The impact of Covid-19 and the ensuing lockdown on renewable energy development has been severe. Under-construction projects have been delayed due to supply chain disruption and labour unavailability, leading to an immediate restriction in capacity addition. Moreover, proper operations and maintenance (O&M) has become difficult due to access issues at many sites, thereby affecting energy generation. Availability of financing for working capital and term loans is also getting affected. However, there have been certain positive takeaways from the pandemic as well including the increasing focus on promoting domestic manufacturing of solar modules, greater application of digitalisation and most importantly, a higher expected transition to renewable energy. Against this backdrop, Renewable Watch spoke to industry experts about the impact of Covid-19 on their projects, mitigation measures and learnings for the future…
What has been the key impact of Covid-19 on renewables’ growth and project pipeline?
A very noticeable and positive trend during the period of lockdown has been that a substantial portion of our portfolio has continued to operate and we are close to 100 per cent operating level already. Customers have made every effort to maximise their savings by relying on inexpensive solar power as their source of first use. In the long term, projects may see an increase in the time required for completion due to delays in procurement and the unavailability of labour. Projects may also experience some increase in cost due to stricter health, safety and environment (HSE) regulations and protocols as well as backup resource planning.
The trends so far seem to clearly indicate that the changes that have occurred in the economy are likely to accelerate the adoption of the opex or RESCO model as companies are now looking to safeguard their capital. We expect solar adoption to gain extra momentum due to a far greater focus on savings and a reduction in operational costs.
Covid-19 has temporarily halted on-ground activities for under-construction renewable energy projects, although the impact of this has been relatively less severe on operational projects. The impact is far higher in the solar segment owing to a strong under-construction pipeline (around 25 GW, as of December 2019) and a huge tendered capacity (25 GW, as of December 2019), which would be up for construction over the next one year. This humongous pipeline of under-construction solar projects surpasses the under-construction capacities of other renewable energy projects, which were less than 10 GW during the same period. Among renewables, solar energy comprises the lion’s share both in terms of targeted installations by the Ministry of New and Renewable Energy (MNRE) as well as the pipeline of under-construction projects, and hence, is the most severely impacted renewable energy source owing to Covid-19 restrictions.
Another reason for the severe impact on solar is the country’s continued reliance on imported modules. Over the 11 months of fiscal 2019-20, India imported solar cells and modules worth around Rs 135 billion; this translates to roughly 6.5 GW of capacity (at an average rate of $0.3), which is close to 80 per cent of the country’s annual solar photovoltaic (PV) installations. Moreover, with China being the largest exporter of solar cells and modules to India and also one of the worst-hit countries owing to Covid-19, the supply of solar modules to under-construction projects in India was delayed. The conditions further worsened owing to issues related to delivery and despatch of physical format-based trade documentation in India, which delayed the release of import containers and cargo across 12 major ports.
The wind segment in India is already struggling because of issues such as delays in land allocation and auctioning procedure, and infrastructure constraints. Covid-19 has further delayed project commissioning. Although the manufacturing of wind turbine components such as nacelles, hubs and towers is done in India, the commissioning of a few capacities was delayed to some extent as testing and the issuance of commissioning certificates by discom officials was postponed owing to the lockdown. Based on industry estimates, the expected capacities to be commissioned during 2019-20 was to be roughly 3 GW; however, only 2.1 GW of projects were actually commissioned.
The growth of renewables would get deferred, but not affected in the medium to long term. This marginal impact is expected due to established fundamentals of the sector, which are improving as the year progresses. Further, immediate impact would be project specific, depending upon the stage of construction of these projects. Key near-term risk factors would be time and cost overruns, which are likely despite the extension of scheduled commercial date of operation by regulators or power purchase agreement (PPA) counterparties, as the impact is not going to be linear with the lockdown period. Areas that would have maximum bearing would be interest cost, unhedgedforex exposure, and disruption in supply chain and human resource availability. Long-term pipeline of projects or tenders is not expected to get affected as demand is likely to pick up after a hiatus, sooner than later.
How has project O&M been affected due to the outbreak? Is financing being impacted?
The pandemic hit during the hottest months of the year and the inability to carry out any operational activities such as cleaning resulted in losses due to soiling. However, it was observed that the impact of soiling during the lockdown was a bit lower than the “business-as-usual” scenario owing to a reduction in industrial activity and transportation resulting in lower pollution levels across the country. In the rooftop segment, where PV systems are located on clients’ premises, O&M has been affected due to new safety regulations put in place by companies to tackle the spread of Covid-19.
Measures such as these have increased the time taken for the completion of operational activities at site. The accessibility to sites is also affected by local transport regulations. As for utility-scale projects, the onus is on project developers to ensure the health and safety of employees. Developers need to work on a robust business continuity plan to ensure that there are backups in place in case an employee gets infected by Covid-19. This could result in increasing the O&M cost in the short term.
Solar and wind energy projects faced the double whammy of limitations in O&M activities and disruption in the supply chain due to the closure of manufacturing plants across India. Owing to the lack of access and unavailability of critical components, wind and solar plants have faced generation losses. Although supply chain disruptions caused by this pandemic are force majeure events, losses owing to performance guarantees given by O&M contractors as well as developers are uncertain.
Project O&M has got adversely impacted by labour shortages. Many migrant labourers who had gone to their villages to harvest the crop were unable to return, while many were not allowed entry into their hamlets owing to the fear of spread of infection.
In the case of solar rooftop, O&M becomes tricky if a project is set up under the Resco mode and the rooftop is leased from the client. Access to solar equipment owing to restrictions across commercial and industrial complexes was a big issue during the series of lockdowns. The issue continues as free access to project sites is still not granted by clients.
In terms of financing, the disbursement of funds was impacted owing to the lockdown. Physical assessment of the progress of work, which is necessary for releasing the debt for renewable energy projects, was delayed; this resulted in a slowdown in project completion. Further, banking activities such as in-person borrower checks impacted day-to-day business activities. However, entities with a strong balance sheet and significant cash balance are expected to be able to avoid challenges.
The beauty of renewable energy sources is that these have the least operational externalities such as fuel supply and waste disposal. So, operations get affected by limited factors such as the lack of energy offtake or equipment breakdowns. The first concern was addressed, in a timely and effective manner, by the MNRE’s favourable must-run order. However, the second issue may have had limited impact on a few operating projects, due to unavailability of human resource, spares or supply chain and logistical issues.
Financing is being impacted, although debt capital availability for renewable energy projects has been an issue for the past 18-24 months. There are various reasons for this, including asset liability management issues of NBFCs and lower appetite of public sector banks, which has affected the underwriting ability of private sector banks. Covid-19 has exacerbated this problem, due to liquidity issues and risk aversion in the lenders’ perspective. Availability of both working capital and term loans has been affected significantly.
What measures can be taken to mitigate the impact on developers?
Developers can look at procuring components from local manufacturers to ensure that there are no delays in terms of logistics for component delivery. It is very important to ensure that all safety precautions are being taken to prevent the spread of the virus across sites. It is crucial to keep a healthy number of spares since there could be potential delays in getting new parts either due to shortage or lack of transport options.
In order to mitigate the impact on developers, certain measures have already been taken by the government. These include the invoking of force majeure provisions in PPAs, blanket extension for project commissioning equivalent to the lockdown period plus an additional 30-day window post the lockdown for normalisation purposes, and a stimulus of Rs 900 billion for discoms. However, as developers having under-construction capacities are bound to commission projects at the earliest in order to start recovering their amount and commence loan repayments, more measures are required from governments. These could be extension in moratorium of the existing loan repayments and some respite in interest during the construction of solar PV projects.
Further, payment delays to developers can be reduced by utilising central government grants for discoms. Dues of over 60 days can be cleared through these funds. Developers can also utilise newer risk mitigating insurance schemes available in the market that cover epidemic risk involving the payment of claims based on the severity of an outbreak.
For under-construction projects, apart from time extension for project commissioning, project-specific and verifiable cost overrun funding, solely attributable to Covid-19, could be considered. For operating projects, apart from the must-run status guaranteeing energy offtake, the continuity of payments to manage cash flows of project SPVs would be of immense help. Similarly, faster implementation of the Rs 900 billion discom relief package would be a big support as it would release long-awaited cash flows from discoms. On the financing side, recycling of capital through public sector banks as well as credit enhanced bonds could provide a good shot in the arm. Finally, this crisis could be used as an opportunity to push through some of the policy and regulatory reforms to accelerate the country’s energy transition.
What learnings can be drawn from this pandemic for the future?
This pandemic would result in developers focusing their attention on better quality equipment with good monitoring systems in place, as labour availability would be hit, with challenges in deputing personnel to sites. Excellent sites built with state-of-the-art components and sound workmanship operate better and more efficiently with little human intervention, and would ultimately be in customers’ best interest. New technology adoption is likely to gain momentum, such as an increased use of drones for inspection or even robots for cleaning activities.
Learnings from the pandemic are distinct for various stakeholders, such as developers, EPC contractors, and entities performing O&M. The solar market is heavily dependent on imported solar equipment, especially solar modules, which constitute up to 60 per cent of the capital cost of a solar PV project. Many countries such as China, Malaysia, Hong Kong, Thailand and Vietnam were in the grip of Covid-19 as early as January 2020. Consequently, factory shutdowns and port restrictions delayed delivery of goods. Covid-19 has exposed the fragile supply chain in the solar segment. It is important that the government works in conjunction with solar manufacturers and associations to create a long-term business proposition to be able to compete with Chinese manufacturers on economies of scale and price.
As far as project developers are concerned, some lessons are obvious. Prudent bidding, which would help absorb the costs, strong force majeure and liquidated damages-related clauses, must-run status under the grid code, online invoicing and payment procedures are a few of these.
Starting with the positives, this pandemic has validated that renewables are truly sustainable and offer better risk protection to all stakeholders, including investors. This can be attributed to the fact that renewables have limited operational externalities. Also, their distributed footprint, as against a large thermal power project, makes them less vulnerable to unpredictable shocks.
The pandemic has reinforced the importance of risk management and business continuity plans, with resilience and adaptability towards the changing normal. On the personal front, this period has taught us the importance of positivity, higher emotional quotient and course correction. In sum, it has convinced us to think of a new paradigm called “pandemic-proofing”.