Large developers in the renewable energy sector have enough options to boost returns even as challenges mount and will fight aggressively in the various auctions scheduled in 2022 in India, said a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).
This report comes even as the industry is going through one of its most challenging periods, with large developers trying to manage the twin pressures of higher import duties and the enforcement of the ALMM list for almost all solar projects.
According to the report, the falling costs of solar modules, which in turn brought down tariffs, fuelled the growth of India’s renewable energy growth story. However, turmoil in global supply chains caused by the COVID-19 pandemic and the Russia-Ukraine war has pushed up costs. Further, the period of lower financing costs is also fast ending as surging inflation forces central banks to tighten monetary policy, pushing up interest rates.
IEEFA holds that challenges are unlikely to have a lasting impact on India’s renewable energy story. “We believe India will be able to continue its renewable energy capacity addition trajectory because current supply chain challenges will ease in the short-to-medium term, and the industry has enough cushion to absorb these downside risks,” says the co-author of the report, Shantanu Srivastava, Energy Finance Analyst, IEEFA.
Ankur Saboo, co-author of the report, maintains, “Central and state nodal agencies should proceed with their pipeline of renewable energy auctions, given that interest from the large companies in the sector should continue, even in these unprecedented times.” The report highlights various options that large renewable energy companies have to enhance their return on equity, which would help them tackle the challenges.
According to Srivastava and Saboo, large renewable energy developers can lean on bond markets to refinance debt at lower rates and take advantage of a non-amortisation period on debt repayments to manage their auction wins. This leads to the front loading of equity returns. The report further adds that margins on in-house engineering, procurement and construction (EPC) provide a nudge to returns. The sale of stakes in operational projects to strategic investors such as global oil & gas majors and financial investors like infrastructure investment trusts (InvITs) is another avenue developers have used to increase returns.