Financial health of discoms hurdle for renewable energy sector: Moody's

The payment delays to the state-owned distribution companies are common, leading to a build-up of receivables from off-takers and an increase in working capital debt for renewable energy companies

The weak financial health of state-owned distribution companies (discoms) will remain a challenge for India's renewable energy sector, where investments worth $225-250 billion are estimated to reach a generation capacity of 500 GW by 2030, according to Moody's.

The payment delays to these companies are common, leading to a build-up of receivables from off-takers and an increase in working capital debt for renewable energy companies.

The rating agency in a statement said that the weak financials of state-owned distribution companies have led to delays in the signing of Power Purchase Agreements (PPAs). This in turn occasionally results in project delays or cancellations.

While renewable energy enjoys preferential dispatch in India, payments for electricity sold to state-owned discoms are usually delayed beyond the 60-day period as specified in the PPAs. There is no history of distribution companies not making payments to distribution companies according to PPA tariff (if undisputed), Moody’s said.

India aims to triple its renewable energy capacity to 500GW by 2030 from 157GW as of March 2022, and to have 50 per cent of the electricity generation from non-fossil fuel sources.

The government of India recently announced a stimulus package to support discoms for the installation of smart and prepaid meters to reduce losses and also reduce the revenue gap between the cost of power procurement and electricity tariffs.

The government has also allowed the state-owned distribution companies to terminate PPAs with coal-based plants that are more than 25 years old, a step that will help to reduce capacity payments and lead to more renewable energy in the system.

Moody's pointed out that continuous policy support from the government is key. The country expanded its renewable energy footprint significantly over the last 4-5 years due to supportive government policies that encouraged the domestic private sector and overseas investors to participate in the sector.

In addition, access to low-cost, long-term and diversified capital from both private and public sectors will determine India's success in meeting its 2030 renewable targets.

The private sector has led the way in investing in renewable energy, having contributed over 90 per cent of installed renewable capacity (excluding hydropower). And sovereign wealth funds, which typically have a low cost of funding, have been active in the sector, it added.