ICRA revises outlook for renewable energy sector to negative amid delays in project execution, payments

"The headwinds related to payment delays, uncertainty over resolution of tariff issue for projects in Andhra Pradesh, as well as execution and financing related challenges for under-construction projects have impacted investor sentiments in the sector.

This is reflected from the slowdown in tendering of wind and solar PV projects by 37 per cent to 10.6 GW in 9 months CY2019 from 16.7 GW in the corresponding period of previous year. Moreover, many of bids called by central nodal agencies remained under-subscribed," said Sabyasachi Majumdar, Group Head & Senior Vice President - Corporate ratings, Icra.

The capacity addition in FY20 will be primarily driven by the solar power segment.

However, compared to 5.6 per cent in FY15, the share of RE based generation in the overall generation mix at all India level is rising, as seen from an increase to 9.2 per cent in FY2019.

The share of RE is expected to reach closer to 10 per cent in FY2020. This is owing to the large sized capacity addition witnessed in the wind and solar power segments during this period, driven by policy support from the central and state governments as well as the significantly improved tariff competitiveness of wind and solar power vis-a-vis conventional power sources.

The average bid tariffs discovered in the auctions for wind and solar power projects in 2019 so far remained at Rs 2.7-2.8 per unit. While this is higher than the low of Rs 2.4 per unit discovered in 2018, the tariffs continue to remain less than Rs 3.0 per unit, given the imposition of tariff cap by the nodal agencies.

"This uptrend in bid tariffs was partly driven by the concerns over project viability, execution delays and increase in capital costs due to imposition of taxes/ duties and rupee depreciation against dollar for imported equipment," Icra said.

On the other hand, the decline in bid tariffs and slowdown in capacity addition in the wind power segment has put pressure on the credit profile of some of the wind turbine OEMs, which in turn has affected the wind turbine machine availability for few IPPs (independent power producers).

As a result, IPPs are exploring either in-house O&M or through third party services. Their ability to ensure the desired machine availability as well as spare parts remains critical for the operations, especially in cases where wind turbine OEM is financially stressed.

With respect to the counter-party credit challenges, Icra said, the payment cycle for wind and solar power projects remains mixed. While the projects having central nodal agencies, and discoms in states such as Gujarat as off-takers are receiving payments in a timely manner, the projects having discoms in most of the other states as off-takers are facing delays in receiving payments.

"The payment timeline has witnessed significant deterioration for Wind IPPs in Andhra Pradesh and Telangana, with delays of more than 12 months. While the provision of letter of credit (LC) or advance payments has been made mandatory w.e.f. August 1, 2019, the implementation of the same has been mixed so far with many of the intra-state RE projects not receiving the LCs.

"Moreover, this does not address the issues pertaining to recovery of old receivables. The IPPs with large exposure to the discoms in Andhra Pradesh and Telangana and belonging to the promoter groups having relatively modest financial strength, remain vulnerable from debt servicing perspective," Icra said.