Headwinds arising from execution challenges and counter-party credit risk amplified by Covid-19: ICRA

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Pune, 02 July 2020 : The wind power sector witnessed a capacity addition of 2.1 GW in FY2020, improving over the 1.6 GW added in FY2019, supported by the large capacity awarded by the central nodal agencies and state distribution utilities of 11.3 GW. However, the actual capacity commissioned under these bids is about 2.5 GW so far, against the 7.5 GW that should have been commissioned by March 2020 as per the timelines provided.

Commenting further, Mr. Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA, says, “The slow execution of the capacity awarded by the central nodal agencies and the state utilities is because of the continued execution challenges, tight financing environment and regulatory delays in tariff adoption from the regulators in the past. This apart, the developers continue to face challenges owing to the significant payment delays by the state distribution utilities (discoms), instances of grid curtailment and pending resolution of the tariff issue in Andhra Pradesh. These challenges are further augmented by the adverse impact of the lockdown imposed to control Covid-19 pandemic on the execution of under-construction projects as well as on the revenues and cash flows of discoms. Therefore, ICRA’s outlook on the wind energy sector continues to remain negative. The wind power capacity addition is estimated to remain modest in the range of 2.0-2.5 GW in FY2021.”

These challenges have further led to a slowdown in the tendering activity, with no wind power project awarded post August 2019. While SECI has issued a tender for 2000 MW under Tranche IX, the reverse auction for this tender is pending. Commenting on the wind capacity requirement, Mr. Vikram V, Associate Head & Assistant Vice President – Corporate ratings, ICRA says, “The slowdown in electricity demand growth in FY2020 and with the demand de-growth expected in FY2021 amid Covid-19, the incremental wind capacity requirement is estimated to remain lower than projected earlier for FY2021-23. As a result, the potential for new tenders in the wind power segment remains limited in the near to medium term. Nonetheless, long term prospects for wind energy remains intact given the strong policy focus and improved tariff competitiveness.”

Under a RPO target assumption of 18.0% (lower than the Ministry of Power stipulated RPO target of 21.0% as most states have lower RPO targets) comprising solar RPO of 8.5% and non-solar RPO of 9.5% in FY2023 on an all-India basis, the incremental wind energy capacity requirement by March 2023 is estimated to be ~12 GW. As the capacity backlog remains large at 8.7 GW, the potential for new tenders in the wind power segment remains limited in the near to medium term.

Further, the wind power IPPs continue to face significant delays in receiving payments from discoms in Andhra Pradesh, Rajasthan and Tamil Nadu. The discom finances have been further constrained by the adverse impact of the lockdown imposed to control the Covid-19 pandemic. In this context, the Government of India announced a liquidity support of Rs. 900 billion for the discoms, in the form of loans against receivables, from the Power Financial Corporation (PFC) and the Rural Electrification Corporation (REC). While the scheme is a positive short-term measure to benefit the IPPs impacted by the long delays in receiving payments from the discoms, there has been a limited progress so far and timely implementation of this scheme remains important.