Cautious Optimism Reigns Over Renewable Energy: Ind-Ra

A sense of cautious optimism is spreading across renewable projects, with bidders and lenders going circumspect around low margin of error owing to the steep fall in tariffs since the start of auction regime, says India Ratings and Research (Ind-Ra).

The recent scrapping of solar auctions around tariff concerns can derail the Ministry of New and Renewable Energy target to achieve 100GW of solar capacity by FY22. The solar auction target for FY19 may be missed on account of frequent changes in the implementation of safeguard duty, apprehensions about grid connectivity and land acquisition-related bottlenecks. Also, a depreciating rupee compared to USD poses a threat to economical solar tariffs.

On the positive side, solar projects in Ind-Ra’s portfolio demonstrated stable generation levels with improving grid availability in FY18. Also, major state distribution utilities, including Solar Energy Corporation of India, demonstrated a stable payment history in FY17 and FY18. Stable generation nature of solar power compared to other renewable sources remains a major advantage for solar power projects.

On wind side, grid connectivity related concerns have forced bidders to skip auctions in the past, and the ministry target to conduct 10GW of auctions in FY19 may be missed. FY18 was a year of underperformance for wind power projects, with generation lagging P90 levels. Ind-Ra considers the unpredictability of wind resource a major risk for wind projects. However, the issuers are managing the risk by portfolio diversification and maintenance of adequate debt coverages and liquidity. A major positive for wind power projects is the stabilising grid availability. Tamil Nadu demonstrated a substantial improvement in grid availability over FY16-FY18.

Mergers and acquisitions activity in renewables was sluggish in the last 12 months, with major players counting on enough capacity available to bid for new projects. In Ind-Ra’s opinion, there could be a few deals in patches. Also, high interest rates and rupee depreciation have discouraged a major surge in capital market transactions on debt side. Achieving financial closure for new renewable projects with highly competitive tariffs and refinancing of existing loans may be a challenge without sponsor backing, on account of the low margin for error.