Month: May 2020

COVID-19 infections in India, relatively low so far, have started rising rapidly. New cases were reported at 8,380 on 30 May 2020, up 4.6x in the last month. Ironically, the lockdown is still being relaxed to avoid economic hardship and under pressure from the business community. Almost all social and business activities would be permitted from 1 June 2020 onwards except in “containment zones”, which will continue to see restrictions until 30 June. In response, most analysts have been marking down economic growth prospects – Goldman Sachs, a US-based investment bank, has projected GDP to fall by 5% in this fiscal year.

The renewable sector, already grappling with a series of vexatious issues on both demand and supply sides, is ill prepared for the pandemic;

We expect negative outlook over the next 1-5 years due to weak power demand, higher offtake risk and shortfall in debt financing;

Fundamental reforms are ever more essential to rebuild growth momentum;

We believe that actual number of infections is much higher as cases are routinely unreported and testing levels are still far below other countries. Over half of infections are reported to come from major cities (mainly Mumbai, Delhi, Chennai and Ahmedabad) but with millions of people on the move again, the pandemic is bound to spread across the country.

Unfortunately for the renewable sector, already grappling with a series of vexatious issues on both demand and supply sides over the last two years, the pandemic comes at a really bad time. The sector has seen a significant loss in growth momentum over last two years. In EY’s latest global ‘Renewable Energy Country Attractiveness Index’ rankings, India has slipped from 3rd place last year to 7th place. Short-term impact may be relatively mild, the mid-longer term impacts caused by weaker power demand growth, worsening financial condition of DISCOMs and shortfall in debt financing would be seriously damaging.

Weaker power demand growthDespite demand slowdown, public sector IPPs continue to add 4-5 GW of net thermal capacity every year mainly because of long gestation periods. The natural commercial response of the DISCOMs would be to go slow in procuring renewable power. We have accordingly revised our base case solar and wind power capacity addition estimate over 2020-2024 to 35 and 12 GW, down from our previous estimate of 43 GW and 15 GW respectively.

Deteriorating financial condition of DISCOMsDISCOM losses in FY 2021 are expected to rise sharply due to fall in demand, unfavourable demand mix, higher Aggregate Technical and Commercial (AT&C) losses and fixed charge waivers. We estimate total losses to the tune of about INR 895 billion (USD 11.8 billion) in FY 2021 almost fully wiping out benefit of INR 900 billion liquidity support from the central government. Unless tariffs are raised quickly and commensurately, which seems unlikely, payment delay and curtailment risks would be exacerbated. DISCOMs in Haryana, Rajasthan, Tamil Nadu, Uttar Pradesh and Maharashtra are amongst the worst affected in our view.

Figure: Estimate of DISCOM losses in FY 2021, INR billion

Source: BRIDGE TO INDIA research

Shortfall in debt financing With the pandemic causing widespread losses in bank loan books, we expect lenders to remain extremely cautious notwithstanding monetary easing by The Reserve Bank of India. Debt financing would continue to be one of the biggest challenges for the sector.

We also expect rooftop and open access installations to suffer from increasing policy uncertainty as DISCOMs try ever harder to retain lucrative C&I customers. There is now need for a robust roadmap for future growth of clean energy giving due regard to long-term structural benefits of the sector – improved air quality, energy access and job creation. Fundamental reforms are ever more essential to rebuild growth momentum.

Note: BRIDGE TO INDIA has prepared two reports assessing COVID-19’s impact on the global and Indian renewable markets respectively. The reports shall be released on 2 June 2020 and would be available as free downloads from our website.

Shell, a global oil & gas major, recently announced accelerated goals in a mission to become zero energy business. The company is seeking to completely eliminate all emissions from its manufacturing business by 2050 and also wants to reduce emissions for all energy products sold by it by 65% by 2050. Forced to take some drastic decisions in wake of the COVID-19 demand shock, the company also announced significant reduction in total capex (down USD 5 billion) and dividend (66%). But tellingly, it has kept capex plans for clean energy intact.  

So far, the oil & gas companies have been testing waters by acquiring minority stakes in disparate clean energy businesses;

But they would want to play a more central role as their primary businesses shrink and clean energy grows in scale and prominence;

For India, entry of oil & gas companies with their deep pockets and strong technology expertise in the renewable sector is highly welcome;

Shell is aggressively expanding presence in the clean energy business internationally across technologies (solar, wind, biofuels, storage, electric mobility and hydrogen) and value chain. In India, the company has already acquired stakes in two distributed energy ventures: 49% in Cleantech Solar, a market leader in C&I renewables, and 20% in Orb Energy, a rooftop solar company focused on SME and residential consumers. It is also believed to be looking actively at round-the-clock and hybrid schemes announced by MNRE.

Shell is not alone amongst the oil & gas majors to try to pivot to clean energy. France’s Total recently acquired 50% stake in Adani’s 2,148 MW operational solar portfolio. BP has set itself a target of building 10 GW renewable capacity by 2023 and has acquired interests in Ayana and Radiance Renewables through its 50:50 JV with Everstone. Petronas bought out complete control in Amplus, another leading C&I renewable company, in April last year.

We expect involvement of oil & gas companies in Indian renewables to grow significantly in the mid to long term. Most of them have sat out the exuberant bidding phase as risk-return was not deemed favourable; and there was little synergistic benefit in vanilla renewable projects. But as the sector grows in scale, procurement schemes become more complex and interlinkages with conventional energy businesses grow, these companies would want to play a central role. Growing complexity of procurement schemes – MNRE stated this week that it may hold auctions for only round-the-clock and hybrid projects in future – would also play to their advantage.

For India, entry of oil & gas companies in the renewable sector is highly welcome. The global majors bring deep pockets, strong technology expertise and international best practices besides more discipline and patience. Other developers, particularly financial investor backed platforms, should take note.

RTC auction a small step towards firm renewable power

SECI completed auction for its 400 MW round-the-clock (RTC) tender last week. Entire capacity has been awarded to ReNew Power at a tariff of INR 2.90/ kWh. Other bidders included Greenko (400 MW, INR 2.91/ kWh) and HES Infra (100, 3.91). Ayana had also submitted a bid for 50 MW but was not qualified for e-auction stage. First year tariff would be escalated by 3% annually for 15 years going up to INR 4.52/ kWh and stay flat thereafter. Levellised tariff is estimated at INR 3.56/ kWh. Unlike most other tenders, offtakers for this tender were identified in advance. New Delhi Municipal Council and Dadra & Nagar Haveli, a Union Territory, are expected to procure 200 MW power each.

The project configuration would most likely be solar-wind hybrid with a relatively small battery storage component;

Minimum CUF and scheduling conditions are stacked in favour of the project developer;

Evolution of tender designs, well under way now, would radically alter competitive dynamics and financing profile of renewable sector;

Contrary to the name, there is no provision for intra-day scheduling of power in the tender. The developer needs to comply only with monthly and annual CUF requirements of 70% and 80% respectively – much higher than the usual 19% and 22% stipulation for vanilla solar and wind tenders. However, the offtakers are obligated to purchase power output equivalent to CUF of up to 100%.

The tender is technology neutral – the developer is free to choose solar, wind or any other renewable technology alongside any storage technology. High CUF requirement means that actual project capacity would be much higher at about 2.4-2.8x tender size. An optimum project design would most likely use a mix of solar and wind technologies with minimal battery storage capacity. And as permitted in the tender, the projects would most likely be located in different regions to achieve highest possible techno-commercial efficiency.

We believe that the tender conditions (CUF, scheduling) are stacked in favour of the project developer. As a key requirement of the two offtakers – firm, predictable power meeting their demand profile – is not met, it remains to be seen if they would actually be willing to go ahead and sign the PPAs. Interestingly, New Delhi Municipal Council’s total power requirement is only 1,400 million kWh, equivalent to 80% CUF for a 200 MW project. So how they could switch their entire procurement to this project and commit to 100% CUF is not clear.

Nonetheless, alongside the recent peak power tender, the RTC tender signals a step change in the market and a move away from vanilla tenders. In response to DISCOM demand, MNRE is pushing for tenders seeking predictable power output. SECI has already issued a 5,000 MW RTC tender seeking a blended mix of renewable and thermal power (bids due on 4 June 2020). We believe that this evolution is going to radically alter the nature of market. For one, the number of participating developers is likely to come down because of complex technology and risk considerations. Second, as storage component becomes larger, tariffs would gradually inch up and renewables would compete more evenly with thermal power.

India added total utility scale solar and wind capacity of 715 and 328 MW respectively in the quarter ending March. These are meagre returns; the combined total represents the weakest quarterly progress on capacity addition in the last two years. For the financial year 2019-20, total utility scale capacity addition was 7,408 MW, 34% below the high of two years ago.

Progress over next two quarters is expected to remain dismal due to Coronavirus disruption;

Faced with sharp demand slowdown and deteriorating financial condition, the DISCOMs are reluctant to sign long-term PPAs;

The sector urgently needs a revised roadmap in view of the slumping power demand outlook, offtake concerns and challenges in tying up land and transmission connectivity;

Jan-Mar is usually the busiest quarter for project construction as developers and contractors rush to complete projects to claim depreciation and meet internal targets for the financial year. So the slow progress is doubly disappointing. Reasons for slow down are multiple and varied. A spate of challenges including delays in regulatory approvals of tariffs, transmission connectivity, debt financing and INR depreciation has affected project execution across the board.

Going forward, supply chain disruption due to Coronavirus would continue to severely affect progress in Q2. Project construction activity was allowed to commence from 20 April 2020 onwards but a further 6-8 weeks are expected to be lost in remobilisation effort and resolving shipment blockages. There may be further hold-ups depending on government approvals, or reopening of PPAs in case of open access projects.

Figure: Solar and wind capacity addition, MW

Source: BRIDGE TO INDIA researchNotes: Figures include open access projects but exclude rooftop solar and other distributed solar systems.

There are 37 GW of solar and wind projects currently in pipeline. Excluding 3 GW capacity in the manufacturing-linked tender, the remaining 34 GW is due for completion in the next two years. But we are skeptical if more than 24 GW can be added in this period in view of the various ongoing challenges. Faced with sharp demand slowdown and deteriorating financial condition, the DISCOMs are reluctant to sign PPAs and commit to long-term purchases. SECI is believed to be struggling to find buyers for the recently completed 1,200 MW peak power tender auction (weighted average tariff of INR 4.30/ kWh) and 4,000 MW manufacturing-linked projects (INR 2.92/ kWh).

Our most plausible renewable capacity estimate for March 2022 is 116 GW including rooftop solar and open access projects. These numbers are consistent with our recent study on 5-year outlook for the renewable sector. MNRE has been keen to rush out new tenders and auctions but should instead focus on finding decisive solutions to supply side constraints. Unless these factors are addressed, the sector would stay stuck in the third gear at 9-10 GW average annual capacity addition.