India's solar sector is shining! While tariffs have come down by 73 per cent from 2010, developers are looking at best-case scenarios with margins for error nearly non-existent. However, in the entire solar programme there is a glitch. If reports are to be believed, payment delays by distribution companies continue to pose a challenge for the growing solar sector in India.
Irony is such that the developers are yet to receive their payments, which are adding to project costs. And, since bank charges higher interest rates due to project being built in high-risk state known for payment delay issues, this has been a stumbling block for further investment into the sector.
Here's the silver lining in the era of falling solar tariffs; The general consensus within the developers is that despite tariffs being at an all-time low; projects can be profitable. But, when the dues are not cleared, importantly, on time, it will certainly hollow out the sector.
Meanwhile, the delay in payment seems to have a big impact on developers, as players including Azure Power, ReNew Power, Solar Industries India, Indo Solar, Surana Solar to mention a few which rely heavily on capital market, have suffered an erosion in their market valuation. In some cases, delay in payments have jeopardised a project developer's potential fund raising plans from the bond market. Default on these capital market instruments or invocation of a security or credit enhancement, adversely impacts the efforts made to deepen the infrastructure bond markets.
State governments should understand that payment delays affect the project liquidity - the money is stuck, and yet the developers have to pay back to lenders. This may also lead to lenders apprehension in financing future projects.
States like Madhya Pradesh, Andhra Pradesh, and Telangana, along with Rajasthan, Tamil Nadu and Maharashtra, have a track record of payment delays and curtailment of renewable energy. However, there is some improvement by Rajasthan's discom due to their recently issued Rs 1,564 crore bond and a relatively improved financial position. Meanwhile, despite states joining Ujwal Discom Assurance Yojana (UDAY) program for financial turnaround, the interest costs of these states have been reduced by nearly Rs 119.89 billion, when compared to the same period in FY2015-2016. Interest costs have been a part of the financial concerns that DISCOMs in the India face today. If this goes down, a considerable amount of pressure will be relieved and payments will be streamlined.
However, the status-quo remains. This clearly hints that politics plays a huge role where utilities have to let off dues or provide subsidies when asked. Paying on time becomes difficult without adequate revenues.
The bitter truth is, although tariffs are falling at a record pace in solar due to a rapid decline in component costs - a welcome development for states which will see their power purchase costs decline; further drops in tariffs are in the hands of the government, which can reduce risks by removing hurdles like payment delays, transmission issues and curtailment, all of which are interlinked. By removing these risks, borrowing becomes cheaper for developers. But, the state discoms have failed to complement the efforts of developers.
At the end of the day states cannot pay developers if they don't raise power tariffs and bring in revenues. A lot depends on the success of UDAY and everything is coming to a head at a crucial time when Indian solar installations are on a path to more than double from the 5.5 GW installed last year. By the end of next financial year, our minister has committed to a cumulative target of 20 GW from current 12 GW. This would mean adding another 7.7 GW in 2017-18.
As installations double, power purchase bills will also jump. If states cannot upgrade their financial situation quickly, improve their ability to make payments to developers, and take care of other bottlenecks, installations will stall and so will the goal of reaching 100 GW by 2022.