Renewables to witness above 4 lakh Cr investment till March 2025: ICRA

Capacity addition expected to improve to about 11-12 GW in FY2022 aided by large project backlog

ICRA Ratings has said that it expects the incremental bidding activity for renewable energy (RE) projects to gradually shift over the medium term from standalone wind or solar bids to hybrid projects blended with other sources for round the clock (RTC) and peak supply. This is given the competitive tariffs discovered and the fact that hybrid projects enable efficient grid integration of renewables. Further, the bid out pipeline for the awarded projects as on date remains strong at about 50 GW and this in turn, is expected to result into a recovery in capacity addition to about 11-12 GW in FY2022.

Commenting on these trends, Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA, says, “The RE sector has witnessed aggregate project awards of ~78 GW under the tariff-based competitive bidding route across wind, solar and hybrid projects so far. Within this, the solar power segment has occupied a dominant share of 79 percent in the bid-out projects, while wind and hybrid share stood at 16 percent and 5 percent respectively. The COVID-19 pandemic induced lockdown restrictions slowed down the RE capacity addition to 2.2 GW in H1 FY2021 against more than 4 GW reported in H1 FY2020. Nonetheless, the execution is expected to improve in the second half of the FY2021.With the easing of supply chain challenges, the capacity addition for the full year of FY2021 is expected to be about 7.5 – 8.0 GW comprising 5.5-6.0 GW from solar and 1.5 to 2.0 GW from wind.”

Overall, ICRA expects the RE capacity to reach to about 160 GW by March 2025 with a combination of standalone solar & wind projects and hybrid projects, with incremental capacity addition of 74 GW during April 2020 – March 2025, with estimated investment of more than Rs. 4 lakh crore. However, the realisation of this potential is subject to resolution of execution challenges and timely signing of power purchase agreements (PPAs)/ power sale agreements (PSAs). This apart, a sustainable improvement in financial position of state distribution utilities (discoms) remains critical, given that counter-party credit risk is one of the prominent risk for RE IPPs.

The improvement in the financial profile of the discoms, as envisaged under UDAY could not be achieved due to the limited operational improvement and lack of adequate tariff revisions. This is in turn led to large build-up of receivables for RE IPPs from discoms, especially from the states of Andhra Pradesh, Tamil Nadu and Telangana. The discom finances have been further constrained by the sharp decline in revenues during the lockdown period in H1 FY2021. In this context, the Government of India announced the liquidity support scheme of Rs. 90,000 crore, now increased to Rs. 120,000 crore, in the form of loans from Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) to clear the dues to power generating companies, backed by state government guarantees and linked to implementation of reforms in the state power sector. While the liquidity scheme is a short-term measure and is still in the process of being implemented, a sustainable improvement in discoms’ finances can be achieved through an improvement in operating efficiencies and timely pass-through of cost variations through tariff revisions to consumers.

Vikram V, Associate Head & Assistant Vice President – Corporate ratings, ICRA, adds, “The sector outlook remains negative given the regulatory challenges persisting for RE IPPs in the state of Andhra Pradesh, execution headwinds for the under-construction projects and concerns on the financial health of the discoms. Nonetheless, credit profile for majority of the ICRA-rated portfolio in renewables remains supported by presence of long term PPAs, satisfactory operating performance, adequate liquidity buffer available (both in the form of debt service reserve and access to working capital limits) and the strengths by virtue of a strong sponsor profile as also evident from the demonstrated track record of support in case of any cash flow mismatches.”