Owing to improving cost competitiveness of wind and solar power coupled with favourable policy support from both Central and state governments, the long-term demand outlook for renewable energy (RE) sector looks strong, says ICRA.
Owing to improving cost-competitiveness of the wind and solar power coupled with favourable policy support from both Central and state governments, the long-term demand outlook for renewable energy (RE) sector looks strong, says ICRA. According to a study by the rating agency, the improving cost competitiveness for renewable energy players has been driven mainly by competitive bidding process followed as well as a significant fall in photovoltaics (PV) module price levels over the last three year period for solar players. “Even under a conservative assumption of overall renewable purchase obligation (RPO) at 15 per cent (comprising 10 per cent non-solar RPO and 5 per cent solar RPO) by fiscal 2022, the incremental cumulative RE requirement for the period FY2018-FY2022 is estimated at 65 GW, which is quite significant,” said ICRA Senior Vice President and Group Head Sabyasachi Majumdar. Within this, he said, ICRA estimates the share of wind and solar energy capacity addition requirement to be at least 35 per cent and 55 per cent respectively. Given the strong pipeline of projects awarded in the last 12-month period, ICRA expects solar capacity addition of 7-7.5 GW in FY2018, which is likely to be higher than the wind energy capacity addition. “In case of the wind energy segment, the capacity addition in the near term will be critically dependent upon the finalisation of bidding plans by distribution utilities and the Ministry of New and Renewable Energy (MNRE),” Majumdar said. The RE sector continues to face regulatory challenges related to RPO norms and its compliance, continuing delays in payments from distribution utilities and risk of forced back down by the utilities in a few states. “Nonetheless, some easing in release of payments has been observed in few states in the recent months, with the implementation of the UDAY scheme. This apart, while falling tariffs improve demand outlook, they also affect the cost competitiveness of pre-existing RE projects as well as the project economics of new projects,” ICRA said. Also, the viability for the winning bidders from the credit perspective would depend upon availability of long tenure debt at cost competitive rates, plant load factor (PLF) levels and their ability to meet the budgeted costs, it noted.
“The RE projects in few states are facing issues with tariff renegotiation requests by utilities in view of the falling wind and solar tariffs under competitive bidding. However, such renegotiation is unlikely given that there has been a precedence of regulatory ruling in favour of the developers in such cases,” Majumdar said. He also said such RE projects may remain exposed to risk of forced back-down by utilities, especially in case of purchase power agreements (PPAs) wherein tariff is significantly higher than average power purchase cost of the respective state owned distribution utilities. Going forward, ICRA said, the timely alignment of RPO trajectory in line with targets specified by the power ministry along with improvement in RPO compliance remains extremely crucial for achieving the 175 GW RE capacity target set by the Centre.
“Moreover, a fundamental improvement in the financial position of the distribution utilities remains important in the long run, which is dependent upon their ability to curtail distribution loss levels in line with targets and tariff adequacy,” ICRA noted.