How payment delays, fear of tariff renegotiations hurt renewable energy projects

Discoms are large buyers of electricity in India and their revenue shortfalls have hit payments to power producers. This, in turn, has worsened the financial metrics of renewable energy projects.

During 1 January-15 August, renewable energy projects in India Rating’s portfolio saw 25% more downgrades than upgrades. This is in variation to the previous calendar year when projects in India Ratings portfolio saw more upgrades than downgrades.

The ratings downgrades are largely attributable to delays in payments from the offtakers, which are mostly the state government owned discoms. As of July, payment dues worth ₹9,735 crore were pending for renewable power generators, according to data from Central Electricity Authority.

“Key updates since the release of the last outlook in February 2019 include Andhra Pradesh state’s efforts to negotiate renewable power tariffs/terminate costly power purchase agreements (PPAs) and increasing receivables period from select state discoms on a negative side," India Ratings said in a note.

The ratings revision is not confined to India Ratings portfolio. According to Gautam Bafna, chief executive officer, Wisdom Torch Consulting Solutions LLP, a consulting firm, revisions are happening at other ratings agencies also.

The trends do not bode well for the affected projects or the sector. Payment delays and fear of tariff renegotiations raise financial risks of renewable projects, which make lenders cautious about committing funds to such projects, potentially driving up the finance cost. “Earlier because of less perceived risks interest rates were low. Debt funding at such low rates is no longer available," Bafna adds.

Rise in finance costs can have detrimental impact on project returns for investors. Similar to infrastructure projects, renewable energy plants have large debt component constituting as much as 75% of the project value. So even a marginal increase in interest rates can adversely impact project returns for investors.

Projects headed for refinancing will be hit harder. Once a project is commissioned, developers usually refinance the debt to optimise returns or avail the benefit low interest rates. Therefore a rise in finance cost will make the process of refinancing at favourable rates more difficult.