As the world grapples with the coronavirus pandemic, industries worldwide are shutting down operations due to lockdowns announced to contain the virus. Solar power plants, although classified under essential services, are also bearing the brunt of this dire situation. The installation of solar assets is stalled as supply chains are disrupted, and operating projects are unable to find skilled manpower to operate them. As a result, millions of rupees of investments are virtually stranded, incurring incremental running costs. Developers are facing liquidity constraints even as the government has provided extensions in the form of force majeure. Against this backdrop, industry experts deliberated on the likely impacts of coronavirus on solar projects and probable mitigation measures at a recent webinar organised by Renewable Watch. Excerpts…
Co-Founder, SunSource Energy
These are unprecedented times for the solar power sector. We have faced challenges to ensure that operations and maintenance (O&M) teams are actively working either from home or from the site. This becomes a greater challenge when the sites are located across the country.
We have clients in Covid-19-hit areas, particularly in Rajasthan, where some plants have been shut down. We are curtailing power from our plants as well in the state. We have a lot of cooperation from the local authorities. The local police have delivered food to site workers. The remobilisation of the workforce, in particular, will lead to increased project costs.
The short-term impact on the solar power segment will be substantial. The issue will be more severe due to the lack of availability of financing. However, there is a silver lining too. In the past few weeks, our teams have interacted with clients. These clients have requested us to look at their data more closely and expressed their wish to incorporate more renewable energy. While open access projects have been impacted as most of the industries have shut down, I believe, in the long term, open access, rooftop solar and storage projects can scale up.
It is too early to gauge the impact of the pandemic on rooftop solar tariffs. In sum, the future outlook of the entire solar segment depends on the ability of banks to get back to financing projects. Rooftop tariffs may become stable with more liquidity in the market. Fluctuations in foreign exchange rates will also have an impact on project economics as well as solar module prices.
The future outlook of the commercial and industrial (C&I) rooftop solar segment is positive as grid power tariffs they pay are expected to increase with discoms incurring heavy losses. This will drive another growth story in the C&I segment.
Ayana Renewable Energy
Just before the lockdown started, we had started the execution of a solar project in Rajasthan. However, due to the current crisis, all the processes related to land registration have come to a halt. The module and supply agreements have also been affected.
Time extensions under the force majeure clause in power purchase agreements (PPAs) will not be sufficient in these difficult times. It is important that the Ministry of Power and the Ministry of New and Renewable Energy (MNRE) work together to give seamless extensions and support to developers. Many approvals are required for setting up transmission infrastructure. It will really help if a blanket approval is given for managing the current crisis.
Currently, the challenge is to predict when things will come back to normalcy or when the supply of modules from China will start. The remobilisation of the workforce will also be a key challenge. A lot of precautionary steps will be required for the workforce. And obviously, it will be hard for everyone to get to 100 per cent productivity from day one itself.
Therefore, government support will be required for the first three months after the lockdown ends and everyone in the industry starts to work again. Support will also be required on the financing side as it is currently completely blocked.
The financing issue has worsened with the current mess in the banking sector. The rate at which capacity build-up will happen will depend on how quickly the challenges are addressed and the finances are arranged. Also, there are going to be short-term working capital gaps for generators. To solve this issue there should be some form of soft loan provisions.
Discoms have also been impacted financially because of the fall in the recovery of cross-subsidy surcharges. The central government should devise policies such as UDAY to help discoms in these difficult times, by giving them financial security. Otherwise, it will impact the payments made by discoms to generators.
In fact, many challenges that the solar segment is facing right now have no links with the challenges posed by Covid-19. The existing challenges for the segment are related to financing, tariff adoption, and land acquisition. One positive development has been the government’s decision to remove ceiling limits. The pressure of ceiling tariffs is not there on developers any more. This will enable generators to price the tariffs sensibly.
The increase in equity capital is not a problem in India as a lot of funds have entered the market. The biggest challenge has been with debt financing because of the banking crisis. The crisis remains as we can see from the current case of Yes Bank. Unfortunately, there have not been many successful IPOs in the solar segment which could help in the smooth exit of investors.
Going forward, I foresee consolidation in the solar segment. This has been an ongoing trend as scaling up is important. Also, the use of innovative financial products such as InvITs will go up.
Global CEO and Director, Sterling and Wilson Solar
There have been reports of supply chain disruptions in solar power projects since the bulk of solar modules and inverters in India are imported from China. However, we have been having regular discussions with our partners and suppliers in China and they have assured us that 80-85 per cent of the production facilities have returned to normalcy, except in the Wuhan region. These manufacturing units are expected to be 100 per cent operational by the end of April 2020. We have started getting despatches for our projects across the globe, and we have not witnessed any increase in prices from the Chinese players as of now. Although our under-construction projects have got extensions under the force majeure clause, certain fixed running costs would be incurred and we are trying to evaluate the impact of the lockdown on these costs. These would keep increasing if construction continues to be halted. The other cost impact is going to be due to the volatility being witnessed in dollar prices.
We will have to keep examining the situation as it evolves. Projects that are under construction will most likely be delayed by three months due to the lockdown and halting of construction activities in many areas. However, renewable energy has been categorised under essential services, and thus all operational projects are running as before. This means that we will continue to provide O&M services to our clients. As of now, our O&M projects have not suffered, but this might change if the situation persists for a longer duration. Water and manpower availability might become an issue affecting important services such as module cleaning, project generation and our performance guarantees. It is still unclear what protection does the force majeure conditions provide to an EPC contractor in terms of fulfilment of generation and performance guarantees.
CEO, Sprng Energy
Very clearly, there are three categories of projects – the ones for which only PPAs have been signed, those that are under construction, and operating assets. The challenges witnessed due to the coronavirus outbreak for each of these categories are different. For projects where PPAs have been signed recently, financial closure timelines and land handover from solar park implementation agencies to developers will be delayed. Solar park implementation agencies, themselves, have to commission the solar parks within a certain time frame. Although force majeure conditions have been introduced, this would mean the MNRE would first have to give extensions to solar park implementing agencies, which, in turn, will give the same to project developers. Similarly, for financial closures, tariff adoption is necessary, and many projects are still awaiting power purchase approvals from state regulators. Only after that can financial closures be considered by lenders. Hence, the entire solar space is currently witnessing a slowdown.
Our under-construction project sites are completely shut down due to manpower unavailability during the lockdown. Even after the lockdown ends, it is going to take some time to mobilise the labour and get it back to these sites. Moreover, due to the coronavirus outbreak and closure of all government offices, many of our approvals are stuck. In addition, timely grid connectivity approvals for renewable energy projects, which have been a major hindrance earlier as well, are only going to be more difficult now. Another issue is the disruption of the supply chain from China. Even though their manufacturing facilities are back on line, they have lost at least two months of their production time. First, they will cater to their pending order books and then only will they take new orders, thus impacting many of our projects.
Although power generation has been classified as an essential service, our operating assets are also a source of concern. Our assets are located in states such as Telangana, Rajasthan, Gujarat and Madhya Pradesh, and a few infected cases were found in villages near our sites. Thus it has been difficult to source manpower even for security purposes, and our assets are now operating with very limited labour. Services such as module cleaning are going to be surely impacted not only on account of manpower issues but also due to water scarcity at many sites. Hence, maintenance will be a challenge and this will affect power generation from projects, if the situation persists.
Overall, this situation has highlighted the importance of the force majeure clause, something which previously did not receive much attention. Hopefully, we will not face any issue regarding force majeure clauses in our PPAs from our power offtakers. As it is, many state discoms have not been paying developers on time, and there are dues outstanding for the past 9-10 months. We hope that this does not extend, especially since it is going to be difficult for discoms as well to collect revenues. However, the developer community is already facing viability risks due to unpaid discom dues, and we believe that some support from the government will be required to safeguard these projects. On the cost front, we expect the project costs to go up, especially due to the depreciating value of the rupee since module import costs and duties are going to be impacted.
Right now, liquidity is not a concern, however, if this trend continues it might become an issue in the near future. In many operating projects, we are witnessing that lenders are not keen to continue the unutilised credit lines as they foresee risks. We are hopeful that the Ministry of Finance and the Reserve Bank of India will take the necessary steps to prevent the occurrence of this situation.