Business News/ Market / Mark-to-market/  Renewable energy project returns face counter party risks

Falling component prices and project costs may have vindicated renewable energy developers’ bets on low tariffs. But their returns are seeing risk from an unexpected quarter---power distribution companies or discoms, the buyers of renewable energy.

The weak financial health of discoms is constraining the credit profile of renewable energy developers, raising debt costs and crimping potential returns for project developers, ratings agency India Ratings and Research said in a note.

According to India Ratings, discoms in Madhya Pradesh, Rajasthan, Maharashtra and Tamil Nadu, which have large installed renewable energy capacities and more in the pipeline, are taking more than four to eight months to release payments. Maharashtra State Electricity Distribution Co. Ltd is said to have delayed payments to wind projects by about a year. The payment delays and uncertainties are raising the credit risk profile of the developers, driving up the finance costs. “This uncertainty is factored into the pricing of infra bonds, causing a burden on the projects’ cash flows," India Ratings adds.

Renewable energy projects in general are built on an 80:20 debt-equity ratio. So higher finance costs can crimp cash flows and weigh on project returns. The ratings agency says the project developers may not have fully considered the counter-party risks and their impact on finance costs while making aggressive tariff bids.

Vikram Kailas, vice chairman and managing director of Mytrah Energy Ltd, a renewable energy company, says the aggressive bids (at tariffs of 4 per unit) had “very low" margin of error. Those bids do not fully cover risks like project quality, execution and payment delays, which matter to lenders, Kailas said.

Raj Prabhu, chief executive of Mercom Capital Group, echoes these views. Competition has squeezed margins and lenders are wary of financing such projects. “Due to recent fall in Chinese module prices, some of these low bids that were looking unrealistic may become viable, but banks need to (be) convinced to lend to these projects," Prabhu adds.

According to Mercom, developers are “waking up" to the reality and the scenario may improve. But that will only solve part of the problem. For the situation to improve, power distribution companies should get their finances in order. That will reduce counter-party risks and ensure competitive power tariffs for consumers.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 11 Oct 2016, 08:51 AM IST
Recommended For You
Get alerts on WhatsApp
Set Preferences My Reads Watchlist Feedback Redeem a Gift Card Logout