ReNew Power COVID-19 Liquidity Support Project (RRP IND 54165) SECTOR OVERVIEW A. Introduction 1. Background. India is the third-largest electricity producer in the world after the People’s Republic of China and the United States,1 with an installed capacity of 370.1 gigawatts (GW) as of March 2020.2 India’s electricity generation capacity increased by 213 GW during 2010–2019. Although thermal power accounts for 62.3% of the installed capacity, renewable energy has been a key driver of capacity growth. India ranks fifth in installed renewable energy capacity globally,3 and added 71 GW of renewable power generation capacity during 2010–2019. Base load and peak load deficits have decreased beginning in fiscal year (FY) 2013 (ending 31 March); India’s base load deficit (0.5%) and peak load deficit (0.7%) in FY2020 were at their lowest levels since 1992.4 India’s average per capita energy consumption of 1,181 kilowatt-hours (kWh) in FY2019 is estimated to be one-third of the global average. Total power generation capacity as of 31 March 2020 is in Table 1. Table 1: Installed Capacity by Resource Capacity Capacity Resource (MW) (%) Thermal (coal, gas, oil) 230,599.6 62.3 Hydro 45,699.2 12.4 Nuclear 6,780.0 1.8 Renewable energy resources 87,027.7 23.5 Total 370,106.5 100.0 MW =megawatt. Source: Central Electricity Authority. 2. Government of India’s renewable capacity targets. As part of its nationally determined contributions under the Paris Agreement, India intends to achieve a 40% share of installed power generation capacity from nonfossil fuel sources by 2030,5 equal to about 450 GW of renewable installed capacity.6 India has a shorter-term interim target of adding 175 GW of renewable installed capacity by FY2022, including 100 GW of solar and 60 GW of wind energy capacity.7 3. Renewable capacity growth. From 2010 to 2020, India’s wind power installed capacity increased from 13 GW to 37.7 GW and solar power installed capacity increased from 10 MW to 32.2 GW.8 The renewable energy capacity additions have been driven by various government fiscal and regulatory incentives, such as generation-based incentives,9 a tax holiday under section 1 Enerdata. 2019. Global Energy Statistical Yearbook 2019. 2 Government of India. Central Electricity Authority. 2020. All India Installed Capacity (in MW) of Power Stations (as on 31.03.2020). 3 Government of India. 2019. Economic Survey 2018–19. New Delhi. 4 Government of India. Central Electricity Authority. 2020. Executive Summary on Power Sector. 5 United Nations Framework Convention on Climate Change (UNFCCC). 2016. India’s Intended Nationally Determined Contribution: Working Towards Climate Justice. 6 Economic Times. 2020. India to have 450 GW Renewable Energy by 2030: President. 31 January. 7 Government of India. Press Information Bureau. 2020. Contribution of Renewable Energy Sources is Estimated to be Around 21% of Electricity Demand in 2021-22 : R.K.Singh. New Delhi. 8 Government of India. Ministry of New and Renewable Energy. 2020. Programme/Scheme wise Physical Progress in 2019-20 & Cumulative up to March, 2020. New Delhi. 9 An additional incentive of ₹0.50 per unit above the feed-in tariff for wind projects, capped at ₹10 million/MW and available for a minimum of 4 years and a maximum of 10 years. The scheme ended in March 2017. 2 80IA,10 accelerated depreciation,11 renewable purchase obligations,12 must-run status,13 and deemed generation for renewable projects.14 4. Trend in tariffs. Renewable power procurement in India is conducted through a competitive reverse-auction process. Wind energy procurement was under a feed-in tariff regime until the commencement of competitive auctions in February 2017. There has been a significant decline in solar and wind energy tariffs in India since 2015, which is attributable to technological advancements that have resulted in increased power generation, leading to a decline in equipment prices. Wind tariffs reached a low of ₹2.43 per unit in December 2017 but subsequently increased to ₹2.7–₹2.8/kWh, with a weighted average tariff in FY2019 of ₹2.7/kWh. Solar tariffs reached a low of ₹2.44/kWh in July 2018, and averaged ₹2.67/kWh from April 2018 to December 2019. B. Challenges in the Sector 5. Impact of coronavirus disease. The suspension of a large proportion of commercial and industrial activity in India due to the lockdown to contain the spread of the coronavirus disease (COVID-19) has resulted in a decline in power demand, which has not been offset by a moderate increase in demand from less-profitable household consumers. In April 2020, India’s energy demand was 85.6 billion kWh, 22.3% lower than in April 2019.15 Reduced power demand, particularly from high-paying, profitable customers, is expected to lead to deterioration of the already poor financial health of state power distribution companies (DISCOMs). DISCOMs are expected to delay making payments under power purchase agreements (PPAs), citing force majeure and/or lack of liquidity. Lower power demand is also expected to lead to some curtailment of renewable energy generation, despite such projects having a “must-run” status in the grid code.16 Delayed payments and power curtailment are expected to have a negative financial impact on independent power producers.17 6. Delays in receivables. The financial health of many of state DISCOMs has been a cause for concern as their losses have mounted because of high aggregate technical and commercial losses and failure to recover the cost of power sold. As a result, these DISCOMS have resorted to delaying payments to developers. The average payment cycle for state DISCOMs as of March 2020 was about 4–5 months, with delays of about 10–12 months in some cases (e.g., in Andhra Pradesh, Tamil Nadu, and Telangana). 7. Renegotiation of power purchase agreements and grid curtailment. Andhra Pradesh DISCOMs issued notice to developers for renegotiation of PPAs of operational renewable projects. The PPAs entered at feed in tariff rates were perceived by the state government to be awarded at higher tariffs than the tariff levels discovered in later years through the auction route in the renewable energy sector. Although the Andhra Pradesh High Court issued a stay order, 10 Allowed tax waivers on profits for 10 assessment years. The incentive ended in March 2017. 11 Accelerated depreciation reduces tax outflow in the initial year; the depreciation began at 80% in the first year of operations but the government halved the benefit to 40% for projects commissioned after March 2017. 12 A mechanism by which state power distribution companies and consumers are obligated to purchase (i) a certain percentage of power from renewable energy sources; or (ii) renewable energy certificates traded on power exchanges. 13 The power generated from a renewable project will be compulsorily evacuated, with no provision of backing down. 14 The developer is paid for its plant availability (based on the annual generation on pro-rata basis) if electricity is not purchased because of grid issues (e.g., grid unavailability). 15 Business Line. 2020. All-India Power Demand Declines 22% in April Amid Covid-led Lockdown. 3 June. 16 Central Electricity Regulatory Commission. 2010. The Indian Electricity Grid Code. New Delhi. 17 Fitch Ratings. 2020. Indian Renewables Generators' Liquidity Risk Manageable Amid Coronavirus. Singapore. 3 this action adversely impacted investor confidence. Renewable power has must-run status in the merit order dispatch and this is generally adhered to by transmission companies, although some projects have experienced grid curtailment in some states (e.g., Andhra Pradesh, Karnataka, and Telangana) that adversely impacted cash flows. 8. Lack of access to low-cost, long-tenor project finance funds. Availability of long-term financing for renewable energy continues to be a challenge in the local market, as domestic banks and local financial institutions have largely reached their exposure limits for the energy sector. Furthermore, bank financing is usually not available for more than 10–15 years, even though PPAs usually have a tenor of 25 years. Rising stresses associated with irregularities in some DISCOM’s payments have also made lenders averse to increasing their exposure to renewable energy. C. Policy Response and Sector Outlook 9. Government of India’s liquidity infusion as part of the COVID-19 Response Stimulus Package. The government’s financial package to revive the Indian economy allocated $11.9 billion to assist DISCOMs across India under stress during the COVID-19 lockdown, which restricted commercial and industrial activity and reduced associated power demand. The package for the power sector is expected to reduce the burden on DISCOMs for maintaining distribution of electricity as supplied by generation and transmission companies. The liquidity would be infused (in two equal tranches) through the Power Finance Corporation and Rural Electrification Corporation, which extend special long-term transition loans of up to 10 years to DISCOMs. Loans will be provided to the DISCOMs against guarantees by the respective state governments. 10. Payment security mechanism. In July 2019, the Ministry of Power directed the regional and the state load dispatch centers to dispatch power to DISCOMs only after the generation company confirmed that the DISCOMs had opened letters of credit in favor of the generation company (as required under the respective PPAs).18 However, most state DISCOMs have not yet provided letters of credit to the generating companies, and there is a lack of clarity concerning these letters.19 The central government has also entered into a tripartite agreement with the Reserve Bank of India and state governments with central entities such as Solar Energy Corporation of India and NTPC Limited as beneficiaries.