ICRA’s outlook for the renewable energy (RE) sector is stably supported by the continued policy support from the Government of India, strong project pipeline, and superior tariff competitiveness offered by wind and solar power projects – both in the utility and the open-access segments. Further, tariff competitiveness offered by the solar and wind power projects in the utility auction routes continued to remain superior, with tariffs remaining below Rs. 3.0 per unit, despite the upward pressure arising from the imposition of customs duty on imported cells and modules, w.e.f. April 2022.
Commenting further, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head, ICRA Ratings, said, “The investment prospects in the RE sector thus are expected to remain strong, given the policy impetus with a target to reach 450 GW by FY2030 and competitive tariffs. The capacity addition in the power sector over the medium term will be driven by the RE segment, led by a strong project pipeline of close to 40 GW as of date. The key challenges constraining the growth remain on the execution front, mainly associated with land and transmission infrastructure as well as the slow but improving progress in signing of power purchase agreements and power sale agreements by intermediate procurers with state distribution utilities (discoms). An improving financing environment along with the softening in the interest rate for the RE projects over the last 12-18 months period has been a positive for the sector.”
Apart from the execution-related challenges, the RE developers are facing challenges arising from delays in payments from the state distribution utilities and grid curtailments as observed in few states, especially for the relatively higher tariff projects. Based on a petition filed by the solar developers affected by grid curtailment in Tamil Nadu, the Appellate Tribunal for Electricity (APTEL) issued a favorable order in August 2021. The same stated that the actions of the state utility of Tamil Nadu were ‘mala fide’ in issuing backdown instructions for commercial reasons and ordered payment of compensation to the solar IPPs at 75% of the PPA tariff. Further, the APTEL issued directions to all state discoms, state electricity regulators, and grid operators stating that any curtailment of RE plants (for reasons other than grid security) shall be compensated at PPA tariff.
In this regard, Mr. Vikram V, Vice President & Sector Head – Corporate Ratings, ICRA, adds, “This order by APTEL is a positive for the RE sector and is expected to act as a deterrent against grid curtailment by discoms and grid operators. However, timely implementation of the order remains key, given that risk of a further challenge to the Supreme Court cannot be ruled out. Further, while the operating projects continue to face delays in payments from the state discoms in some of the key states, the presence of strong intermediate procurers like SECI and NTPC is supporting the addition of new capacities led by the presence of strong payment security mechanism in the form of a letter of credit, payment security fund and tri-partite agreement with Central government, state government, and RBI.”
Further, the demand outlook for the domestic solar OEMs remains favorable, with the strong policy support through the imposition of BCD on imported cells and modules, the notification of the production-linked incentive (PLI) scheme, and a strong project pipeline from various schemes requiring the use of domestic modules. Also, the non-inclusion of the overseas suppliers in the Approved List of Models and Manufacturers (ALMM) so far, is likely to support the demand for domestic module OEMs in the near term. The policy push is expected to improve the cost competitiveness of domestic OEMs and has led to new capacity announcements of more than 15-GW by various OEMs and the entry of new players. The timely commissioning of these new capacities remains important to meet the growing demand from the developers, given the current capacity constraints. Moreover, the ability of the OEMs to achieve backward integration and build economies of scale would be important to remain competitive against the overseas suppliers on a sustained basis.
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