By Fitch Solutions
- We have made further downward revisions to our growth forecasts for India’s power and renewables sector due to ongoing impacts from the Covid-19 pandemic, China-India tensions and policy uncertainty in the solar sector.
- Recent events have also exacerbated key issues in the power sector, including high debt levels and dependence on power equipment imports amid supply chain disruptions, which poses considerable risks to India’s power expansion plans over the longer term.
- Despite some attempt to relieve these issues in recent months, we remain bearish on the effectiveness of these efforts given the ongoing structural problems in the sector and implementation time lags. We believe that the government also has to enact complementary supportive policies to boost local manufacturing, beyond increased taxation and restrictions, to support continued growth, particularly for its solar sector.
We have made further downward revisions to our growth forecasts for India’s power and renewables sector, due to several near-term headwinds. We now expect India’s power consumption and generation to contract by 6.6% and 6.8% respectively, and for capacity to grow by only 2.7% in 2020. Our initial forecasts accounted for a slight recovery in H220 from the Covid-19 pandemic, but we no longer think this will take place, given near to medium term pressures on the sector from multiple fronts. Over the longer term, we expect India to add a net capacity of 262GW between end-2019 and 2029. However, there are increasing downside risks to this view if structural issues in the sector remain unresolved.
Ongoing impacts from the Covid-19 pandemic will continue to weigh on our near-term outlook for India’s power and renewables sector. Continued state-level Covid-19 movement controls amid a still rife outbreak across many major states have continued to weigh on the economy. Given that India’s daily new Covid-19 case count continues to grow on a national level, our Country Risk team has revised our forecast for India’s FY2020-21 real GDP to contract by 8.6%, from a 4.5% contraction previously. Ongoing lockdowns will weigh on domestic economic activity, including manufacturing, heavy industries and construction, all of which are energy-intensive sectors. Power capacity growth will also slow as a result of project delays stemming from labour and supply chain disruptions.
We have previously highlighted increased risks and delays to projects in recently-completed auctions, particularly as power distribution companies (DISCOMs) are unwilling to sign long-term power purchase agreements (PPAs) amid existing financial conditions. The financial stability of companies operating in the market has deteriorated over recent years, which has been exacerbated by the pandemic. Significant debt levels, particularly among the DISCOMs, poses considerable risks to India’s power expansion plans. As of July 2020, it is estimated that DISCOMs still owed about USD17.6bn to power producers, despite the government’s three-month debt moratorium and stimulus packages to support the subsector. A drop in power demand and depreciation of the Indian rupee will further weigh on revenue in the near-term, and these distribution companies now face a high financial liquidity risk, weakening the stability of the debt-ridden sector. In line with this, the Ministry of New and Renewable Energy has told the Lok Sabha in September 2020 that renewable projects with a total capacity of 16.8GW have yet to sign PPAs. We expect those in the thermal power sector to face similar pressures. As such, we see risk to projects in recently-completed auctions if they are unable to secure their PPAs. Similarly, there is a risk of delays to newer project approvals, with a backlog of projects over the near term.
In recent months, the government has been attempting to relieve the financial issues in the sector, but we remain bearish on the effectiveness of these efforts given the ongoing structural problems in the sector and implementation time lags. These efforts include a debt reduction programme, plans for an investment fund, tax waivers and the use of direct subsidies. However, none of these plans are confirmed at present. The government mandated state DISCOMs to offer bank letters of credit in PPAs with effect from August 1 2019, to ensure timely payments to power producers (although this has now been temporarily halved due to Covid-19). The Ministry of Power has also issued a framework in late September to privatise distribution licenses for the distribution and retail sale of electricity, in a bid to alleviate the high levels of debt in the sector and increase private sector participation in the sector. This will be done through the creation of a special purpose vehicle, with selected bidders acquiring equity stakes.
The ongoing China-India tensions will also cause increased supply chain disruptions, project delays and reduce the viability of certain projects in the pipeline due to cost pressures. In July 2020, the Ministry of Power announced that it will impose restrictions on all imports of power equipment from China. Any company that wishes to import any of this equipment from China (or Pakistan, by association) will require prior permission from the Ministry. All imports of power equipment will have to be checked for malware or cyber threats while also meeting stringent quality standards. In India, Chinese imports account for 80% of the equipment and components in the solar power sector, 40-50% in the coal power sector (90% if excluding state-owned utilities), and about 30% in the transmissions and distribution sector. Given this high level of reliance, these restrictions will disrupt existing supply chains and cause further delays to a sector that is already reeling from the Covid-19 crisis. Several developers with projects at an advanced stage have also reported consignment delays due to a deadlock at Indian ports, despite these consignments having been paid for and shipped prior to the announcement. The existing economic responses will weigh on investor interest going forward.
In particular, we also expect the solar sector, which accounts for the largest growth in India’s renewable power capacity, to come under pressure due to existing policy pressures. The government has extended the safeguard duties against China on the import of solar cells and modules by an additional year to 29th July 2021, and expanded it to include Thailand and Vietnam, from where many developers rerouted their supplies in the last two years. India was originally set to enact a Basic Customs Duty on solar components (20-25% for solar modules and 15% for solar cells) with effect from August 1 2020, but this has been delayed due to ongoing disagreements between the Ministry of New and Renewable Energy and the Ministry of Finance. In light of this, there is an increasing risk of a double taxation on solar, which will increase costs significantly and jeopardise the economic feasibility of several projects in the pipeline.
We believe that if the government does not enact complementary supportive policies to boost local manufacturing, it will risk negatively affecting its domestic solar capacity growth. India has been making some efforts to boost the domestic solar manufacturing base in recent years but has not been very successful, as solar equipment produced in China still remain much cheaper and of a higher quality. The government has recently established a new task force with the aim to develop its domestic power manufacturing industry, although specific details and directions to achieve them still remain limited.
The article has been sourced from Fitch Solutions and can be accessed by clicking here