By Invitation. Who will regulate the discoms?

The use of solar power to generate electricity is rapidly gaining in prominence, not only in India but in other developing and developed regions as well. At this stage, it is very important that in India, the regulators, developers and stakeholders, including the Central and State governments and the load dispatch centres, deal with solar projects with great care so as to protect the interests of the projects and the investors.

Investor interest is burgeoning in this space and, in the broader interests of the capital market and the sector, regulators must, if required, make a separate case to facilitate these projects to access the capital market. Thermal power (including coal and gas) offers lessons on how not to deal with such investments, and this may be a guiding factor in dealing with investments in solar power projects.

If the Centre’s solar capacity addition plans (100 GW by 2022) work the way they should, the debt required may, at a conservative estimate, add up to around ₹50,000-75,000 crore over the next two to three years. This is a whopping number for a fledgling sector, especially at a time when the banks are sceptical about the overall power scenario and, therefore, hesitant to lend further.

This will place a burden on the debt issuance market, which may demand a considerable premium in pricing. Just the sheer volume of investment demand needs a disciplined behaviour and track record by all the stake holders concerned, mainly the revenue counterparty — the State discoms.

Construction risks are considered minimal in these projects. Besides other supply-related and operating issues, two major risks continue to haunt the sector.

One, general uncertainty in the minds of lenders about the performance of the newly manufactured panels that lack a track record and, second, and more important: counterparty uncertainty.

The second risk is more serious but avoidable. This is whether the discoms can stick to their contractual commitment to the power purchase agreement (PPA) on scheduling and evacuation of power, as well as their uncertain payment track record.

Practical experience suggests that these risks are more overwhelming than the supply and operating risks of the project. Contrary to public perception, solar PPAs are not ‘take-or-pay’ contracts, nor based on declaration of available capacity. They are just paid based on the energy evacuated.

Power must be scheduled without any grid curtailment. If the State discoms use grid-curtailment as a tool to bring in cost efficiencies, higher tariff solar power will obviously be crowded out. But that is against the spirit of the renewables sector’s ‘must-run’ status and the commitment to cut dependence on fossil fuels. Unfortunately, this commitment does not run deep with the counterparties.

The mixed signals sent out by some of the State discoms in renegotiating or cancelling higher cost PPAs appears, prima facie , to be an efficient option for the discoms; however, it gives capital market investors a big jolt and leaves them guessing whether investments in these instruments will sustain. This could hit potential issuances of solar projects — in terms of pricing and investor interest, domestic and international. Delays in power purchase payment, coupled with these signals, will hurt investor sentiment.

Ironically, the solar energy component bills (even at higher tariffs), compared to their total energy bill, are not significant enough to create such a panic in the market.

Given these concerns, discoms cannot claim they are not a part of the capital market any more. If a company suffers impact from banks or investors due to non-payment of debt or interest owing to contractual breaches by discoms; the State discoms will have to be held accountable.

A stereotyped penal interest clause for delayed payments may have to be revisited to include suitable modifications. Grid curtailment could be prevented by including clauses that penalise the State discoms.

(With inputs from Divya Charen, Senior Analyst, Infrastructure Ratings.)

The writer is Senior Director and Head, Infrastructure and Project Finance, India Ratings

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