Financial Constraints

Standing Committee on Energy report on funding concerns for the renewables sector

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”

GET ACCESS TO OUR ARTICLES

Enter your email address