India’s Renewable Energy Market Set to Grow, but Faces a Few Headwinds

The renewable energy market has a bright future in India, which is moving to meet its commitments under the Paris agreement on climate change. “However, renewable energy projects face challenges related to the weak credit quality of offtakers, an evolving regulatory framework, as well as financing and execution risks,” said Abhishek Tyagi, a Moody's vice president and senior analyst in a new report.

The country is attempting to achieve 40% of cumulative installed capacity through non-fossil fuel sources by 2030 from a current level of 30%. Also, India plans to increase its renewable energy capacity to 175GW by 2022 from the current capacity of 57GW, Moody’s said. All of this will take place in the public and private sector.

"However, the key offtakers for most renewable projects are state-owned distribution companies, and these firms typically demonstrate weak financial profiles," said Tyagi. "This situation poses a key challenge for developers such as Neerg Energy Ltd (Ba3 stable). And, while there is no history of defaults under power purchase agreements, payment delays are quite common."

Policy related to renewable energy is also a potential headwind to the sector. As an example, there has not been significant adherence to Renewable Purchase Obligations which would have led to lower demand for renewable energy, Moody’s analysts said. Still, the Feed-in-Tariff and competitive bidding guidelines for wind and solar projects have done well to improve revenue visibility through the course of purchase power agreements. Execution challenges including land acquisition, establishing resource quality, grid connectivity and availability may also be an issue as renewable energy capacity increases.

“On the financing of renewable energy projects, Moody's explains that India will need to invest close to $150 billion to meet its 2022 renewable energy targets,” analysts said. “Because domestic banks are constrained in their lending to renewable projects, foreign capital will play an important role. However, foreign currency financing is constrained by the limited hedging products available to fully cover the INR currency risk of purchase power agreements.”

– Nicholas Stern, senior editor

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