Near Term Regulatory Risk for Third-party Off-take Based Renewable IPPS to Increase,Given the Adverse Impact of Covid-19 on Cash Flows of the Distribution Utilities: ICRA


The state power policies in many states have been amended over a period and the states have either completely withdrawn or reduced incentives given to open access customers (mainly commercial & industrial (C&I) consumers) for power procurement from renewable energy projects, as tariff competitiveness of wind and solar power has shown a significant improvement. Further, the open access charges applicable in case of third party sale of power have also shown an increasing trend across the key states, highlighting the rising regulatory risk for such IPPs. Earlier, the state power policies were attractive for open access based renewable power projects as concessions were available from levy of cross-subsidy surcharge (CSS), transmission and wheeling charges as well as favourable banking facilities to promote the renewable sector.


Commenting on this trend, Mr. Girishkumar Kadam, Sector Head & Vice President, ICRA Ltd says, “The renewable IPPs based on third party / group captive off-take remain exposed to regulatory risk, which is set to augment even more, given the likelihood of an increase in open access charges due to an adverse impact of the lockdown/restrictions to control COVID 19 outbreak on the cash flows and revenue profile of the state owned distribution utilities. Further, with the improved tariff competitiveness for wind and solar energy against the conventional power sources, the open access charges for renewable energy projects are likely to remain aligned as that for conventional power sources, going ahead.”

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The State Electricity Regulatory Commission (SERC) in Maharashtra has recently approved the levy of additional surcharge on group captive projects, as per the order issued in April 2020. Group captive consumers were earlier exempt from such levy in Maharashtra. Risk of such levy by SERCs in other states cannot be ruled out for group captive IPPs.


The viability of power procured under the open access route in the renewable energy segment is a function of discount offered by the power producer as compared to the grid tariffs and applicable open access charges. The applicable open access charges across the key states are estimated to vary quite widely from Rs.2.5 per unit to Rs. 5 per unit. The states under comparison are namely Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan and Tamil Nadu. As a result, the tariff expected for renewable IPPs in
case of third party sale has come down to some extent and is estimated to remain in the range of Rs. 3 per unit to Rs. 4 per unit across the states, given the still high level of grid tariffs for C&I customers and slow progress in tariff rationalization by SERCs for the distribution utilities.

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Assuming an average net realisation of Rs. 3.5 per unit for a wind power project selling power under open access third party route having a capital cost of Rs. 7.0 crore per MW and PLF level of 30.0%, the debt coverage metrics for the project are expected to remain comfortable with cumulative debt service coverage ratio of 1.3 times over a 15-year debt repayment period. For 25 paise/unit reduction in tariff, impact on the project DSCR is estimated at 10 bps. “However, such third-party based projects face challenges arising out of relatively much lower tenure (5-10 years) of the power purchase agreements (PPAs) under the third-party sale route as against the 25 year-tenure for PPA in case of utility scale projects. Further, net tariff realised for such projects remains exposed to regulatory risk given the likelihood of revision in open access charges by the
regulators and tightening of energy banking norms being observed by SERCs across the states.”. says Vikram V, Associate Head & Assistant Vice-President, ICRA Ltd.

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