Damage Control

Government initiatives to help the sector on its long road to recovery

Six weeks of the nationwide lockdown necessitated by the coronavirus pandemic, and India’s economy is set to take a hit that could have significant ramifications for the country’s growth prospects. The World Bank expects India to grow at 1.5-2.8 per cent in 2020-21, the International Monetary Fund predicts a 1.9 per cent expansion and ratings agency ICRA estimates a growth rate of 2 per cent. While health spending must come first, various industries will need bailouts from the government, energy being among them. The power sector is facing a problem of subdued demand, low collections, and difficulty in operationalising assets.

Power demand has declined by 20-25 per cent as a result of the shutdown of industrial and commercial establishments. Medium- and long-term demand growth is likely to be tepid till the economy regains the pre-Covid-19 activity levels. This, in turn, is expected to have a major impact on the liquidity profile of the financially weak discoms with a loss in revenue collection, which may result in payment delays to gencos including renewable IPPs and transmission companies. There will also be a limitation on tariff increases due to the consequential economic impacts. This will hinder the recovery of discom finances, which are already in a precarious condition. Further, the development of transmission projects is likely to be delayed.

In the renewable energy space in particular, Covid-19’s rapid spread has brought severe disruption and uncertainty in the supply chain for wind, solar and energy storage projects, as well as in the renewable project finance market.

From what it seems, it will be a long road to recovery, which will need to be supported by government measures and incentives. To its credit, the government has, through various ministries, already enforced several measures to reduce the negative impact of the Covid-19 outbreak on the power sector, especially the renewable energy industry.

While this is an evolving story, Renewable Watch highlights the key measures and steps being taken by the government to help the sector overcome the current and potential challenges brought on by Covid-19…

Addressing delays in project development

The Ministry of Home Affairs recently issued revised guidelines allowing select additional activities to keep the wheels of the economy turning. These included renewable energy power project development. The announcement came as a big respite to the renewable industry as it allowed the construction of renewable energy projects from April 20, 2020. As per the notification, the continuation of construction work within the limits of municipal corporations and municipalities will be allowed, provided that workers are available on site and do not have to be brought in from outside.

Prior to this, considering the adverse impact of the lockdown on renewable energy project development, the Ministry of New and Renewable Energy (MNRE) had, on March 23, 2020, issued a memorandum stating that the time extension in scheduled commissioning of renewable energy projects due to the disruption of supply chains would be treated as a force majeure event. A force majeure clause means that if there are extraordinary events that are beyond human control such as wars, riots, crimes, or natural calamities, both parties are free from contractual liability to fulfil their obligations under the contract. According to the MNRE, the duration of the lockdown and the time needed to remobilise the workforce would also be taken into consideration while granting the extension.

Meanwhile, the three power and renewable energy sector NBFCs – the Power Finance Corporation, REC Limited and the Indian Renewable Energy Development Agency (IREDA) – have reduced their repayment charges to 2 per cent in order to enhance the funds available for new projects in the sector. Moreover, IREDA has brought out a scheme for project-specific funding to promote new renewable energy projects. The moves are aimed at easing financing for both ongoing and upcoming projects.

Ensuring renewable energy offtake

In the current Covid-19 scenario, certain discoms (such as those of Punjab and Andhra Pradesh) started curtailing renewable power, claiming relief for this force majeure event under their PPAs. To address the concerns of developers on this count, the MNRE, on April 1, 2020, inter alia, issued an office memorandum, clarifying that renewable energy has been granted “must-run” status under Indian law and this status should continue even during the lockdown period.

While the MNRE has issued a number of orders in support of the must-run status for renewable power, stringent steps are needed to deal with the reality of curtailment, post consultation with all relevant stakeholders. To cite an example, on April 9, 2020, the Transmission Corporation of Andhra Pradesh reportedly issued a telephonic message to certain solar power generators to back down 100 per cent of their solar generation with immediate effect till further instructions. While this message did not specify a reason for the curtailment, in view of the timing it seems linked to the current situation in the country. Such instances will be difficult to control.

In yet another advisory, the MNRE has stated that the energy departments and discoms in three states – Andhra Pradesh, Karnataka and Tamil Nadu – should consider permitting a roll-over of banked electricity from rooftop solar photovoltaic projects and open access renewable energy generating stations under captive and third-party sale. Given that power demand has plummeted in recent weeks, the MNRE has advised the roll-over of banked electricity for 2019-20 and 2020-21 to 2021-22. Banked electricity is settled each year, but given the unprecedented situation caused by the pandemic, the ministry has now stated that it can be carried forward to the next financial year.

Due to the nationwide lockdown in the wake of Covid-19, industries and commercial establishments using electricity generated directly or through banking from solar rooftops and open access under captive and third-party sale are running their operations at lowest capacity. Consequently, their demand for electricity has reduced substantially.

The ministry observed that due to the dip in power demand, the units generated and banked in previous months could not be utilised by consumers. The lapse of such banked units or purchase at the average pooled purchase cost (as is typically done) would severely affect the profitability of both developers and consumers of rooftop solar PV and open access projects.

The move will help rooftop solar projects that are likely to take a harder hit than grid-connected PV and wind power installations due to the lockdown. Most rooftop solar companies in India are small-scale businesses that lack the financial strength to absorb losses and meet the additional working capital requirements under current conditions.

Supporting discoms

While addressing renewable energy offtake issues is important, it cannot be at the cost of discoms’ health. The Ministry of Power (MoP) has therefore issued instructions granting a moratorium period for distribution companies to make payments to generation companies due to the Covid-19 outbreak.

Recently, the Central Electricity Regulatory Commission has reduced the rate for the late payment surcharge (LPS) payable by discoms to power generators. The surcharge has been reduced to 12 per cent per annum from the earlier 18 per cent if the due date falls between March 24, 2020 and June 30, 2020. Following this, the Punjab State Electricity Regulatory Commission has also provisionally reduced the rate of the LPS to 6 per cent per annum if the due date falls between March 24, 2020 and June 30, 2020. Madhya Pradesh and Delhi have also issued similar orders.

The Delhi Electricity Regulatory Commission has reduced the LPS rate from 18 per cent to 12 per cent per annum for bills that are raised between March 24, 2020 and June 30, 2020. The Madhya Pradesh Electricity Regulatory Commission has reduced the rate of the current LPS to be paid by the state’s discoms to power generators and inter-state transmission licensees by 0.5 per cent per month.

The latest regulator to join this list is the Joint Electricity Regulatory Commission for the State of Goa and union territories. It has reduced the LPS rate from 2 per cent to 1 per cent per month. The commission noted that the decision was taken in light of the gravity of the situation prevailing in the country, which was affecting the ability of discoms to pay the generators, maintain the distribution infrastructure and serve bills to consumers.

Promoting domestic manufacturing

With a growing sentiment among companies to shift out their manufacturing base from China in the wake of the coronavirus epidemic, India is preparing to introduce policy changes to facilitate manufacturing in the country and attract investments.

Sensing an opportunity to provide a fillip to domestic manufacturing during the current supply chain crisis, the ministry, in March 2019, wrote to various state governments and port authorities to identify land parcels of 50-500 acres for setting up manufacturing hubs and parks. The Tuticorin Port Trust and the states of Madhya Pradesh and Odisha have expressed keen interest in setting up renewable energy manufacturing parks. These facilities will be used to manufacture equipment such as silicon ingots and wafers, solar cells and modules, wind equipment and ancillary items such as back sheets, glass, steel frames, inverters and batteries.

The hubs will also be encouraged to export equipment and services to the rest of the world. At present, the country has around 10 GW of wind equipment manufacturing capacity. In the case of solar cells and modules, India imports about 85 per cent of its requirement. The government levies a basic customs duty in order to protect the domestic solar manufacturing industry. This duty is likely to continue in the foreseeable future. Besides, to facilitate investment in the sector and ensure easier processing, the MNRE has set up the RE Industry Facilitation & Promotion Board under the joint secretary in the ministry. This board will serve as a single-window clearance and facilitation point for potential investors.

These moves come on the heels of several other initiatives taken last year to provide support to domestic manufacturing. These range from introducing the domestic content requirement in specific PSU-linked projects to linking all subsidies to domestically sourced components.

Securing the supply chain

In order to help the industrial sector and aid ongoing project development, the government has allowed manufacturing and other industrial establishments with access control in special economic zones, export-oriented units, and industrial estates and townships to operate during the lockdown. According to the government notification, these establishments should have standard operation protocols in place and arrange for the stay and transportation of their workers. Further, the ministry has stated that goods traffic would be allowed to ply, both interstate and intra-state. Railways and airports would be allowed to operate for the movement of cargo. Operations of seaports and inland container depots for cargo transport, including authorised customs clearing and forwarding agents, would also be allowed.

This move will certainly help export-oriented sectors. For instance, in the wind power segment, the lockdown has impacted not just domestic but also global project development as India is one of the world’s largest wind gearbox manufacturing bases with nearly 10 GW of annual output, and a large number of countries are dependent on wind equipment manufactured in India. To comply with the lockdown in India, both local and international turbine OEMs and component manufacturers have temporarily suspended production activities in India. These include gearbox manufacturers such as ZF Wind and Winergy, which have halted production in India. NGC has also suspended construction work at its upcoming facility in Sri City. All of these can now resume operations.

The Ministry of Shipping had earlier issued a notice to the major ports in the country directing them to deal with the issues arising from the coronavirus pandemic. It directed all major ports to ensure that no penalties, demurrage (charges to be paid to the owner of a chartered ship for failure to load or discharge the ship within the time agreed), charges, fees or rentals are imposed on traders, shipping lines, concessionaires, licensees or other port users for any delays due to the lockdown in the country.

Working on larger reforms

In order to address some recurring issues and  provide commercial incentives to private players to enter the power generation, distribution and transmission market, the Ministry of Power introduced the Draft Electricity (Amendment) Bill, 2020 with some policy modifications on April 17, 2020. The ministry has given stakeholders 21 days to send in their suggestions on the draft bill. Several industry bodies have, however, proposed that the date of receipt of comments should be extended to September 2020 as no discussion can take place due to the ongoing lockdown.

The bill is of particular significance for the renewable energy sector, as it promises to tighten the enforcement of orders made previously, be it regarding renewable purchase obligations (RPOs), the enforceability of PPAs or payment terms of discoms. The draft bill focuses particularly on pushing through better efficiencies on the discom side and higher participation and protection for private sector investments on the renewable energy front by protecting payment commitments.

Conclusion

Historically, it has been observed that an economic recession pushes climate change discussions to the margins. However, that was in the past – when renewable power was not cheaper than coal, when the air was not grey, and when climate change was not a global crisis. The situation has since changed drastically. The aforementioned initiatives clearly reflect the transformation that has taken place in the energy space over the past decade. Renewable energy power has joined the list of priority sectors. In fact, it is believed to be one of the sectors that will help in faster economic recovery post the Covid-19 crisis.

According to the latest report by the International Renewable Energy Agency, accelerating investment in renewable energy could generate huge economic benefits while helping tackle the global climate emergency. The report states that investing in renewable energy would deliver global GDP gains of $98 trillion by 2050 compared to a business-as-usual scenario by returning between $3 and $8 on every dollar invested. It would also quadruple the number of jobs in the sector to 42 million over the next 30 years and measurably improve global health and welfare scores.

If that be the case, India’s efforts to promote renewable energy development and boost investor confidence in the sector are clearly steps in the right direction.

By Dolly Khattar

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