According to reports, payment delays by distribution companies (discoms) to wind and solar projects in India is hurting project costs for companies and posing a challenge to the sector’s growth plans, Mercom Capital Group said in a report on Tuesday.
Payment delays by discoms to these projects is hurting their liquidity and payment to lenders. Discoms in Tamil Nadu, Rajasthan and Maharashtra, Madhya Pradesh, Andhra Pradesh, Telangana and Jharkhand have so far found it difficult to pay renewable energy producers on time due to their own weak financial health, according to the report.
Discoms in Maharashtra, Tamil Nadu, Madhya Pradesh and Rajasthan have delayed payments to generators of wind and solar power by as much as 8-10 months, putting their cash flows under tremendous pressure and sending negative signals for developers and investors, Mint had reported in October 2016.
Tariffs, both in wind and solar, have come down significantly in the past year. Average solar tariffs in India have fallen by about 73% since 2010, almost in line with Chinese spot module prices.
In February, solar tariffs fell to a record low of a levelized tariff (the value financially equivalent to different annual tariffs over the period of the power purchase agreement) of Rs3.30 per unit in a reverse auction at the Rewa solar park. Similarly, wind tariffs fell to Rs3.46 a unit in a recent auction held by the Solar Energy Corp. of India.
“With these extremely low tariffs, developers are looking at best-case scenarios with margins for error nearly non-existent. Payment delays are adding to project costs as banks charge higher interest rates due to projects being built in high-risk states known for payment issues, stymying investment into the sector,” the report said.
Payment issues persist in some states despite progress of the government’s Ujwal Discom Assurance Yojana (UDAY) scheme, where 25 states and one Union territory have joined the program, the report said.
Of the Rs488 billion discom debt, about Rs239 billion loan amount was repaid till the third quarter of FY17 under the UDAY scheme and another Rs90 billion was repaid by Tamil Nadu recently—resulting in 65% of discom debt being repaid, Edelweiss Securities analysts Kunal Shah, Nilesh Parikh and Prakhar Agarwal wrote in a 30 March report.