Renewable capacity addition likely to improve in FY2022: ICRA

ICRA expects the capacity addition to improve to 10.5-11 GW in FY2022 led by a strong project pipeline of ~38 GW

While there is a slowdown in renewable energy (RE) capacity addition to 7.4 GW in FY2021 from 8.7 GW in FY2020 amid the execution headwinds due to Covid-19, ICRA expects the capacity addition to improve to 10.5-11 GW in FY2022 led by a strong project pipeline of ~38 GW. This apart, more than 20 GW RE projects are under the tendering phase from various nodal agencies, providing visibility for capacity addition over the medium-term. 

Commenting further, Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA Limited, said, “The RE sector is expected to witness investments of ₹3.5 trillion over the next four years, increasing the share of RE capacity to 34 percent of the overall installed capacity by March 2025 from 25 percent as of March 2021 led by the solar power segment. However, the delays in signing of PPAs/PSAs as observed in the past and cancellation of bids owing to expectations of a reduction in tariff rates, remains a key challenge. Nonetheless, given the expected rise in solar bid tariffs in the upcoming auctions amid the rise in module prices and imposition of basic customs duty (BCD) on imported solar PV cells and modules from April 2022, progress is expected in signing of PPAs/PSAs for the earlier awarded tenders by the central intermediate procurers.” 

Despite the rise in tariff, the solar power tariffs are expected to remain below ₹3.0 per unit and cost competitive, against the marginal cost of generation from thermal sources in the bottom 25 percent of the merit order dispatch. On the other hand, the execution challenges persist for the under-construction projects with respect to land acquisition and evacuation infrastructure, especially in the wind power segment. In this context, the government has approved extension in commissioning timeline by 2.5 months, considering the second wave of Covid-19. Also, the government has extended the waiver on inter-state transmission charges for wind and solar power projects commissioned till June 2025 from June 2023 earlier.

Further, the demand outlook for the domestic solar OEMs remains favourable, with the strong policy support through imposition of BCD on imported cells and modules and the notification of the production-linked incentive (PLI) scheme along with a strong order pipeline aggregating about 35-40 GW over the next three to five-year period from various schemes requiring the use of domestic modules. Also, the delays in inclusion of the overseas suppliers in the Approved List of Models and Manufacturers (ALMM) could support the demand for domestic module OEMs in the near term. 

Vikram V, Vice President & Sector Head – Corporate Ratings, ICRA, adds, “The policy push for the promotion of domestic module manufacturing is expected to improve the cost competitiveness of domestic OEMs and has led to new capacity announcements of more than 15 GW by various OEMs. The timely commissioning of these new capacities remains important to meet the growing demand from the developers, given the current capacity constraints. Moreover, the ability of the OEMs to achieve backward integration and build economies of scale would be important to remain competitive against the overseas suppliers on a sustained basis.” 

This apart, the credit profile of operational RE projects remains constrained by the exposure to discoms in states such as Andhra Pradesh, Telangana and Tamil Nadu, with large payment overdues. The overall dues from discoms to RE IPPs remained high at ₹118.4 billion as of April 2021, declining marginally from ₹122.7 billion as of January 2021, as per the data from the PRAAPTI portal. Nonetheless, the credit profile of ICRA-rated RE IPPs is supported by the presence of liquidity buffer in the form of debt service reserve or working capital and relatively strong sponsor profile. Overall, ICRA’s outlook for the RE sector remains stable, driven by factors such as continued policy support from the Government of India, large growth potential, the presence of creditworthy central nodal agencies as intermediary procurers and tariff competitiveness.