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 Climate Change

Energy
Published on: Feb. 14, 2020, 3:52 p.m.
Most renewable developers may have bid aggressively
  • Visible similarities between the renewable and thermal stories

By Vishal Pandya. The author is Co-Founder, REConnect Energy

According to Bloomberg and International Monetary Fund’s (IMF) report on Financial Stability Indicators of Countries for 2018, India emerged as a country with the highest bad-loan ratios (10.8 per cent) among the top 10 world economies. The power sector remained a key contributor to this problem where the lenders in the country are staring at about $25 billion worth of thermal power assets classified as non-performing assets (NPAs). Total 34 thermal power plants with a capacity of about 40,000 MW are classified as stressed assets.

With the RBI tightening norms around NPA classification and a requirement of mandatory restructuring of the debt within 180 days, it rattled companies in power sectors as well as lending communities.

The Supreme Court (SC) as well as the government swung into action and the SC intervened in the matter staying the RBI’s directive on classification and treatment of bad loans. Likewise, the government also formed a High-Level Empowered Committee (HLEP) under the chairmanship of the Cabinet Secretary to come up with a plan to resolve issues around the stressed thermal power projects. The HLEP analysed the situation and pointed out the following key reasons for distress in thermal power segment:

• Aggressive tariffs quoted by bidders in competitive bidding process

• Regulatory and contractual disputes

• Delayed payments by DISCOMs

• Inability of promoters to infuse equity and service debt

• Falling plant load factors (PLF) of thermal power plants (78.8 per cent in FY07 to 59.88 per cent in FY18)

A similar set of observations were being recorded in the Forum of Regulators (FoR) report on Competitive Tariff vis-a-vis Cost plus Tariff – Critical Analysis published in 2017.

While these issues are being tackled through various administrative initiatives, when India is adding up its renewable energy capacity at a rate unprecedented, the “thermal problem” seems far away from a reasonable resolution.

The orange story: In 2015, India announced a very ambitious target of achieving 175 GW of renewable energy capacity by 2022. About 100 GW of it, expected to come from only solar energy. Further, as per the announcement made by India during the 17th meeting of the International Renewable Energy Agency (IRENA) council meeting held at Abu Dhabi in September’19, the target has now been further scaled up to achieve 500 GW of renewable energy by 2030.

In 2017-18, India achieved something for the first time. India added more capacity in renewables (11,788 MW) than in the thermal and hydro sectors combined (5,400 MW). Further, as on July 2019, according to the ministry of new and renewable energy, India has already reached 81.3 GW of renewable energy installations. Further, tariffs of solar energy in India have reduced significantly over the last 10 years. According to IRENA’s report titled Renewable Power Generation Costs in 2018, India has emerged as the lowest-cost producer of Solar energy leaving behind China, Germany, Italy and France. The costs for utility-scale solar projects in India have dropped fastest (~80 per cent) in India compared to any other country in the world between 2010 and 2018. 

While the journey of renewables in terms of capacity addition and fast falling price discovery of solar energy bids have been almost exemplary in India over the past nine years, there are visible similarities surfacing between the thermal story and the renewable story in India.

• Aggressive tariffs: In May 2017, India discovered an all-time low tariff of 2.44/kWh ($ 0.034 as in Sep’19) in Rajasthan, Bhadla Solar Phase III solar park auction, where ACME Solar got awarded 200 MW of solar capacity. Many in the industry then also termed the new price discovered as “a race to extinction”. However, the race is still continuing, and all the subsequent capacity allocation auctions across India have seen tariff discovery in the range of Rs2.47/kWh ($ 0.035/kWh) to Rs2.91/kWh ($ 0.041/kWh). 

• Regulatory and contractual disputes: The fast-falling solar tariffs also created tariff pressure on other renewable generation technologies especially for wind, where the existing feed-in-tariffs in many states took a long uncertain pause. The declining tariffs in each subsequent solar auction caused insecurities among utilities having committed higher prices for their earlier solar procurements. Thus, the objective of “discovering best tariff” through nerve exhausting electronic reverse-auctions (e-RA) did not end with the completion of each auction. It rather extended further towards the results of the next auction and an auction after. States like Karnataka – which created one of the best solar policies in the country for open-access, backtracked from their commitment retrospectively. Likewise, Andhra Pradesh recently proposed to renegotiate legally binding power purchase agreements (PPAs) signed with the wind and solar developers in Andhra Pradesh. Both the matters are now pending for judicial decisions. 

• Delayed Payments by DISCOMs: When it comes to payments from public DISCOMs in India, renewables are no different than thermal. Payment delays beyond few years (not months) are a new norm. In select few states, in order to get payment from DISCOMs, the generator would be required to forgo late payment charges on their dues (along with interest) and further be ready to take a haircut on their net outstanding amount in order to get “priority” over other claimants. 

According to the Central Energy Agency’s (CEA) recent report on Payment Dues on re Generators, as on August 2019, the total dues from the DISCOMs to RE generators in India amounts to Rs11,458 crore ($1.605 billion) which also includes an amount of Rs1,722.5 crore ($241.3 million) from one generation company alone who initially reported the dues and withdrawn it later. Top five states (Andhra Pradesh, Tamil Nadu, Telangana, Karnataka, and Madhya Pradesh) alone constitute about 86 per cent of net dues to renewable sector. According to PRAPTI portal maintained by the ministry of power (MoP), many states like Haryana, Rajasthan, Bihar, Andhra Pradesh, Telangana, Tamil Nadu and Karnataka have been reported to take as long as 790 days and more to clear their dues.

• Inability of promoters to infuse equity: With gradual decreasing focus on accelerated depreciation regime, most of the capacity addition in renewable energy in the past few years in India has been added by institutional investors. Many of such investments are being made under Build and Sell model (“the BS Model”) where the funds are raised, CEOs are appointed, some plants are built while the remaining projected in spreadsheets and the story is sold to the highest bidder. With excessive interest in India’s renewable story from overseas players, most such assets were being built on valuation game and not necessarily based on a project viability. Now with the international interest waning away from the India renewable story, the fund flows have started declining leaving existing asset owners with very little manoeuvring capabilities in terms of infusing additional equity into existing projects. 

• Falling grid availability: The grid availability for RE has been a significant cause of concern in India already. The poor grid availability for wind and solar assets across states like Tamil Nadu, Rajasthan, Karnataka and Andhra Pradesh has been widely reported across various platforms. Recently, the ministry of new and renewable energy (MNRE) had to issue a warning letter to all the states and Union Territories (UTs), to restrain from curtailing renewable energy production and accord “must run” status to renewable energy. While the efforts from the central institutions and various state institutions to ensure “must-run” status are appreciable, the fast increasing penetration of renewables is certainly going to increase the balancing costs and there are enough global examples pointing towards the same. 

In California, one of the most progressive states for renewables in the US, renewable energy curtailment in the California ISO (CAISO) has steadily increased over the past few years. According to the UCSUSA Article dated 25 June, 2019, the renewable energy curtailment in CAISO is expected to increase from 2 per cent in 2018 to about 3-4 per cent in 2019 (50-100 per cent increase). 

In China, according to a Forbes article (China Sends In The Inspectors To Clamp Down On Wasted Renewable Energy), the curtailment rates for renewables was 39 per cent in Xinjiang province and 19 per cent in Gansu province during 2017. In Germany – one of the pioneers in promoting renewable energy, exercised curtailment of about 3.2 billion kWh of electricity from German wind capacity during January to March alone this year costing the operators E364 million ($403 million) in compensation (reference: Clean Energy Wire article, 9th August 2019). 

There is a real possibility that the “must-run” status and close to 100 per cent grid availability for renewables might be a far-fetched dream in India (as well) which most renewable developers may not have factored into their project planning while bidding aggressive tariffs. 

• Compromised OEMs, EPCs and O&M: The overall renewable ecosystem is further deteriorated with much weaker OEM, EPC and O&M segments. With extremely competitive tariffs, the quality of plant constructions have been put under intense economic constraints leading OEMs, EPCs, and O&M partners to constantly strive for avenues to discover “value engineering”. Further, due to lack of consistency in off-take over the last few years – both in wind and solar segments, no major O&M companies have been able to sustain their operations. India’s largest turbine maker Suzlon almost going bankrupt is a testimony to this. 

Overall, there are startling similarities between the India thermal story and India Renewable story. Both the stories have evolved with a similar level of industry excitement and perhaps similar levels of entrepreneurial spirits. It took about a decade or two for Indian thermal story to come to a grinding halt. The pace at which the renewable market has been moving in India as well as at a global scale, there is a real possibility that the whole renewable story in India could come to a grinding halt much faster than the thermal story.

Two of the most important power generation segments (thermal and renewables), accounting for nearly 85 per cent of total installed capacity in India facing a grim fate, there is perhaps one sentence that may be able to summarise the overall sentiment of the industry – Lagi Hui Hai, per Lage Hue Hai!

Some of the recent initiative by the MoP on ensuring payment security mechanising through Letter of Credits (LCs) and MNRE directive to states and UTs on honouring must run status for renewables are some of the shining examples of clear intent of Indian administration to resolve the prevailing issues in the power sector. However, the root cause of the situation still lies in distribution reforms.

According to Crisil’s recent report, DISCOM debts are expected to reach pre-UDAY (Ujwal DISCOM Assurance Yojana) level in FY20 to about $37 billion. India needs a credible off-taker of power and the existing structure of distribution reforms are certainly not an answer to it. With commercial and industrial (C&I) consumers accounting for nearly 55 per cent of total electricity consumption in India, maybe it’s time that India separates the content and carriage business and creates a credible threat via competition to the existing distribution businesses to bring accountability and stability in this weakest link which has been dragging the whole power sector downtime and again. 

Further, there is a need to encourage and facilitate C&I consumers to start adopting smart power procurement strategies, which could be done through an innovative over-the-counter marketplace. This would not only enable C&I consumers to increase competitiveness at global scale but also create a large pool of creditworthy buyers being made available for the power market.

(Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and does not of the author’s organisation.)


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