Financial Constraints

Standing Committee on Energy report on funding concerns for the renewables sector

The Standing Committee on Energy (2021-2022) has released its 21st re­p­ort, titled “Financial Constraints in Re­­n­ewable Energy Sector”. The report was presented to the Lok Sabha on February 3, 2022 and was laid in the Rajya Sabha on the same day. The report notes that accor­d­ing to the government, an additional in­v­estment of about Rs 17 trillion, including as­­­sociated transmission costs, has been en­visaged to meet the country’s long-term commitments. The country would therefo­re need an annual investment of Rs 1.5 trillion-Rs 2 trillion in the renewable energy sector. However, the estimated investment for the last few years has been in the range of Rs 750 billion. There is thus a huge gap between the required and actual investment, and filling this gap would be a difficult task that would require an enabling fra­mework to be created by the government, according to the committee’s findings.

Rene­w­able Watch provides an extract from the report covering the key financial constra­in­ts in the renewable energy sector, the measures taken by the government to boost in­vestments and the key re­commendations made by the committee to the government…

Key constraints

The report mentions that the following constraints have been highlighted by REC Limited.

  • Re-negotiation of power purchase agr­eement (PPA) tariffs discovered through competitive biddings: In the past, some states have resorted to cancellation/re­ne­gotiation of tariffs discovered throu­gh competitive bidding. In case of An­dh­ra Pradesh, an interim tariff of lesser am­ount (Rs 2.44 per unit) has been allowed by the state’s High Court, pending final decision. Such uncertainty and the consequential impact on revenues has aff­ected the debt serviceability of the project as well as investors’ sentiment.
  • Delay in adoption of PPA tariffs: As per statute, the tariffs discovered through co­mpetitive bidding are required to be ad­opted by central/state electricity regulatory commissions. While PPA off-takers are filing application for adoption of tariffs, there have been multiple instances of delay in disposal of tariff adoption ap­p­lications by the electricity regulatory co­mmissions. As the gestation period for renewable energy projects is generally low, renewable energy developers resort to aggressive biddings, estimating a f­ix­ed cost of implementation with timely pr­o­ject execution. Delays in tariff adoption further delay project execution and may cause time and cost overruns, thereby impacting the viability of projects.
  • Delay in payment of energy bills by state discoms: Renewable energy developers are facing severe challenges in realising revenue on time from renewable energy ge­neration. There have been cases of exorbitant delays in receipt of payments from various state discoms. Renewable energy developers in Telangana have wit­­nessed payment delays of over 10 mo­­nths at times. Some of the renewable energy developers in Maharashtra and Andhra Pradesh are also facing similar is­sues. Although the projects are perfor­ming very well technically and are generating the envisaged energy, delays in releasing payments against the energy bills of developers has led to delays in debt servicing of lenders and thus downgrading of assets to non-performing as­sets (such as Shrikant Energy, and Glo­bal Metal and Energy Private Limited in Maharashtra). While discoms have been claiming rebates for payments before due dates as per PPA terms, they are re­luctant to pay compensation/penal inte­rest to renewable energy developers for de­layed payments, payable in the form of late payment surcharge as per PPA terms. This adversely affects lenders’ as well as investors’ sentiments.
  • Non-compliance with respect to payment security instruments: The standard PPAs approved/adopted by the re­gulators have payment security provisions, which generally include revolving letters of credit or payment security fun­ds, es­crow, etc. It has been observ­ed that in the majority of cases where PPAs are ex­ec­­uted with discoms, the payment security instruments, namely, letters of credit, are not being provided by discoms.
  • Reliance on imports: Presently the dom­estic manufacturing capacities of solar cells and modules are approximately 3 GW and 13 GW respectively, which is not sufficient to cater to the current de­mand of the country. Therefore, renew­able en­er­gy developers in India are dependent on imports of solar modules, mainly from China. This high reliance on imports creates uncertainty of prices and timely av­ailability of modules. The Indian government has introduced a 40 per cent basic customs duty on solar modules as of April 2022 and 25 per cent on solar cells to reduce the reliance on im­ports and expand the country’s photovoltaics (PV) manufacturing base. Ho­w­ever, owing to inadequate domestic ca­­pacity, reliance on expensive imports and price variation may affect the viability of current projects under execution.
  • Lower tariffs: Discovery of lower tariffs in competitive biddings and the rise in mo­d­ule cost in the recent past have an ad­verse bearing on the debt service coverage ratio and the internal rate of return of projects. Given the high cost of debt in the Indian market, funding of renewable energy projects with significantly low tariffs is a cause of concern for lenders.
  • Land acquisition and clearance cons­traints: Policies regarding the acquisition of land and non-agriculture conversion of the acquired land are state specific. Pe­nding litigations (post acquisition) in co­urts and non-disposal of non-agriculture conversion applications by state departments lead to delays in security creation, leading to charging of additional interest for non-creation of security, wh­ich further burdens project cash flows.
  • Evacuation constraint: Solar and wind power, being intermittent in nature, have created challenges for the transmission grid due to a mismatch in peak demand and generation availability. Refurbish­me­nt/revamping of grid infrastructure is required for sustainable transmission of renewables. Availability of evacuation ap­­p­­rovals along with adequate infrastr­ucture, at the time of commissioning of a renewable energy project, is critical.
  • Non-compliance of “must run” status: In India, renewable energy projects enjoy the “must run” status and hence are not subjected to curtailment, except for grid safety reasons. However, there have be­en some instances where PPA off-takers have been discoms, and state load dispatch centres, at times, restrict the energy evacuation schedule for renewable en­ergy projects, causing capacity loss as well as revenue loss to renewable en­ergy developers.

Measures taken by the government

  • The report mentions the measures taken by the government to boost investments in the renewable energy sector based on in­formation provided by the ministry:
  • Permitting foreign direct investment up to 100 per cent under the automatic route.
  • Fiscal incentives such as accelerated de­­preciation, goods and services tax at lo­wer rates, and a concessional customs duty.
  • A payment security mechanism for projects bid out by the Solar Energy Cor­poration of India (SECI), to cover re­ceivable delays.
  • Mandating the requirement of letter of credit as payment security mechanism for distribution licensees to ensure timely payments to renewable energy generators.
  • A Dispute Resolution Committee to consider the unforeseen disputes between solar/wind power developers and SECI/ NTPC, beyond contractual agreements, which facilitates smooth implementation of solar/wind energy projects.
  • Setting up of the Renewable Energy Ind­ustry Promotion and Facilitation Board.
  • Waiver of interstate transmission system charges and losses for interstate sale of solar and wind power for projects to be commissioned by June 30, 2025.
  • Declaration of trajectory for renewable purchase obligations.
  • Setting up of ultra-mega renewable en­ergy parks to provide land and transmission on plug-and-play basis.
  • The Green Energy Corridor Scheme for ev­acuation of renewable power.
  • Notification of standards for deployment of solar PV systems/devices and a revis­ed list of models and manufacturers for wind turbines as quality control mechanisms.
  • Standard bidding guidelines for the tariff-based competitive bidding process for procurement of power from grid-connected solar PV and wind projects.
  • “Must run” status for renewable energy projects under the India Electricity Grid Code.
  • Introduction of the Green Term Ahead Market, with plans for a Green Day Ah­ead Market.

Key recommendations

With respect to the overall debt require­me­nt and cost of financing, the Committee re-commends that, first, the ministry should work proactively to make available and explore innovative financing mechanisms and alternative funding avenues such as infrastructure development funds, infrastructure investment trusts, alternative in­vest­ment funds, green/masala bonds and crowd funding. Second, the ministry may explore the possibility of prescribing rene­wable finance obligations on the lines of renewable purchase obligations for ba­nks and financial institutions in order to make them put a specific percentage of th­eir in­vestment into the renewable energy sector. Third, the government should ex­p­l­ore the setting up of a green bank system.

With respect to the issue of delays in tariff adoption, which leads to financing problems for developers, the Committee reco­mmends that a maximum period should be prescribed for providing approvals or disposing of petitions by the state electricity regulatory commissions (SERCs) throu­gh appropriate amendments in the Elec­tri­city Act. Further, a maximum stipulated time sh­ould also be prescribed for the ap­point­ment of SERC members after vacancies arise. Similarly, regarding the problem of pay­ment delays by discoms, the com­mit­tee recommends that the ministry sh­­ou­­ld ensure proper implementation of Electricity (Late Payment Surcharge) Rules, 2021, so that developers get compensated for delays caused by discoms in pay­ment of dues. The committee also recommends that the ministry should ensure that every PPA signed between renewable energy developers and discoms has a pay­ment security instrument provision, wh­ich is to be implemented in letter and spi­­rit. More­over, the ministry should pursue st­at­es/ discoms to clear dues on first in-first out basis so that the oldest dues are paid first. In addition, the committee recommends that the government should come out with lucid and enforceable guidelines for compensation with respect to curtailment for reasons other than the grid security. Acc­o­rding to the Committee, the limit on loans for the renewable energy sector un­d­er prio­rity sector lending should be inc­rea­sed.

Fu­rthermore, banks should be se­n­si­tised ab­out the importance and benefits of re­ne­wable energy, so that they do not ov­e­rlook this sector for priority sector lending.

The article is an extract of the twenty-first report released by the Standing Committee on Energy (2021-2022) titled “Financial Constraints in Renewable Energy Sector”

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