The year 2020 has begun on a gloomy note for the solar power industry. The Covid-19 pandemic, which originated in China and caused a shutdown of most of its production facilities, has severely impacted the global solar supply chain. Although China is slowly getting back to its feet and restarting its manufacturing units, the rest of the world is still in lockdown mode as Covid-19 cases mount. As a result, the logistics and supply chain is getting affected. Projects in leading solar hotspots such as the US, India, Germany and the UAE are witnessing construction and commissioning delays due to the coronavirus outbreak. Bloomberg NEF has already reduced the global solar demand forecast for 2020 by 6-11 per cent, which is only an initial estimate and the impact could be much worse.
Impact on India
In India, the growth of the solar segment has already been tardy owing to issues such as regulatory uncertainties, lack of contract sanctity, financing challenges, and transmission and land constraints. The annual capacity additions, which peaked during 2017-18 with 9.4 GW, have been declining steadily and have not even crossed 7 GW during 2019-20. Moreover, the thrust on domestic manufacturing of solar components has been insufficient and there is a severe lag in the country’s capacity to locally meet the demand of the industry. In fact, the Indian solar industry depends on China for over 80 per cent of its module requirements. Thus, the slowdown in supply chain is expected to delay the commissioning of ongoing and recently awarded projects thereby impacting developers. Moreover, the demand and supply gap may hike the price of certain components and increase the cost of energy. Manpower shortage on project sites might affect operations and maintenance (O&M) activities of solar plants, thus reducing generation and expected returns for developers. If the situation persists, payment delays and generation curtailment will become the order of the day. There would also be challenges in arranging adequate financing for projects. Similarly, lenders might suffer due to delays in the payback of loans by developers on account of late project commissioning.
Not limited to developers and lenders, the impact of Covid-19 is expected to be quite far-reaching in India, thereby affecting other stakeholders in the solar power value chain including government, discoms, consumers and human resources. While the government might not be able to meet its solar targets and would have to allocate finances to the healthcare sector, discoms might have working capital issues due to delays in revenue collection and receipt of government subsidies, and reduced demand from high-paying commercial and industrial consumers. Similarly, consumers might have to pay higher power tariffs in the next fiscal as discoms make efforts to recover their losses. Finally, daily wage workers on project sites would suffer due to loss of their source of income as solar plants get stranded due to the ongoing crisis. Overall, it is estimated that it may take at least an entire quarter of this year for business to normalise.
Certain measures are already under way to mitigate the impact of the coronavirus on stakeholders in the solar segment. Some state governments have announced relief packages to protect daily wage earners, the weakest links in the solar value chain. To safeguard developers, the Ministry of New and Renewable Energy has directed all its implementation agencies to consider project delays on account of COVID-19 supply disruptions as “force majeure” events. Developers have been asked to submit an application to the implementing agencies in this regard.
Further, discoms have been notified that renewable energy projects will continue to have a “must-run” status despite the nationwide lockdown and they have to make regular payments to power producers as agreed to in the power purchase agreements. While the government will continue to take new measures depending on the outbreak containment in the coming days, certain additional support measures can be considered for developers due to project disruptions. These include pass-through of project cost increases for developers, a moratorium on loan repayments to lenders and safeguarding of developers from a possible increase in curtailment.
The way forward
Although it is a grim situation, the Covid-19 outbreak does present a few important lessons for the solar industry. First, there needs to be a greater focus on domestic manufacturing of solar components to minimise the impact of external disturbances. The pandemic creates a strong case for self-dependency in sourcing solar components. Second, the sourcing strategy needs to be modified so as to make the supply chain more diversified both country- and manufacturer-wise.
Third, there is a need for larger cost-effective inventories to ensure that supply delays do not affect project deliveries. Finally, digitalisation needs greater impetus as it can allow better assessment of challenges, efficient O&M and ease in transactions till the crisis is over.
Based on a presentation by Anvesha Paresh Thakker, Executive Director, KPMG India