The ‘corona’ threat to solar energy sector

Will it be a Black Swan moment for the solar energy sector? The Covid-19 outbreak will not only hinder the execution of several projects but the supply chain disruption threatens to hurt the sector in the near and medium term.

Even before the virus hit businesses worldwide, the sector had its hands full, addressing concerns such as payment delays from distribution companies, renegotiation of power purchase agreements, anti-dumping concerns, transmission-related issues and financing, leading to execution delays. Covid-19 further compounds this litany of problems. There are fears that it could hit availability of capital, especially for independent power producers (IPPs), liquidity on both equity and debt could be further constrained. Project time lines will likely be hit due to disruption in logistics. BusinessLine spoke with several players in the sector, and rating agencies who closely monitor the progress of projects, to get the pulse. Excerpts from the interaction.

Supply chain disruption

Raj Prabhu, CEO, Mercom Capital Group, feels the sector’s supply chain will be the most affected because the viral spread is global. “Initially, it started with solar component shortages as manufacturing facilities in China were shut down, which has now trickled down to other markets, including India, the US and Europe.”

Solar module costs will go up in the short term due to shortage and this could cause some project commissioning delays. Since India mostly assembles modules and has limited cell manufacturing capacity, most Indian manufacturers may not benefit much from the crisis. “If the problems persist into the second half of the year, there will be a decline in Indian solar installations this year. In 2019, India added 7.3 GW of solar, which was a 12 per cent decline compared to 8.3 GW installed in 2018,” says Prabhu.

Agrees Sabyasachi Majumdar, Senior Vice-President, Group Head, Corporate Ratings, ICRA: “Given the import dependency on China for sourcing PV modules, the execution time lines for the ongoing utility scale/roof-top solar projects are likely to be affected with delays in the delivery of PV modules.” Further, there could be a disruption in the domestic supply chain and labour availability, which could further impact project implementation. This development, Majumdar feels, could negatively impact capacity addition in the solar power sector in the near term. As it is, the sector is already facing headwinds because of execution delays for projects bid out over the past two years due to challenges in land acquisition, securing transmission connectivity and financing in a timely manner. Further, solar PV module price levels may spike in the near term from the current 20-21 cents/watt and put an upward pressure on expected bid tariffs. With respect to capacity addition for FY2020, the solar power sector has already added 6.2 GW in the first 11 months and it is likely to be 6.8-7.0 GW for the full year of FY2020.

For domestic module manufacturers, sales volumes are likely to be impacted in Q4 FY2020 and in the near term, given this uncertainty, as original equipment manufacturers (OEMs) source the wafer/cells from China.

As a result, a de-risking strategy to identify an alternate supply chain other than China in the long run would be critical for domestic independent power producers and OEMs, says Majumdar.

But Miren Lodha, Director, CRISIL Research, has a more optimistic take. As he sees it, the corona outbreak has currently had limited impact on renewable energy. Precautionary measures across States and employee welfare initiatives may cause overall activity to slow down, if at all. However, impact is expected to be limited.

With regard to the supply chain, Lodha says, “So far, two of the major PV module producers have assured of continued operations as predominantly their manufacturing units are not located in the severely affected zones in China. Further, units located outside of China continue to function. Consequently, module prices have also remained stable within the $0.19-0.20 per watt levels, with module and associated component prices remaining stable as of mid-March. The main issue arising has been logistical, considering port restrictions and inter-regional freight availability.” Overall, he says, if we consider an optimistic scenario where the situation stabilises by April /May 2020 in China with limited impact within India, then the damage from the outbreak could be limited to a quarter.

However, in the worst case, if the impact extends beyond April/May in mainland China, H1 fiscal 2021 commissioning deadlines may be impacted. But he adds that the government has clarified in advance about utilising the force majeure clause in such an event, although the legal process for this may take time.

Export market

Meanwhile, the export market for solar modules may remain subdued as activity stalls in the regions of the US and Europe, key export destinations along with Africa. Lower capacity addition activity is predicted in these regions until the coronavirus impact subsides till which time China may also recover.

Projects to be completed in the short term will be hard pressed, is the assessment from within the industry. Points out Gautham Nalamada, Executive Director, Photon Energy: “While large projects with gestation period of 12-18 months are better off, those to be completed in the next 3-6 months will take a hit. There is no clarity how things will pan out. It may be difficult for the existing domestic manufacturing capacity to bridge the gap of imports. Clearly, we are in for uncertainty and possible project delays.”

India’s dependency on Chinese equipment is a source of concern. Notes Gyanesh Chaudhary, Managing Director, Vikram Solar, a leading module maker: “India’s current installed module manufacturing capacity is close to 8 GW. The current capacity can satisfy India’s demand for solar projects. However, India has been focusing on importing solar equipment, mainly modules from China and other countries since solar became a lucrative industry.

Chinese solar equipment manufacturers, he says, have been undercutting domestically manufactured solar equipment (mainly modules) in India. “Currently more than 80 per cent of solar modules used in Indian solar projects are imported from China.

Although, the Government has taken initiatives like DCR (domestic content requirement) category, safeguard duty and others to support the domestic solar manufacturers, a more direct approach is needed to build a manufacturing scale in India that can save billions in forex outflow,” says Chaudhary.

On costs going up, Lodha says, “Costs of implementation from component pricing angle have so far remained stable, logistical issues apart. Delays in commissioning can impact working capital requirements, especially in the light of the fact that successfully appealing for the force majeure clause applicability on a case to case basis may take time, leading to payment delays or penalties, in the meanwhile.”

As we go to press, here comes some news. Following representations by various renewable energy sector players on supply chain disruptions due to the coronavirus, the Ministry of New and Renewable Energy has agreed to treat it as a force majeure event for grant of appropriate time extension in scheduled commissioning date of renewable projects in concerned contractual agreements.

The sector certainly needs a helping hand as it faces an uncertain future caused by a pandemic that no one had foretold.

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