Home » CleanTech/ Renewable Energy » Payment delays, lower tariffs hurt renewable energy sector: Mercom study

Payment delays, lower tariffs hurt renewable energy sector: Mercom study

According to reports, payment delays by power distribution companies (Discoms) is posing a major challenge to the growth of the renewable energy sector, as it chokes liquidity and creates roadblocks in further funding of projects. While in some states the delay has been up to four months, the Maharashtra State Electricity Distribution Company Limited (MSEDCL) has stoppped buying power from wind power generators for the past three years, resulting in heavy losses, said a report.

Many developers completely rely on the capital market to raise funds, and payment delays by discoms impact their bond issuing capacity. Any default on these capital market instruments affects efforts to deepen the infrastructure bond markets, says one developer.

According to a report by Mercom Capital Group, the delay in payments continues to pose a challenge for the growing renewable energy sector in the country as it tries to achieve 175 Gw of renewable installations by 2022.

 Payment delays affect the project liquidity, the money is stuck, and yet the industry has to pay back its lenders, failing which the lenders will have apprehensions about further financing, the Mercom report stated, quoting a developer.

Tamil Nadu, Rajasthan and Maharashtra have a track record of payment delays and curtailment of renewable energy. The states of Madhya Pradesh, Andhra Pradesh, Telangana and Jharkhand are also having problems with paying on time, said another developer. An earlier Mercom report said that during the first nine months of FY17, the interest costs of states and union territories that joined the Ujwal DISCOM Assurance Yojana (UDAY) programme for financial turnaround have been reduced by Rs 11,989 crore (around $1.83 billion). However, payment issues persist in some of the major renewable energy states.

Quoting an official from MSEDCL, the report said that Maharashtra has stopped sourcing from wind power companies and has not signed any new PPAs for wind projects over the past three years. In 2016, the MSEDCL even asked MAHAGENCO to shut down thermal power projects, as prices elsewhere were lower.

Tamil Nadu and Andhra Pradesh are dealing with about four months of delay in payment to the renewable energy sector, while Rajasthan, Madhya Pradesh and Telengana, the delay period is three months, but steadily improving.

The discoms in some of the northern states are attributing the delay in payment to various factors such as demand-supply gap, the subsidy provided for electricity to farmers, not getting payment for electricity from the consumer owing to rampant theft and the role of politics in letting off dues or providing subsidies, which affects their ability to pay to power generation companies on time.

In Andhra Pradesh, the State discom offers the cheapest power to farmers at less than 30 paisa per unit. Farmers constitute close to 40 per cent of its consumer base, which has resulted in a lack of revenues leading to payment delays.

In Rajasthan, the number of industrial power consumers has gone down drastically. There is a preferential tariff in the state for industrial consumers, which is lower than the average industrial power price in India. With the decline in the number of consumers and revenues, it has become an inhibitor in making payments, the report quoted an official at Jaipur Vidyut Vitaran Nigam Limited. According to developers, payments in Rajasthan are delayed by about three months but the situation is reportedly improving.

Tariffs have come down by 73 per cent since 2010, the report said, and the recent REWA auction recorded the lowest solar tariff in the country at Rs 3.30 (about $0.494)/kWh (levelised tariff over 25 years). With these extremely low tariffs, developers are looking at best-case scenarios with margins for error being 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, stalling the investment into the sector.

“Tariffs are falling at a record pace in solar due to a rapid decline in component costs, which is a welcome development for states which will see their power purchase costs decline. But, further drops in tariffs are in the hands of the government, which can reduce risks by removing hurdles like payment delays, transmission issues and curtailment, all of which are interlinked. By removing these risks, borrowing becomes cheaper for developers,” commented Raj Prabhu, CEO and Co-Founder of Mercom Capital Group.

States cannot pay developers if they don’t raise power tariffs and bring in revenues and a lot depends on the success of UDAY and everything is coming to a head at a crucial time when Indian solar installations are on a path to more than double from 4 GW installed last year. As installations double, power purchase bills will also jump and if states cannot upgrade their financial situation quickly and improve their ability to make payments to developers and take care of other bottlenecks, installations will stall and so will the goal of reaching 100 Gw by 2022., he added.

Comments are closed.

Scroll To Top