BW Businessworld

Clean Energy Is Not Spotless

The wind and solar energy industry face a few dark spots that need immediate attention. Renewable energy now accounts for over 5 per cent of the electricity generated in India, and growing

India’s clean energy push, with its ambitious target of 1,75,000 megawatts (mw) of capacity by 2022, is being driven by a new set of companies — independent power producers (IPPs) focusing only on renewable. Companies such as Greenko, Mytrah, ReNew and Welspun Renewables have all come up after 2010 and are the largest renewable energy generators in India, with close to 1,000 mw of capacity each.

This is a contrast from the previous boom in renewable energy; before the 2008 financial crisis, wind power was going strong, but most of the orders were from companies/entities looking for accelerated depreciation to bring down tax on profits made elsewhere. Top owners of wind farms at that time included real estate companies, auto-makers, oil drillers and even a seed company. The bulk of orders now, are from companies in the power generation business — indicating a level of maturity in the business.

Renewable energy now accounts for over 5 per cent of the electricity generated in India, and growing. Renewable energy installations during FY16 added up to 7,072 mw (see Gaining Heft), and are likely to exceed 10,000 mw in FY17.

Falling Costs, Rising Capacity
During FY16, multiple developers bid to supply solar electricity at less than Rs 5/unit, enabled by improvements in solar photovoltaic manufacturing technology. Wind is a relatively mature technology and has been on par with coal-based power for some years now. “The cost of solar power for our projects ranges from Rs 5.5-5.75/unit, while the cost of wind energy is Rs 4.5-5.8/unit across different locations,” says Ravi Kailas, founder and chairman, Mytrah Energy. Mytrah currently operates 827 mw of windmills, and has another 500 mw of capacity — mostly solar, under implementation. ReNew Power, which is India’s largest renewable IPP, puts the cost of solar power production at Rs 4.5-4.7/unit. These numbers compare favorably with thermal power that stands at Rs 4.5-7.5/unit for newly built coal-based power plants, depending on location. Additionally, renewable electricity has flat tariffs for 20-25 years, whereas price of coal-based power will increase in line with the price of coal and handling costs.

Solar and wind power projects can be put up in 1-1.5 years’ versus 4-5 years’ gestation for thermal power plants, says Vinay Rustagi, managing director of Bridge to India, a renewable energy consultancy. Construction time for nuclear power plants in India is usually over a decade, with even higher capital costs. Having capital tied up for a shorter duration also helps in keeping costs down.

The falling cost of solar power is reflected in the pipeline of new projects. “The government’s target for new solar installations in FY17 is 10,500-12,000 mw, but our research shows that 6,000 mw of new installations is a more realistic target,” says Rustagi. Some projects are likely to get delayed as tenders were completed late or the power purchase agreements got delayed, he says.

In case of wind, the industry expects some growth, albeit slower. Inox Wind, one of the leading wind turbine manufacturers in India, expects 4,100 mw of wind energy installations during the current financial year.

However, as this industry builds up scale, it is now having to deal with a new set of issues, ranging from access to capital, weak counter-parties and technology.

Solar Shift: Well advised?
Wind energy currently accounts for over 60 per cent of installed renewable capacity in India, and new installations exceeded solar during FY16 as well. However, this is expected to reverse in the current year — with projected solar and wind installations at 6,000 mw and 4,000 mw, respectively. The government is also looking at solar power for the bulk of its renewable commitments — of the 175,000 mw that India has committed as a part of its renewable energy goals, 100,000 mw is going to be from solar power. Is this shift well advised?

Solar power has one advantage over wind — that it is almost similar all across India irrespective of location. Wind energy is confined to specific locations with favourable wind characteristics. That said, as of now, almost all solar power equipment in India is imported, mostly from China. Wind energy equipment on the other hand, is almost entirely made in India, by Indian and foreign firms including Gamesa, Suzlon and Inox. For a country struggling to create manufacturing jobs and a government trying to push for ‘make in India’, pushing for a higher share of wind in the renewable mix should be a no-brainer.

Capital Crunch
The renewable IPPs are in an asset-heavy industry — the cost of solar and wind energy installations averages Rs 6 crore per megawatt, with returns spread over as long as 20 years. During FY16, total investments in wind and solar power added up to Rs 38,588 crore or $5.7 billion. At this pace, the investment required during FY17 for capacity additions, would be $9 billion. Is this sustainable?

With most IPPs going big on new installations, this kind of capital cannot come from internal accruals. Access to capital is a major issue for the sector. The sole listed renewable IPP, Mytrah Energy, had a debt of $674 million on a total asset base of $949 million. Although, Mytrah reported a profit after tax of $0.39 million on revenue of $74.72 million in FY15, it’s not sufficient to meet the investment commitments of the company. ReNew Power has a project pipeline of 1,650 mw to be executed over the next 12-18 months, which can’t be funded by existing cash flows. Recent reports suggest that Welspun Renewables is looking for a buyer while ReNew Power is readying plans to file for an IPO.

“India’s target of 175,000 mw capacity by 2022 would need a total investment of $200 billion,” says Kailas of Mytrah. Assuming 25-30 per cent equity, this means an equity component of $50 billion and a debt component of $150 billion. While equity is available, debt financing is a problem in India, he says. With the poor health of the India’s banking sector, rounding up this kind of capital will be a major challenge.

Could This Be A Re-run?
A number of companies had entered power generation during the pre-2008 boom — Reliance Power, GVK, GMR, Lanco, JSPL and JP Power amongst others. Many of these companies have been selling assets to bring down their debt levels. While high debt has heightened the financial distress of these companies, the trigger for the misery lies elsewhere. In some cases, the fuel linkage that the plants had relied on — such as natural gas from KG Basin or coal — didn’t materialise. Moreover, the buyers of electricity from these plants — the state electricity distribution companies (discoms) are also in poor financial health and can often not afford to buy power from all, but only the cheapest sources. Payments also often end up in arrears. In a statement to BW Businessworld, ReNew Power says, ‘The poor financial health of the discoms is a cause of concern for all the stakeholders...Payment delays have plagued the renewable sector today especially in the states of Maharashtra, Madhya Pradesh, Rajasthan and Tamil Nadu.This results in negative investor sentiment because these are the states where most of the development has happened in the past.”

As discoms continue to remain the largest buyers of electricity, do renewable IPPs run the risk of going down the same path as the conventional power companies?

“Weak financial health of state electricity boards (SEB) has always been an issue,” says Rustagi of Bridge to India, “but IPPs have now become comfortable that these are government entities and won’t default.” Companies also factor in delayed payments at the time of making their bids. “Cost of electricity is lower by 20-30 paise/unit if the counter party is NTPC instead of an SEB, because of higher payment security,” says Kailas. However, since renewable energy has zero cost of fuel/goods, a delayed payment doesn’t hit operations, he adds. Because of this last factor, a renewable energy asset is less likely to become a stranded asset compared to a conventional power plant. Even if a company/project falls into distress, a financial restructuring is all that it would take to bring it back into black, unlike a conventional power plant with issues of fuel supply and other operating costs.

Diseconomies Of Scale
A new issue, which is now coming up, as renewable energy gathers scale, is of demand curtailment. Tamil Nadu, which has the highest concentration of wind-mills in India, is facing it already. The 7,500 mw of windmills on Tamil Nadu’s coast tend to work or stay idle at the same time. And when, all of these wind-mills produce electricity together, the state grid is unable to absorb the electricity and cuts back the renewable purchase. The same scenario is likely for solar panels — all of them work in sunlight and stay idle the rest of the time. As solar capacity becomes a significant part of energy supply, this problem will be encountered more frequently, and will have to be addressed.

These issues of access to capital, problems of the discoms and issues with grid are growing pains of a fast growing sector. To meet the 2022 renewable target, the sector needs to expand at over 20 per cent per annum for the next seven years — which is not possible without addressing the problems of capital, counter parties and technology.

The author is a media, research and finance professional. He holds a B-Tech from IIT-BHU and an MBA from IIM-Ahmedabad.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Amit Bhandari

Bhandari is a media, research and finance professional. He holds a B-Tech from IIT-BHU and an MBA from IIM-Ahmedabad.

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