31 May 2020 | BRIDGE TO INDIA
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 growth
Despite 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 DISCOMs
DISCOM 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.