‘Firm fuel supply remains key risk to biomass projects'

Even as the Government is doing its bit to promote renewable energy in all forms, options such as biomass continue to suffer from fuel price volatility and supply issues says Mr S. Nandakumar, Senior Director, Global Infrastructure & Project Finance Group, Fitch Ratings India. In an interview with Business Line, MrNandakumar discusses the issues in developing renewable energy sources such as biomass and hydro power.

Excerpts from the interview:

Have you been seeing an increase in the number of renewable projects coming for credit rating?

We have rated a few small bio-mass power projects. And recently there has been talk of solar power projects getting graded under the Ministry of Renewable Energy where the Ministry is willing to provide capital and interest subsidies to projects that have grading from any of the four rating agencies. But we have not got down to rate any of the solar projects as yet. But there is some traction in biomass and wind projects. The biomass projects are small, something like 7 MW and are localised projects.

Slowly the volumes of these projects are increasing but if you see it as a percentage of overall power generated it would still be small. The bulk, as you would expect, comes from coal, then natural gas, hydro, wind and then biomass.

Tying up for fuels has always been a key risk in biomass energy. Has this situation improved now?

If you take off all the sheen in biomass energy, the risk really centres around the fuel (supply and price). Most of them have long-term power purchase agreements with some utility or the other whether in Rajasthan, Maharashtra or Tamil Nadu. So that is not a concern. Whatever is produced will be purchased. There will also be no major issue with construction and setting-up of the plant.

The real challenge comes with fuel because you operate within a 50-60 km radius for your fuel need. Theoretically, you can get you biomass fuel from a longer distance but then the economics will not work out. So you operate within your area or catchment area, as it is called in the sugar industry, within that 50-km radius and you are dependent entirely on the farmers in that area for the supply.

Now, something which did not have an economic value so far has suddenly acquired a value and naturally the tendency of market forces is to drive the prices up. And when you draw your business plan, your decision is based on the Rs 4-4.25 from say Rajasthan government, while taking into account the then biomass fuel rate of say Rs 700-750 a tonne. The developer would therefore believe that the project would provide some profit margin and sets up a plant.

But if the fuel cost goes up from Rs 700 a tonne to say Rs 1,300 in a matter of 12-18 months, it can throw all your calculations to the wind. You then have no alternatives because you are dependent on that geographical area and you don't have any firm tie-ups.

Are firm tie-ups for biomass fuel not possible?

I don't think it is feasible to have any long term tie-ups given the nature of this industry. You cannot go to the farmer and ask him for a 20 or 50-year tie-up for the fuel. Typically the farmer brings the fuel in a truck, dumps it and wishes to leave with cash in hand. If the farmer says the price today is Rs 1,200, you only have two choices: you either buy it at Rs 1,200 or you don't.

Remember that most developers of biomass have taken short duration loans of 8 years or 10 years. So while your plant life is 20 or 25 years, to be able to repay the loan in 8 years is going to be a challenge if you have not got your hands around the raw material.

Is there any other alternative to secure fuel?

A developer can start cultivating. But that becomes a different ball-game. There is the question of land and so on. And remember lots of these players have jumped in to biomass because of the lure of fixed tariff and PPAs. Now for somebody not otherwise connected to this business, to become an agriculturist and on top of it growing biomass is all a big leap of faith. So they are going to face some trouble unless the smarter players have tied up their fuel in some form – either formal or informal or are just plain lucky that fuel prices are not volatile. They can then get away with the risk. Otherwise how do you get your arms around fuel supply? Unless you get a definitive answer to that question, it is going to be difficult.

What kind of credit rating have you awarded to these biomass companies?

It is very low. We have been rating them at the B category in the pre-construction stage on a national scale. Post-construction we have rated as far as BB. That's not much. The investment grade threshold starts at BBB-.

How would you rate the other sources of renewable energy in terms of risks involved?

We just discussed biomass. Hydro energy has a longer history in this country. The nuances there are in terms of construction. With coal and gas based power plants you can get around to construct them. With hydro, despite all hydrological studies, you can always encounter some surprises when you start to build. For example you are doing a run of a river plant and you construct a tunnel, given the hostile terrain you can encounter some difficulties which can push the schedule beyond all expectations. So it becomes a question of how resilient you are, your financial wherewithal to pump in additional equity, to absorb the overrun and then actually get in to the production of power. That is the key challenge.

Once the player is done with this, he will be reasonably okay as it gives a lot of flexibility in terms of managing peak load, supplying power to peak load requirements and so on. Again the question of merchant power versus PPA will arise but that is true of any power plant irrespective of the fuel.

We have not rated many solar projects and so cannot comment on that.

The common refrain across many renewable projects, globally also, is that a lot of them are dependent on some form of direct or indirect state support or incentives to become viable. It is either a capital subsidy or interest subsidy or tax incentive. It becomes a play on public policy where the government says green power is necessary. So there is a cost for the government. But minus that, if this segment has to compete on its own with coal and natural gas then the economics could work adversely.

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