Shock and Disruption

COVID-19 threatens to derail the renewable energy supply chain

  • “Coronavirus is grounding the world’s airlines”
  • “Manufacturers entangled in logistical nightmare”
  • “Coronavirus wreaks havoc on retail supply chains”
  • “COVID-19 casts a shadow on solar power projects”

 

The stark headlines say it all. As the novel coronavirus tightens its grip across the world, businesses are trying to grapple with the economic implications of the COVID-19 outbreak. Renewable energy companies too are grappling with logistical challenges and staring at major supply chain disruptions. While world leaders have been taking measures to contain the pandemic and reassure businesses, its ripple effects are expected to be felt for a long time beyond.

The impact is already palpable across the world – countries are in lockdown, financial markets are in turmoil and economies are in a state of shock. The crisis has also brought home the fact that overdependence on China, the country where the disease reportedly originated, for supplies is a serious concern. Sectors and countries that are highly dependent on China for the procurement of material are the ones that will be the most impacted.

Renewable energy is one such sector that is taking a big hit. China is a leader in the global solar supply chain. Nine of the top ten cell makers in the world are Chinese. According to recent estimates by PwC, worldwide, approximately 63 per cent of the modules required by solar power projects as well as associated hardware such as inverters and trackers are supplied by China. Some of the largest global wind turbine makers are significantly dependent on China for raw material and wind turbine parts. Factory shutdowns and workforce unavailability in China have disrupted global supply chains for wind turbines and solar panels, with major consequences for clean energy goals in 2020. Moreover, as the COVID-19 outbreak rages on, the production crisis is spreading to the rest of the world as well.

Bloomberg New Energy Finance (BNEF) has recently lowered its 2020 global solar demand forecast to 108-143 GW, a 9 per cent drop at the lower end compared to its previous estimate. That could mean the first slow year for global solar installations since the 1980s. As for wind, BNEF states, “There is considerable downside risk to our forecast for 2020 wind installations from the 75.4 GW we forecast in December 2019. But we still expect this year to be a record year for new wind installations.”

In what can be termed as a positive development, a number of factories in China restarted operations in February. This may ease the pressure on supply, though only partially. While often ignored, the challenge of securing module components such as module frames, seals, junction boxes and connectors will be crucial in reviving the overall solar supply chain. Many makers of these components are located in Jiangsu and Zhejiang provinces where serious epidemic precautions and stringent countermeasures are in place. As a result, production volumes of these components are reported to be low and difficult to ramp up quickly.

While the supply-side impact may be relatively short-lived, analysts are more concerned about the demand side of the equation. As policy-makers divert attention to more pressing concerns posed by COVID-19 on the overall economy, renewable energy capacity development may not remain a top priority. China has already pushed back its “solar mega auction” from May to June this year. Moreover, an economic slowdown could dent the overall demand for energy and reduce the amount of finance available. Industry conferences are already being cancelled or postponed, hampering networking and deal-making. Workforce shortages could also knock project timelines off course.

India is among the countries that are significantly dependent on solar equipment imports from China, although its wind power segment is mostly self-sufficient. The former is, therefore, likely to witness a much stronger impact of the temporary Chinese supply chain disruption.

Impact on the Indian solar market

The Indian solar power segment is likely to be considerably impacted by the COVID-19 outbreak and the production shutdown in China. India imports nearly 80 per cent of its solar cells and modules from China. Owing to the lack of domestic manufacturing capability, the Indian solar industry has been highly dependent on China-based module and cell manufacturers. According to BRIDGE TO INDIA, four of the top five solar module suppliers for projects set up during the period October 2018 to September 2019 were Chinese. Several safeguard duties, of 20-25 per cent, were imposed by the Indian government in the past year to provide a level playing field to the more expensive Indian manufacturers, but this has done little to reduce imports. Further, India does not have commercial production capacity for ingots, wafers and polysilicon, the essential components of solar cells and modules. Therefore, the impact of COVID-19 may also extend to Indian manufacturers as these components will have to be sourced from alternative, more expensive, markets.

Sanjeev Aggarwal, founder and chief executive officer (CEO), Amplus Solar, says “China, the manufacturing hub of the world, is the largest solar panel technology manufacturer, manufacturing more than 60 per cent of the solar panels globally. About 90 per cent of solar modules and panels used in Indian projects are sourced from China and Malaysia. The outbreak of the novel coronavirus has led to a delay in the procurement of these modules, panels, inverters and other small components, further leading to a delay in commissioning deadlines.” He adds, “If the demand remains unmet, it can lead to an increase in costs for developers, who will have to opt for other expensive markets. This will eventually lead to a hike in prices. Thus, this issue is bound to affect the entire industry world over, if it is not catered to rapidly.”

As per estimates, about 4 GW of solar power capacity at various stages of development is likely to be impacted due to the coronavirus outbreak. The largest impact is expected to be for projects for which supply was supposed to be dispatched during January-March. The production and delivery of these products is most likely to be delayed until the supply chain resumes. This may have a significant impact on the revenue of developers and manufacturers alike. Developers opt for the lowest-cost technology to improve their margins in the present low-tariff scenario. Chinese manufacturers have been able to provide the most cost-effective solutions due to large economies of scale and low labour costs, rendering Indian OEMs uncompetitive.

According to Pranav R. Mehta, chairman, National Solar Energy Federation of India (NSEFI), “NSEFI members have around 4 GW of projects in the pipeline that are likely to be affected due to COVID-19. Many developers have already entered into contracts with suppliers, especially for near-term projects that are scheduled for commissioning in 2020-21. Such suppliers have started notifying developers on delivery delays due to the current situation in China. As of now, it is unknown when normal operations will resume.”

The loss for developers is multi-fold. With the projects facing delayed commissioning, they are liable to attract penalties and result in deferred revenue generation. Moreover, since the transmission capacity would have already been provided, the charges will begin to be levied on these projects. Mehta adds, “The majority of the projects are connected to the inter-state transmission system (ISTS). Therefore, a delay in project commissioning will also result in the levy of transmission charges/ point of connection (PoC) charges by Power Grid Corporation of India Limited (Powergrid) due to the operationalisation of long term open access (LTOA).”

In a positive development, the Ministry of Finance (MoF) has recently notified that the impact of coronavirus will be covered under the force majeure clause of contracts. However, the clause only suspends project timelines for a specific duration and cannot be taken as an excuse for poor performance by the developer. There is still some ambiguity on the extensions that will be provided under the clause. To this end, Mehta says, “As events like these qualify for force majeure, we welcome the decision of the MoF and the Ministry of New and Renewable Energy (MNRE) to qualify them as such.” NSEFI had earlier written to the MNRE to allow developers to invoke this clause to seek protection from the damages resulting from the virus outbreak.

Considering the lack of clarity on the timelines and extensions given by the government so far, developers, suppliers and other stakeholders may find themselves contesting claims. Pallavi Bedi, partner, Luthra & Luthra, weighs in on the legal perspective associated with force majeure and the impact of coronavirus. “Developers of solar projects are rightfully concerned about the delays due to the outbreak of coronavirus, including a potential levy of penalties by state discoms for any delay in the commissioning of projects. Typically, in the power purchase agreements (PPAs) of Solar Energy Corporation of India Limited (SECI), a force majeure event is defined inclusively to cover specified acts, events or circumstances or a combination of such acts, events or circumstances that wholly or partly prevent or unavoidably delay performance by the affected party of its obligations to the extent that such events or circumstances are not within the reasonable control (directly or indirectly) of the affected party and could not have been avoided if the affected party had taken reasonable care or complied with prudent utility practices. Subject to the affected party giving a notice to the other party of the occurrence of a force majeure event (and SECI agreeing with the FM event), the affected party is excused from the performance of its obligations and no party is liable to the other for any loss relating to or arising out of the occurrence or existence of any force majeure event.”

About the ambiguity surrounding the timelines of the clause, Bedi adds, “While the occurrence of a force majeure event entitles the developer to claim extension of time, the maximum time period allowed for commissioning is typically six months after the scheduled date of commissioning (inclusive of extensions due to a force majeure event). Thus, the language of notification from the MNRE would be important to ensure that it grants appropriate extensions to developers for this outbreak as a force majeure event in the scheme of the PPA without imposing any penalties.”

Meanwhile, there is also a looming concern for the manufacturers of solar modules. “For domestic module manufacturers/OEMs, sales volumes are likely to be impacted in the fourth quarter of 2019-20 and in the near term, given this uncertainty,” says Sabyasachi Majumdar, senior vice-president, ICRA. Their production too will be impacted as they are largely dependent on China for raw material which is not just in short supply but is facing logistics challenges as well. Ship container companies have currently stopped picking up load from China ports and transporting them to different countries, including India.

Majumdar further says that the upcoming solar power bids may witness an increase in tariffs. “Solar module price levels may spike in the near term from the current level ($0.20-$0.21 per watt), putting an upward pressure on expected bid tariffs. As a result, a de-risking strategy to identify and ensure an alternative supply chain to China in the long run would be critical for domestic IPPs/OEMs.”

Brace for the impact

Given the constantly improving cost economics, it had for the longest time seemed that nothing could slow the global renewable energy juggernaut. Nothing, that is, until COVID-19.

Today, from the solar factory floors of China’s Jiangsu province to wind farms in West Texas, clean energy industries are struggling to gauge the potential damage. And it is not a pretty picture.

In fact, the story is changing rapidly, with new developments each day. Just a few weeks ago, the biggest COVID-19 concern for renewable energy appeared to be the supply of equipment, reflecting the outbreak’s early impact in China. Would there be enough solar panels, wind turbines and batteries to meet demand and project deadlines given the widespread factory shutdowns? But after a few chaotic days of escalating infection numbers and increasingly frantic government responses across the world, the focus is quickly shifting to demand, as the reality dawns that a global economic slowdown may be inevitable.

For India, while demand-side issues in the power sector may not arise on a large scale, the bigger concerns for the sector pertain to the expected rise in equipment prices, delayed project development and the predicted economic recession. Another potential problem if the economy takes a nosedive will be a lack of financing for renewable energy projects. Renewable energy IPPs have slim margins.

Project developers, therefore, need to develop a mitigation plan, assessing contractual options, and negotiating to manage risk.

As for the government, Aggarwal provides some key pointers that it must focus on at present. “It is essential to keep up the momentum of the solar industry. The government should remove the safeguard duties on imports from other countries for the time being. It can also incentivise developers to source from Indian manufacturers. Addressing these issues is not only essential for developers but is also a must for the government, which has set remarkably high solar targets.”

While Covid-19 has turned into a challenging global phenomenon, its aftermath could present a significant opportunity for Indian solar OEMs to strengthen their manufacturing operations. For the government, it is the right time to push the Make in India programme forward for the solar segment in order to build a strong and competitive domestic solar manufacturing industry

By Dolly Khattar and Ashay Abbhi

GET ACCESS TO OUR ARTICLES

Enter your email address