PDF A gigawatt problem CRISIL webinar on Renewables

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A gigawatt problem

CRISIL webinar on the power sector

Speakers

Ankit Hakhu

Director, CRISIL Ratings

Surbhi Kaushal

Manager, CRISIL Research

Varun Marwaha

Associate Director, CRISIL Ratings

CRISIL webinar on automotive and automotive components sector

CRISIL webinar on cement sector

July 9, 2020

CRISIL webinar on Renewables

Reinforcing renewables

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Key messages

• Project execution to be impacted amidst COVID, operational projects at limited risk owing to must run status

• Government support needed to improve competitiveness of domestic solar manufacturing industry

• New tender structures improve quality of power, however, higher tariff required to maintain similar returns

• Sector to require estimated investments of ~Rs 1.4 -1.5 lakh crore over the next five years

• Payment delays from state discoms continue to be a concern but increasing exposure to reliable central counterparties to 29% by Mar 22 partially mitigates this risk

• Regulatory environment continues to be conducive; a key reason for relative cash flow stability amidst covid pandemic

• Rs 60,000 – 70,000 crore of renewable debt can be potentially refinanced which can free up capital for

growth

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Policy clarity, low base and milestone period to drive growth

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 P 2022 P 2023 P

Solar Wind Solar Capacity Additions Wind Capacity Additions

National Solar Mission launched; first batches under NTPC; SECI was founded

Increased focus on investment; share of solar energy begins to rise

substantially, led by a fall in capital cost and government push

Slowdown from policy

changes, renegotiations and pandemic-led restrictions

December 2022 milestone; healthy pipeline

16 GW 24 GW 27 GW 56 GW 64 GW 79 GW 113 GW

Slow growth Moderate growth High growth

Nascent period Peak addition period Policy rehaul and Milestone period uncertainty period

Note: Years indicate fiscal years; installed base is only for solar and wind energy (excludes other renewables) Source: MNRE, CRISIL Research

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0.23 0.22

0.19 0.15

0.70

0.49

0.33

0.32 0.34

0.29 0.27

0.21

0.14-0.16

Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

(USD per wattpeak)

Multi crystalline module price (w/o duty) Multi crystalline module price (with duty)

Tariff trend

Capital cost

Regulatory changes PLF

Benchmark tariff New tenders

Bhadla

Safeguard duty maintained

at ~15%

Safeguard duty implemented

@25% Rate

falls to 20%

China changes

subsidy policy

0.16 - 0.18 0.18 – 0.20

~19% Older projects form the majority portion of the installed base

Pan-India average PLF

150-200

bps Usage of higher efficiency tech becoming more economical Choice of technology

22-25% DC overloading for newer projects have increased to 40-50% from 20-30% earlier Design of plant

Tariff drop aided by falling capital costs Module pricing remains a big silver lining despite duty

Utilisation levels from rising base of newer projects aiding PLF

Module prices post 14.5% SGD

Module prices post 14.5%

SGD, 10% BCD

Negative impact on sector Neutral impact on sector Positive impact on sector 4.0-5.0

2.58 2.90 2.68

2.97

4.55

5.20

6.53

FY21 Expected FY21(YTD) FY20 FY19 FY18 FY17 FY16 FY15 Rs / unit

Note: YTD tariff spans from Apr 2020 to June 2020 2.5-2.6

FY21 expected tariff for regular solar tenders

FY21 expected tariff for new tender structures

Note: The rate of 10% for Basic Customs duty has been used to depict a scenario, any decision on the imposition of the same and its actual rate is yet to be decided by the government.

Source: SECI, MNRE, Industry, CRISIL Research

Low module prices, efficient plant design support lower solar tariffs

Tariff renegotiation and back-down incidence, especially in Andhra Pradesh

Sanctity of PPAs

MNRE allowed a blanket extension of projects for lockdown plus 30 days;

Provision of force majeure allowed Covid-19 impact

Safeguard duty implemented in July 2018, leading to an increase of ~10%

in capital cost; payments have begun Safeguard duty imposition

Final effective GST higher at 8-9%; reimbursements have begun GST

Regulatory changes

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~3.0 2.8 2.7 2.6

3.5

4.5 4.8

FY21 Expected

FY20 FY19 FY18 FY17 FY16 FY15

35-38% Type I wind site 28-32%

Type II wind sites

Tariffs inching up again, range bound at Rs 2.8-3.0 p/u Capital cost to remain stable

PLF highly dependent on the availability of wind site Concentration of capacities leading to congested infra

Execution issues Benchmark tariff,

Tariff caps

5-10%

Project delays costing money

Time and cost over-run

PLF (>100 metres)

Rajasthan: 4300 MW Mainly in Barmer and

Jaisalmer

Gujarat: 7492 MW

Rann of Kutch region; select sites in Jamnagar, Porbandar, Morbi, Bhavnagar

Newer projects in Surendranagar.

Karnataka 4791 MW and Andhra Pradesh 4092 MW Connectivity and terrain key

constraints in ghat area

Capacity located in Tamil Nadu : 9304 MW

Mostly in Tirunelveli, Nilgiris, Erode, Coimbatore and Tiruppur.

FY15 FY'16 FY17 FY18 FY19 FY20 FY21 P FY22 P FY23 P

Rs 6.8-6.9 cr/ MW

Rs 6.6-6.7 cr/ MW Rs 6.8-6.9 cr/ MW

Site availability, delayed infra to keep wind tariffs from dropping

Tariff trend

Capital cost

Regulatory changes PLF

Rs / unit

Peak demand;

good phase for

OEMs

Change in bidding mechanis

m

Covid led lower additions

Increased demand

& new tech

Source: SECI, MNRE, Industry, CRISIL Research Negative impact on sector Neutral impact on sector Positive impact on sector

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Characteristic Competitive comparison

China India

Integrated large plants

Smaller plants covering the end of

the value chain

Raw material availability

Power cost $ 0.08 / unit $ 0.09 / unit

Labour cost USD 5.2 / hr USD 1.8 / hr

Labour skill

Technology R&D: 3% R&D: NIL

Cost of debt 4-5% 11-12%

Scale

~10 GW ~1 GW

45-50%

65-70%

9-11%

1-3%

3-5%

0-2%

7-10%

10-13%

2-5%

2-4%

0-2%

2-4% 5-8%

10-13%

12-15%

1-3%

Mark-up 15%

SG&A R&D

Maintenance Depreciation Interest Labour Power & fuel Raw material

0.20 - 0.22

Cost break-up (100%)

0.24 -0.26

$800 – 1,000 million

Polysilicon Ingot Wafer Cell Module

$200– 250 million

0.17-0.19

Safeguard duty

Note: Based on study of 2 Chinese suppliers with share of ~25% of Chinese market and 1 domestic player with share of ~12% in domestic market Source: SECI, MNRE, Industry, Company Filings, CRISIL Research

Cost comparison for a typical player in China and India

Demand- supply gap 40-50%

33- 35 GW

14-16 GW 3 – 4 GW

Expected module capacity addition (FY21-23)

Estimated domestic module production from existing (FY21-23) Total estimated capacity addition (FY21-23)

USD cent / watt

Domestic module makers less competitive than global leaders

China India

Capital cost of indicated part of

value chain At advantage Similarly placed At disadvantage

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Note: RE: Renewable Energy; CUF: Capacity Utilisation Factor; For simplification of comparison, above scenarios are based on the assumption of standard 500 MW rated project plant capacity Source: SECI, MNRE, Industry, Company Filings, Tender documents, CRISIL Research

Power dispatchability to be the new focus area for upcoming renewable energy tenders

Key monitorables Quantum of storage element; Scaling factor; Balance between solar and wind to achieve the generation requirement

Thermal Tie-up (Existing plants vs new plants)

Peak power supply Round the clock Bundled – Thermal and

renewable Annual availability required

Storage requirement Tariff condition

Minimum annual CUF - 40% or 3.504 MU/ MW

Mandatory Two part tariff:

Peak tariff and off-peak tariff

Annual availability @ 90%

Can use

Tariff escalation @4% per annum up to end of 15^thyear; fixed thereafter

Annual availability @ 80%; Supply at least 51% annual energy from RE

Use of coal plants

Composite tariff; 30% of total quoted tariff be indexed to coal prices

Key features

Scaling factor for RE component and storage

1.3-1.5x 100% storage

2.5-2.7x No storage

1.1-1.3x

No storage and 33% thermal Expected operating cost

(Rs mn/ MW)

Expected total capital cost (at AC capacity) (Rs bn)

Expected tariff range (@ 14-16% Equity IRR)

0.6-0.8 45-50

0.5-0.7 50-55

0.5-0.7 35-40

Assumptions and output

Generation requirement (MU) 1,752 3,942 3,504

New business models warrant higher tariff to maintain returns

Players

(Capacity auctioned) Renew Power (300 MW) Greenko (900 MW)

5,000 (tendered, not auctioned) ReNew Power (400 MW)

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Global funding (green bonds and foreign funds)

Internal accrual Domestic debt

Investments of ~Rs 1,400 - 1,500 billion required over the next three years

Sustained investor confidence key to meeting future investment needs; domestic lending environment remains cautious

Note: Estimates based on publicly available data. Developer green bond issuances, equity investments pertain to funding provided by global private equity and sovereign funds to developers for expansion have been considered; stake sales and acquisitions excluded.

Source: SECI, MNRE, Industry, Company Filings, CRISIL Research

FY 20 FY 21 FY 22

57% 42% 40-45%

36%

17%

15-20%

3%

19%

15-20%

4%

21%

20-25%

FY15-17 FY18-20 FY 2021-23 P

Green bonds Foreign funds Internal accrual Financial institutions

& banks

~Rs 1,200 – 1,300 bn ~Rs 1,100 – 1,200 bn ~Rs 1,400 – 1,500 bn

Ease of availability Low Moderate High

Policy + new instruments

Global investors a key pillar of support for funding needs

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Section 2

Renewables replete with refinancing opportunities

• InvITs and structures such as co-obligor groups can help in such refinancings

• Increasing scale, diversity and track record make renewables sector conducive to refinancing with comfort on cash flow stability

• Refinancings can free up banking lines creating room for debt capital for implementation projects

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-5%

-3%

-1%

1%

3%

5%

Actual PLF –P90

Solar (PLF actual - P90)

•

^Remaining ^20%

instances were largely due to operational &

O&M issues

•

Only stray incidences where performance was lower than 3%

from P90 PLF 7%

40%

1%

31%

11%

8%

~80% of the instances, solar assets performed better than P90 estimations

Indicates % of instances b/w -3 & -5%

CRISIL’s experience: Solar modules building track record of stable power generation

Study undertaken for assessment of technology risk:

•

CRISIL has assessed a portfolio of over 7.5 GW solar projects

•

75 Projects selected which have an operational track of more than 3 full years (individual projects having CODs ranging from 2011 to 2017)

•

Unbiased sampling done across multiple states, module manufacturers & developers

•

Overall 330 instances studied (1 year of performance of 1 project counted as 1 instance represented by 1 dot in chart below)

Source: CRISIL Ratings study

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0-0.4%, 59%

0.4-0.8%, 9%

0.8-1.2%, 7%

>1.2%, 25%

2020 study

Vintage solar assets continue to show stable performance even after 7 years

0.63% 0.60%

0 0 0 0

2018 study 2020 study

Annual performance losses

¹

stable at around 0.6% overall

•

^70% ôf înstances ^showed ânnual

performance loss <0.8% (modelled/

expected & around typical warranted by suppliers for 25 yrs life)

•

^Average ^remained ^at 0.60-0.65%;

Within range observed in similar study done in 2018

•

Vintaged projects showing within same range of overall portfolio assessed; Implying that older projects seen are also not showing signs of accelerated performance loss

0.61%

Average performance loss in FY18-FY20

CRISIL’s Experience Solar’s performance losses 1 within modelled range & around the 2018 mark studied

Source: CRISIL Ratings study Source: CRISIL Ratings study

•

¹Performance loss = (PLF_Yn - PLF_Yn+1 ) – (solar irradiation_Yn - solar irradiation_Yn+1 )

•

Study of 57 solar projects; Projects having track record of > 3 years

•

One instance studied of 1 project represents annual performance loss in 1 year as compared to previous year. In all 210 instances studied

•

Study of 9 solar projects; Projects having track record of > 7 years

•

One instance studied of 1 project represents annual performance loss in 1 year as compared to previous year. In all 63 instances studied

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~40% of industry’s operational private capacity exposed to weaker discoms (payment period of over 6 months)

Percentage of operational private capacity mix in overall renewables with respective state discoms (as of March 2020)

RAG Average payment period

> 6 months 3-6 months

< 3 months

•

Central counterparties: NTPC (and NVVN), SECI

& PTC

•

Additional 8-10% of capacities would be in captive and PSU balance sheets

Variability/ volatility seen in payment profile of state discoms

GJ

AP

MH KA

MP RJ

0 5 10 15

Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20

Payment track record across leading states (months) Seen in CRISIL rated projects

Gujarat Andhra Pradesh Maharashtra

Karnataka Madhya Pradesh Rajasthan

•

Average of multiple state discoms in a particular state (if applicable)

•

Payments made by AP discoms in December 2019/ January 2020 have been amortised at full tariffs

•

Payment delay/ track record means months of receivables standing in March 2020 (similar to balance sheet method of calculation)

Rajasthan 7%

Gujarat 10%

Maharashtra 8%

Madhya Pradesh 5%

Tamil Nadu

11%

Andhra Pradesh Karnataka 8%

10%

Telangana 5%

Payment behavior of state discoms remains a key risk

Source: MNRE, CEA, CRISIL Ratings Source: CRISIL Ratings

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Increasing footprint of central counterparties

3

9

14

27 5%

15%

20%

29%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0 10 20 30

Mar-18 Mar-19 Mar-20 Mar-22P

Capacity with central counterparties (GW) % of overall installed capacity

Strengths of central counterparties

•

Bargaining power and diversification – leads to payments < 1 month (from SECI to projects)

•

Reasons for stronger bargaining power:

•

Tripartite agreement

•

Payment security fund (PSF)

•

Increasing proportion of LCs received from underlying discoms (>80% as of Mar 20)

Continuance of benefits of central counterparties to be seen

•

PSF may be relatively given increasing scale with SECI (<3 months of current overall billing)

•

Financial profile of SECI is currently healthy: No LT debt

•

However, SECI receivable days are on an uptrend

48 41

80 95

FY17 FY18 FY19 HY 20 E

SECI receivable days

Increasing proportion of central counterparties lowering payment risk

Represents footprint among privately owned capacities (5-7 GW of capacities are owned by PSUs & government entities

Source: CRISIL Ratings, MNRE Annual Report

Source: SECI Annual Report, CRISIL Ratings

•

^In ^2018, ^>55% ^of ^capacities

auctioned were by central counterparties leading to increase in their proportion in FY 19 & FY 20

•

In 2019 & 2020; >80% of capacities auctioned were by central counterparties which will lead to increase in their proportion going forward

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Rs 60,000 – 70,000 crores of refinancing potential in the next 3 years

90 GW of privately owned capacity with >1 year^ track record

(by March 2023)

48 GW with leading 20 players (Debt of over Rs. 1.6 Lac Cr)

~Rs. 60,000 - 70,000Cr potential for refinancing with moderate to

strong counterparties

~Rs. 90,000 crores (Already refinanced / weak

counterparties etc.)

42 GW with other players

 Banks aligned to refinance operational projects with track record. Growing scale provides healthy opportunity to free up invested debt capital

 Through benefits of diversification and cash flow related covenants, healthy proportion of amber & some red discom exposure assets can also be part of refinancing pool

 Refinancing have also increased in AA category with over Rs. 17,000 crores of debt being refinanced in AA category (domestic / green bonds) in the past 3 years (vis-à-vis less than Rs 8,000 crore compared to previous 3 year period i.e. FY 14 - 16)

^ Typical time frame for stabilisation of project; this removes 12-14 GW of capacities which would be commissioned in FY 23; 7-8 GW capacities present in PSUs & Governments

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3.8 4.4

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70

Equity IRR

Average DSCR Key Concessions supporting suitability

•

Relaxations around number of investors &

leverage cap in private InvIT

•

Ability to attract larger base including retail investors with public InvITs

•

Tax relaxations on distribution or income earned by InvIT from its project SPVs

•

No dividend distribution tax applicable if trust and SPVs operating in old tax regime

Size of the bubble indicates size of the debt (Rs crore per MW)

InvITs can support refinancing and aid capital unlocking

Regulations support InvITs to balance equity returns & debt service cushions;

Healthy equity returns of 12-14% possible with average DSCRs of around 1.5 times in CRISIL’s assessed structures

• Better reporting and corporate governance statutes alongwith equity returns makes them ideal to attract global equity players such as pension & sovereign funds which can further aid equity capital unlocking

Source: CRISIL study of 2 renewable InvITs (Bubbles represent different scenarios of leverage &

acquisition cost of assets)

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Summary

Growth outlook: Strong pipeline of auctioned capacity to drive capacity base to 113 GW by Mar 22

Tendering activity: New bids like RTC, PPS to increase having a higher tariff around Rs 4/ unit

Operational performance: No new material surprises on technical and cost front

Regulatory environment: Continues to be conducive

Payment: Increase in reliable central counterparties offers silver lining with their share expected to rise to 29% of overall private capacities by Mar 22

Key risks: Weak credit profile and payment track record of state discoms, import dependence of modules on China and grid-balancing costs with increasing proportion

Refinancing potential of Rs.60,000 – 70,000 crores of debt

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Thank you

CRISIL Ratings desk Toll free: 1800 22 1301

Email: [email protected]

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