The Wire, April 14, 2020
By Pradeep S. Mehta, Udai S. Mehta and Sarthak Shukla
With the International Monetary Fund (IMF) declaring a global recession, many sectors of the Indian economy are also facing the heat of COVID-19.
A critical sector caught in the grip of this socio-economic and humanitarian crisis is the solar energy sector. As the climate change narrative gains significance globally, thanks to the lockdown also, it becomes imperative that the Indian policymakers understand the structural issues hampering the growth of the solar energy sector.
India has vowed to become a global leader in the solar energy space. Be it forging multilateral alliances like the International Solar Alliance (ISA) or setting impressive targets for domestic solar generation, the importance of this sector for the government is evident from its efforts. The nation also enjoys the natural advantage of having abundant solar-radiation and thus, the solar energy potential.
As per calculations by the National Institute of Solar Energy in India, the country has a solar potential of 750 GW, of which 142 GW is available in the state of Rajasthan alone. This, when read with the installed capacity of around 36 GW (4.8% of the total solar potential) points towards the need to assess the structural challenges behind the lagging pace of solar uptake in the country. Furthermore, we will need a disaggregated approach i.e. to look at states individually and then sum the total.
The ongoing pandemic has exposed issues related to the economic resilience of solar development in India. The Ministry of New and Renewable Energy (MNRE) has stepped in to provide immediate relief to the solar developers by asking discoms to make timely payments for any solar power injected into the grid. However, the discoms and many solar developers have reportedly invoked the force majeure clause of their existing Power Purchase Agreements (PPAs) to express their inability to honour the contracts.
In this context, given that around 29 GW of solar capacity in India is still in the pipeline, let us take a step back to assess some of the structural issues exposed by the COVID-19 pandemic.
Firstly, the large scale dependence of domestic solar developers on global markets has affected the supply-chain of solar modules, inverters and other raw materials from other countries, particularly China. This highlights the need to strengthen the domestic manufacturing industry for producing the range of essential inputs required for solar plant development.
Also, given that the timing of the lockdown in India coincides with the end of the financial year, clearing of bills and inventory management is expected to be disrupted. This puts the smaller players at a disadvantage owing to better inventory management capacity of large-scale developers. Any relief measures or future solutions should take into account this inherent competitive disadvantage of smaller players and provide them with some affirmative action assistance.
Secondly, the financial consequences of COVID-19 for solar project developers and power utilities are also significant. The mere impact of depleting value of Indian rupee points towards a cash-flow crunch for the solar developers owing to their import bills of raw materials. On top of it, the payment relief ordered by the MNRE, Ministry of Finance and many state governments for solar developers, utilities and other consumers will eventually create a bubble of cash flow crunch amongst the contracted parties of solar power agreements.
A deserted view of a street in the backdrop of a sunset during a complete lockdown imposed in the wake of coronavirus pandemic, in Patna, Saturday, April 11, 2020.
Thirdly, with tighter cash flows of solar developers and utilities, it is expected that their payment obligations to the contracted parties, be it utilities or private consumers or EPC contractors (Engineering, Procurement & Construction), will be adversely affected. This will further add to the structural bottlenecks of financial inefficiencies in the power sector in general. In other words, the balance sheets of discoms, generating companies and solar developers will take a hit owing to the financial implications of COVID-19 in the solar power market.
Finally, with the stalled on-site construction work, the developers are expected to overshoot their time-obligations of completing the commissioned projects within time. The construction workers across the state are going back to their homes as was seen in the early days of MGNREGA. This casts a shadow of uncertainty over labour availability post the lockdown period for such construction activities. It can potentially overshoot the time required for completing the under-construction projects by months. This becomes all the more worrying considering that a two-month delay from April 2020 would mean that status-quo would be achieved by July 2020, which marks the onset of monsoon in the northern half of India. Also, time and cost overruns would push many projects into becoming Non Performing Assets for which a robust insolvency and resolution regime is a must.
The inevitable response to these aforementioned issues seems to be a financial restructuring or relief package. But as evidence from the power sector in India suggests, financial restructuring packages fail to achieve an economic turnaround of the sector as long as basic structural issues are addressed. As an immediate response, a financial relief package for the concerned entities could be beneficial. But in the long-run, focused efforts, with a must-do attitude, to address core issues are required for the solar energy sector, some of which are highlighted here.
First and foremost, the monitoring of the progress of various solar projects in the construction phase should be done regularly to inform the different targets set up by the respective state governments. The solar adoption targets should be aligned with the solar potential of each of the states, to ensure that there is an equal geographical distribution of investments and economic opportunities in the development of solar projects across India.
For the effective resolution of litigations and insolvency cases related to the renewable energy sector, specialised policy and institutional mechanism should be in place. Currently, the litigations are handled by the central and state Electricity Regulatory Commissions (ERCs), the Appellate Tribunal for Electricity (APTEL), the National Green Tribunal (NGT) and the judicial system of the country. This complicates the resolution process and further reduces the investor’s confidence as well as the investment climate in the solar sector of the country. Furthermore, to boost investment in this sector, it is crucial to carefully draw the contracts between solar developers and utilities. The first step in this regards could be to undertake effective risk-assessment of any project before signing the contract and commissioning the development of the solar plant.
In addition to this, concerted efforts should be made to strengthen the current governance ecosystem of solar development policies in India. This includes ease of availing regulatory approvals and policy benefits, supply-side issues hindering the manufacturing and construction activities, land acquisition regime, administrative factors and demand-side factors. In addition to these, worker welfare measures and workplace safety are equally important in ensuring a productive labour market for such economic activities.
In this scenario, PPP in its real sense becomes more than important as the government would depend heavily on the private players to lift the economy. Though the government can only provide some relief and financial support and ease the structural process and procedures, it is the private player which has to take the burden to put things in order in a realistic time frame with all its efficiency and management abilities. Power sector which is already under stress cannot afford to let the situation go out of control and make every effort possible to overcome the situation.
Pradeep S. Mehta, Udai S. Mehta and Sarthak Shukla work for CUTS International, a global public policy research and advocacy group.
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