022) has released its 21st report, titled “Financial Constraints in Renewable Energy Sector”. The report was presented to the Lok Sabha on February 3, 2022, and was laid in the Rajya Sabha on the same day. The report notes that according to the government, an additional investment of about Rs 17 trillion, including associated transmission costs, has been envisaged to meet the country’s long-term commitments. The country would therefore need an annual investment of Rs 1.5 trillion-Rs 2 trillion in the renewable energy sector. However, the estimated investment for the last few years has been in the range of Rs 750 billion. There is thus a huge gap between the required and actual investment, and filling this gap would be a difficult task that would require an enabling framework to be created by the government, according the committee’s findings.
An extract from the report covering the key financial constraints in the renewable energy sector, the measures taken by the government to boost investments and the key recommendations made by the committee to the government…
Key constraints
The report mentions that the following constraints have been highlighted by REC Limited.
- Re-negotiation of power purchase agreement (PPA) tariffs discovered through competitive biddings: In the past, some states have resorted to cancellation/renegotiation of tariffs discovered through competitive bidding. In case of Andhra Pradesh, an interim tariff of lesser amount (Rs 2.44 per unit) has been allowed by the State’s High Court, pending final decision. Such uncertainty and the consequential impact on revenues has affected the debt serviceability of the project as well as investors’ sentiment.
- Delay in adoption of PPA tariffs: As per statute, the tariffs discovered through competitive bidding are required to be adopted by central/state electricity regulatory commissions. While PPA off-takers are filing application for adoption of tariffs, there have been multiple instances of delay in disposal of tariff adoption applications by the electricity regulatory commissions. As the gestation period for renewable energy projects is generally low, renewable energy developers resort to aggressive biddings, estimating a fixed cost of implementation with timely project execution. Delays in tariff adoption further delay project execution and may cause time and cost overruns, thereby impacting the viability of projects.
- Delay in payment of energy bills by state discoms: Renewable energy developers are facing severe challenges in realising revenue on time from renewable energy generation. There have been cases of exorbitant delays in receipt of payments from various state discoms. Renewable energy developers in Telangana have witnessed payment delays of over 10 months at times. Some of the renewable energy developers in Maharashtra and Andhra Pradesh are also facing similar issues. Although the projects are performing very well technically and are generating the envisaged energy, delays in releasing payments against the energy bills of developers has led to delays in debt servicing of lenders and thus downgrading of assets to non-performing assets (such as Shrikant Energy, and Global Metal and Energy Private Limited in Maharashtra). While discoms have been claiming rebates for payments before due dates as per PPA terms, they are reluctant to pay compensation/penal interest to renewable energy developers for delayed payments, payable in the form of late payment surcharge as per PPA terms. This adversely affects lenders’ as well as investors’ sentiments.
- Non-compliance with respect to payment security instruments: The standard PPAs approved/adopted by the regulators have payment security provisions, which generally include revolving letters of credit or payment security funds, escrow, etc. It has been observed that in the majority of cases where PPAs are executed with discoms, the payment security instruments, namely the letters of credit, are not being provided by the discoms.
- Reliance on imports: Presently the domestic manufacturing capacities of solar cells and modules are approximately 3 GW and 13 GW respectively, which is not sufficient to cater to the current demand of the country. Therefore, renewable energy developers in India are dependent on imports of solar modules, mainly from China. This high reliance on imports creates uncertainly of prices and timely availability of modules. The Indian government has introduced a 40 per cent basic customs duty on solar modules as of April 2022 and 25 per cent on solar cells to reduce the reliance on imports and expand the country’s photovoltaics (PV) manufacturing base. However, owing to inadequate domestic capacity, reliance on expensive imports and price variation may affect the viability of current projects under execution.
- Lower tariffs: Discovery of lower tariffs in competitive biddings and the rise in module cost in the recent past have an adverse bearing on the debt service coverage ratio and the internal rate of return of projects. Given the high cost of debt in the Indian market, funding of renewable energy projects with significantly low tariffs is a cause of concern for lenders.
- Land acquisition and clearance constraints: Policies regarding the acquisition of land and non-agriculture conversion of the acquired land are state specific. Pending litigations (post acquisition) in courts and non-disposal of non-agriculture conversion applications by state departments lead to delays in security creation, leading to charging of additional interest for non-creation of security, which further burdens project cash flows.
- Evacuation constraint: Solar and wind power, being intermittent in nature, have created challenges for the transmission grid due to mismatch in peak demand and generation availability. Refurbishment/Revamping of grid infrastructure is required for sustainable transmission of renewables. Availability of evacuation approvals along with adequate infrastructure, at the time of commissioning of a renewable energy project, is critical.
- Non-compliances of “must run” status: In India, renewable energy projects enjoy the “must run” status and hence are not subjected to curtailment, except for grid safety reasons. However, there have been some instances where PPA off-takers have been discoms, and state load dispatch centres, at times, restrict the energy evacuation schedule for renewable energy projects, causing capacity loss as well as revenue loss to renewable energy developers.
Measures taken by the government
The report mentions the measures taken by the government to boost investments in the renewable energy sector based on information provided by the ministry:
- Permitting foreign direct investment up to 100 per cent under the automatic route.
- Fiscal incentives such as accelerated depreciation, goods and services tax at lower rates, and a concessional customs duty.
- A payment security mechanism for projects bid out by the Solar Energy Corporation of India (SECI), to cover receivable delays.
- Mandating the requirement of letter of credit as payment security mechanism for distribution licensees to ensure timely payments to renewable energy generators.
- A Dispute Resolution Committee to consider the unforeseen disputes between solar/wind power developers and SECI/NTPC, beyond contractual agreements, which facilitates smooth implementation of solar/wind energy projects.
- Setting up of the Renewable Energy Industry Promotion & Facilitation Board.
- Waiver of inter-state transmission system charges and losses for inter-state sale of solar and wind power for projects to be commissioned by June 30, 2025.
- Declaration of trajectory for renewable purchase obligations.
- Setting up of ultra-mega renewable energy parks to provide land and transmission on plug-and-play basis.
- The Green Energy Corridor Scheme for evacuation of renewable power.
- Notification of standards for deployment of solar PV systems/devices and a revised list of models and manufacturers for wind turbines as quality control mechanisms.
- Standard bidding guidelines for the tariff-based competitive bidding process for procurement of power from grid-connected solar PV and wind projects.
- “Must run” status for renewable energy projects under the India Electricity Grid Code.
- Introduction of the Green Term Ahead Market, with plans for a Green Day Ahead Market.
Key recommendations
With respect to the overall debt requirement and cost of financing, the Committee recommends that, firstly, the ministry should work proactively to make available and explore innovative financing mechanisms and alternative funding avenues such as infrastructure development funds, infrastructure investment trusts, alternate investment funds, green/masala bonds and crowd funding. Secondly, the ministry may explore the possibility of prescribing renewable finance obligations on the lines of renewable purchase obligations for banks and financial institutions in order to make them put a specific percentage of their investment into the renewable energy sector. Thirdly, the government should explore the setting up of a green bank system.
With respect to the issue of delays in tariff adoption, which leads to financing problems for developers, the Committee recommends that a maximum period should be prescribed for providing approvals or disposing of petitions by the state electricity regulatory commissions (SERCs) through appropriate amendments in the Electricity Act. Further, a maximum stipulated time should also be prescribed for the appointment of SERC members after vacancies arise. Similarly, regarding the problem of payment delays by discoms, the Committee recommends that the ministry should ensure proper implementation of Electricity (Late Payment Surcharge) Rules, 2021, so that the developers get compensated for delays caused by discoms in payment of dues. The Committee also recommends that the ministry should ensure that every PPA signed between renewable energy developers and discoms has a payment security instrument provision, which is to be implemented in letter and spirit. Moreover, the ministry should pursue states/discoms to clear dues on first in-first out basis so that the oldest dues are paid first.
In addition, the Committee recommends that the government should come out with lucid and enforceable guidelines for compensation with respect to curtailment for reasons other than the grid security. According to the Committee, the limit on loans for the renewable energy sector under priority sector lending should be increased. Furthermore, banks should be sensitised about the importance and benefits of renewable energy, so that they do not overlook this sector for priority sector lending.
This article is an extract from the twenty-first report released by the Standing Committee on Energy (2021-2022) titled “Financial Constraints in Renewable Energy Sector”