The drivers of growth are threefold: price parity with traditional energy sources, a greener footprint, and a government push towards cleaner energy.
FAQ: Renewables In India
Abhishek Dangra | S&P Global Ratings
India's power industry is being distributed. Between US$90 billion and U$150 billion – according to government and market estimates – is being invested in the drive towards renewables. In fact, by 2022, the country plans to triple its total renewable energy capacity to 175 gigawatts (from 57 gigawatts today). The following questions, answered by Abhishek Dangra, Director, Infrastructure Finance Ratings, Lead Analyst for South and South East Asia, S&P Global Ratings, consider whether India’s renewables growth will be profitable and credit supportive.
What is the biggest factor affecting operating stability for renewable-energy providers in India?
Resource risk: operating performance – especially for lower-than-expected resources such as wind, sun, or water – can be a key credit differentiator for renewable companies in India. Moreover, many of India's emerging renewable energy companies have limited operational track records and their operating performances were generally weaker than predicted. And, despite supportive regulations, this weighs heavily upon their ratings.
What matters more for performance: scale of operations or diversity of assets?
In our view, diversity trumps size for renewables. All else being equal, we consider renewables companies with various smaller projects across India to be better placed than companies boasting a large renewables project in only one state.
This is because resource diversity could support more stable cash flows. Weather patterns – though equally unpredictable for each segment – can offset some of the excess and shortfall of electricity generation across solar, wind, and hydro. Resource diversity also helps smooth out seasonal trends, since, for example, monsoon seasons ease hydro generation while dry seasons are a boon for solar-power generation.
What is the nature of counterparty risk for the renewables sector?
Weak. This is because the primary off-takers from India's grids are state electricity utilities (SEUs), whose own financial positions tend to be weak. Delays in payments by SEUs weigh on the operating efficiency of generators, which in turn causes adverse working capital movements and stretched financials. While payment delays are typical, we are yet to see defaults on payments – nor do we expect them in the future.
What is the impact of increasingly competitive bids and falling tariffs?
The impact is negative because both increasingly competitive bids and falling tariffs pose a risk to the financial health of renewable energy companies in India.
Indeed, an increasing proportion of India's renewable energy is priced according to a competitive bidding system in the unregulated power industry. Because of this, we have observed aggressive bidding – based on forward-looking assumptions for cost savings on capital and optimistic expectations of generation. These aggressive bids leave little margin for error and may result in higher cash flow volatility.
Looking forward, we expect more exposure to competitive bidding overall because new capacity additions are increasingly deriving from this segment.
What's your outlook on the sector's leverage?
High growth has resulted in elevated leverage for many renewable companies in India, a key factor weighing on the ratings. Deleveraging will depend on operating performance and future capital expenditure levels. Most renewable companies in India have been almost doubling capacity annually for the past few years.
Even from a small base, the result is persistently high ratios of debt to EBITDA. The ratio was more than 8x for high growth companies like Greenko, Azure, Mytrah, and ReNew Power Ventures Pvt. Ltd., for the year ending March 2017. EBITDA interest coverage was also around 1x and the ratio of funds from operations (FFO) to debt was negative for these companies, with the exception of ReNew Power. This is because cash flows have been deployed for further growth, rather than deleveraging.
We expect ratios to improve from extremely high levels but the pace of the deleveraging will depend on growth strategies and financial policies. Deleveraging will be driven by level of cushion built into competitive bids, and the pace of expansion. Execution risk is also a factor. That said, to date project execution has generally been well managed due to the short execution time period and modular nature of projects.
Ultimately, what will drive growth in Indian renewables?
The drivers of growth are threefold: price parity with traditional energy sources, a greener footprint, and a government push towards cleaner energy. The latter should see renewables take center stage for new capacity additions – and accounting for an estimated 57% by 2027.
In addition, cost-competitive cleaner power will drive significant growth in renewables. SEUs will be keen to increase their proportion in the renewables mix now that renewables are no longer merely a costly means for meeting green initiatives; in fact, they are economically competitive, too.
Ultimately, an expanding economy, rising population, and increasing electrification will support high electricity demand in India.
In order to read the full S&P Global Ratings Credit FAQ report “Renewables in India – Is there “Red” in this Green story?” please click here.
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