Tariff ceiling removal can revive renewables investments

Due to cap on tariff for green energy tenders, renewables capacity addition dropped to 9000 MW in fiscal 2019, compared with 11000-12000 MW over fiscals 2017 and 2018, and remained subdued through fiscal 2020 as well.

With tariff caps brought down progressively, undersubscription had risen for renewable energy tenders, impacting project pipeline.

That, along with tax issues, inadequate availability of resources (land and connectivity), and imposition of safeguard duty forced developers to cherry-pick projects.

Not surprisingly, the allocation rate fell from almost 75-80 per cent over fiscals 2016 and 2017 to 35-40 per cent over fiscals 2018 and 2019, and is likely to be even lower at 20 per cent in fiscal 2020.

"We estimate an incremental fillip of 6-7 GW from the removal of tariff ceiling over the medium term. Solar energy developers will now have the leeway to factor in higher risk in cases where the counterparty has a weaker profile, or irradiance is low, or there are other execution hurdles. This will allow for higher bid tariffs and improve subscription to tenders, though positive impact is expected to materialise only once the Covid-19 pandemic ends," said Miren Lodha, Director, CRISIL Research.

CRISIL Research, however, expects solar weighted average tariff to remain in the current Rs 2.50-2.60 per unit range as lower module cost, larger scale of projects, and continued tendering activity in the segment continue to pique competition among players.

As for wind energy tenders, though tariffs have remained sticky at the Rs 2.8 per unit mark, viability remains a concern as the sector grapples with execution challenges on the ground.

The removal of tariff cap opens up an avenue for wind developers to bid higher and price in the implementation challenges. As per CRISIL's analysis, bids nearer to the Rs 3 per unit mark will improve returns and also improve activity in the segment.

That said, the weak financial profile of most state distribution utilities limits their ability to buy expensive power.This would compel renewable energy tariffs to remain more competitive compared with non-conventional power so as to propel demand.

Mayur Patil, Associate Director, CRISIL Research said: "A few benchmarks, such as the average cost of non-renewable energy power to states, which stood at Rs 3.60 per unit in fiscal 2019, and the recent medium-term power purchase agreement auctions for conventional power, which saw bids at Rs 3.26 per unit, may act as implied tariff ceilings. Hence, although the tariff cap removal will provide greater flexibility to developers to factor in risk, prices of renewable energy will still be lower than those of non-conventional power."