In an exclusive talk with Animesh Damani, Managing Partner – Artha Energy Resources
Q1. What are the biggest challenges/threats to the growth of RESCO in India? OR
What are the opportunities, challenges, risks in investing in RESCO Projects
A1. The solar sector in India is at a very nascent stage. There has been an increased awareness in the sector with regards to its technology, benefits and the savings it generates. However, if we look at the growth of solar in India it is not uniformly distributed across the country. On one end we are successfully able to build utility-scale projects at record low prices that even global players at times find it extremely competitive.
Animesh Damani, Managing Partner – Artha Energy Resources
However, on the other hand, solar as a technology and a source of power for commercial and industrial users have still been slow to pick up. The biggest reason why commercial and industrial users haven’t been able to pick up solar on a very large scale is that;
- The initial capital investment in solar is very high
- The government compliance and liasioning to get approvals is an extremely cumbersome process costing at times up to 10% of the project cost, making it a very expensive process
- A lot of industries are not able to understand the technology and therefore are inherently apprehensive about the investment paying off. Additionally, the fact that there are so many options to choose from when it comes to panels, invertors or EPC contractors leaves the industrialists confused.
Most of these issues can be resolved when a commercial or industrial user adopts a RESCO solar model for the project on its unit. In a RESCO model, an investor bears the cost of the plant and supplies electricity to the industry at a low tariff rate. However, when developers are evaluating the financial profiles of industries on which the plant is set up for investments, most of them tend to find that either the company is financially very weak or there is an extremely low expectation of tariff rates. Companies with weak financials, find it hard to get investors and there is a lack of understanding on the consumer side for the need of strong project securities towards the investor. Companies with strong financials tend to adopt a relentless focus on getting the lowest tariff rate without paying attention to the quality of the system being installed, background and previous work of the developer as well as safeguards to ensure the sustainability of savings over the life of the asset
Also, the expectation of lower tariff rates forces developers to use sub-par materials and tactics that are not feasible over the life of the asset, which causes disputes between the developer and the consumer in the long run due to unmet expectations.
Another growing threat is the way developers are selling RE projects to potential investors. What we have observed is that developers are playing on the greed of the investors who are looking to achieve above industry norm returns. It is a well-known fact that the power sector generates a return of 14-16 %. However, developers are pitching projects to new investors with 20% or as high as 28% returns. I find investors becoming gullible to such high returns without questioning the model and the numbers behind it. This leads to first-time investors having a bad experience which restricts them from making further investments as well as spreading negativity around it.
Furthermore, the residential solar has also not picked up positively in the country because the majority of large consumers from the residential perspective belong in the tier 1 cities and these consumers live in flats as opposed to bungalows. By this virtue, the decision to set up a rooftop plant depends on the management of the society which hinders/delays the final decision to set up the plant. In cities where bungalows are a preferred mode of accommodation, the bigger concern comes around the feasibility of these bungalows with respect to their location and surrounding that make them unsuitable for a rooftop setup eg. Shadows cast on the roof due to the low height of the bungalows that are surrounded by trees and high-rise buildings and structures, etc.
Q2. What are the expectations of Government?
A2. The government has done negligible work to promote RESCO projects to date. The only RESCO projects being promoted by the government are those in which the government is the consumer themselves. Overlooking the fact that the majority of market share lies in the hands of the private sector. To overcome this challenge and to attract retail investment, the government should consider giving benefits in the form of tax relaxation for those willing to set up RESCO plants. Additionally, they can set up a model where the solar electricity bill from these plants can be tied up with the electricity bill that comes from the utility companies. Usually, consumers pay their electricity bills to avoid power cuts. By combining these bills, the government can ensure that the consumers pay back investors’ money as well.
Such a plan will open the market for retail investors and domestic HNIs. Additionally, companies with weak financials will get a varied range of investors to fund their RESCO installations.
Q3. What are the real challenges you face building a project with respect to Land, Logistics, Customs, Grid Connection, Manpower resources, etc
A3. The biggest challenge faced by the RESCO players is that the state wise policies are unclear and loosely worded. Moreover, the lack of consistency for the recognition of RESCO in different states leaves the developer with limited states to focus on. To add to this, each state has its own set of policies when it comes to treatment of RESCO projects. For eg. in Gujarat companies with RESCO projects are not permitted for net metering, while other states in the country have no such restrictions. All these artificial barriers including the higher cost of net metering approvals, lack of streamlined online process that is put into place, lack of online features that automatically take the process offline thus delaying it, etc. hinder the interest of investors in this model.
Q4.Kindly enlighten on “Energy Storage as Game Changer” Technology & Cost Trends, Incentives, and Government Support needed
A4. We view energy storage primarily through two prisms, one is the opportunity of attaining a global edge in the production of energy storage devices and technologies while the other angle is the immediate application of energy storage.
- It’s a fact that energy storage is a technology of the near future. We will achieve large scale commercial viability within this decade. Currently, there is a need gap for a lot of research and development that needs to be done for energy storage to become commercially viable. India can take the global lead in encouraging innovation and provide a supportive policy regime for the set-up of the battery manufacturing industries across the country. It can become a key pillar of the “Make in India” initiative. This is an industry, wherein as a country, we should ensure global leadership before another country attains that edge.
- The largest consumer of energy storage devices will be the automobile sector. Globally, all of the large automobile manufacturers have announced the death of internal combustion engines with a focus to convert its entire production to EV by 2030.
- Energy storage will immensely help solar and wind convert to a firm power source, which will help address fluctuations in generation output, peaking power requirements and undesirable effects on the grid caused due to the increased weight of the infirm power in the energy mix. Storage can ensure excess generation during peak period is stored to deliver a stable output during non-peak periods. This will ensure a smooth flow in the grid.
- Energy storage will be a key element in micro-grids. Micro-grids are typically located in remote areas where the cost of delivering energy is very high. Storage will enable stability in a micro-grid and ensure efficient supply and availability.
Q5. The financial health of DISCOMS is a concern for Bankability of Solar Project. How to overcome this challenge OR What are the Financing challenges, PPA, Land, etc
A5.
Source: Ministry of Power
83% of Indian state discoms have a credit rating below “Junk” status with only 7 state discoms commanding a credit rating of A or higher. The poor financial health of the discoms spills over to the entire power sector causing a burden on generators and consumers alike. Discoms are known to have an average payable of over 500 days to power generation companies. Hence, generators face large working capital requirements to service debt and other obligations inherently reducing their own financial viability. Given the poor credit rating of these discoms, banks are reluctant to discount the invoices raised thereby offering no alternative to the power generating company to rack up more debt. Hence, in order to improve the bankability of solar projects with discoms, we must ensure that the financial health of the discoms is restored over the medium term. In the short term, the involvement of IREDA, PTC, and REC should be looked at for discounting of invoices raised to discoms.
Q6. What are the expectations from RBI, Finance Ministry and MNRE for the betterment of financing of RESCO solar projects
A6. The biggest challenge faced by RESCO developers is that their PPA’s are not funded by the banks. Banks in today’s time are clearly more comfortable in supporting the top players to get bigger. While the smaller developers struggle to raise finance and are forced to put their savings as collaterals to get funds for these projects. The lack of support from banks and the burden of additional collateral along with lack of facilities like bill discounting, etc demotivates the retail investor to set foot in the renewable sector.
That being said, there needs to be a focus on the smaller developers. Thirty-eight GW of the forty GW envisioned is still to be set up in terms of rooftop solar. The reason for the slow pick up of this segment is lack of support and focus toward it. All the government has done is given subsidies which are not enough and that have clearly not worked in the developer’s favor. The only way rooftop can grow is through RESCO for commercial and industrial consumers. This is only possible if we allow certain leverage to the RESCO developers through either policies, financing or depreciation benefits.
Q7. In Private PPA market. What is your view on the PPA Risk and the way forward?
A7. I think the private PPA market is the best segment to be in today. The simple reason for this is that the investment per project is much smaller in comparison to the utility-scale projects. Hence, an investor can distribute his risk over multiple projects. RESCO provides a stable monthly cash flow for investors which is more prompt in comparison to the government payback time. Most importantly, for a private PPA to function there is a dire need of trust between both the parties. And with India being a high network and relations driven society it becomes easier for us to get a sense of the promoter’s credibility in the market. The policy risk is extremely low simply because we are not using the grid since the power is produced and consumed at the same time. However, the purely commercial nature of these transactions carries a high counter-party risk i.e. one to one. And the only option to resolve it would be via court which can be a lengthy option.
Source: artha.group
