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View from India: Renewables positioned to attract international investors

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India may not be able to meet the renewable energy capacity target of 160GW, scheduled to be completed by the end of 2022.

The target may be unmet because of the delays in power supply agreements (PSAs) for 7GW of the bid out of renewable energy projects. This is expected to stagger the capacity building process, leading to a 35 per cent shortfall in the target of achieving 160GW.

This delay may, however, not impact the credit profile of developers since implementation and debt draw downs have not yet begun. Moreover, the project viability remains largely intact, supported by benign module price trajectory over the past 18 months. These projects were auctioned by central counterparties such as the Solar Energy Corporation of India and the National Thermal Power Corporation. They are awaiting PSAs with the ultimate counterparties, the state distribution companies (aka discoms).

The Covid crisis has disrupted many things, one of the most obvious ones being the pace of growth. “The PSAs for the 7GW of projects bid out at auctions prior to February 2020 are yet to be signed primarily because subsequent auctions saw tariffs plummeting and even falling below Rs 2 in December 2020. Of this, nearly 3GW run the risk of re-auction or cancellation because their tariffs are comparatively higher at over Rs 2.75 per unit - a good 75 paise more than the recently discovered tariffs,” said Hetal Gandhi, director, CRISIL Research, speaking at the CRISIL media webinar, ‘Recharging renewables.’

Although India is projected to miss out on 160GW, strangely this has not been caused by the second wave of the pandemic. Rather, it is attributed to the delay in project execution which has slowed the momentum. Unsigned power supply is another dampener. Connectivity and land-related issues have resulted in a lag in the solar sector. Covid has delayed projects to such an extent that many of them are unviable.

Yet there could be sunshine moments ahead. The growth outlook is positive. The pace of execution is estimated to pick up from fiscal 2022. It will require capital of Rs 1.8 lakh crore over FY22-24. As a long term perspective, the renewable energy sector will witness an increase in consolidation. “Renewable energy can attract international investors if they are on the international listings stock exchange. Greenfield and brown field opportunities can also be explored,” explained Manish Gupta, senior director, CRISIL Ratings.

Other favourable aspects include InvITs platforms that are scalable and offer long-term returns. An acronym for infrastructure investment trusts, InvITs are investment instruments that work like mutual funds and are regulated by the Securities and Exchange Board of India (SEBI). This is a statutory regulatory body that monitors and regulates the Indian capital and securities market. The RPO (Renewable Purchase Obligation) targets for the states are being increased. As per the RPO, all electricity distribution licensees should purchase or produce a minimum specified quantity of their requirements from Renewable Energy Sources. The minimum RPO for each state is fixed by the State Electricity Regulatory Commissions. 

Wind doesn’t seem to be blowing in the right direction for the wind sector. The wind market has faced turbulence because of the grid and tariff concerns. Medium-term growth seems unlikely. The gap between the solar and wind tariff continues to widen.

The pandemic has staggered progress in India’s renewable energy sector. As a result the pace of capacity addition in the solar and wind sectors has slowed. Nevertheless, with regulatory support things are expected to look up. Better outcomes are expected from positive budget measures. Going ahead, agreement enforcements are becoming speedier. As well, Goods and Services Tax (GST) reimbursements are being passed on to developers. The sector is expected to bounce back given a strong pipeline of orders and project tenders and continued investor confidence.

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