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According to a report by the Institute for Energy Economics and Financial Analysis (IEEFA), major developers in the sector of renewable energy have plenty of options to increase their returns, despite the challenges. They will also aggressively compete in the auctions set for 2022.
Falling tariffs have resulted in renewable energy capacity in India increasing by nearly 10-fold in the last decade from ~12 gigawatts (GW) in 2010 to around 110GW in March 2022. Over the years, alongside tariffs, ROE expectations have also fallen. From a must-have 18% threshold, the ROE expected now hovers around the 12% mark, says the report.
However, fresh challenges have emerged for the sector. Global supply chains have been in tatters lately due to the disruption caused by the pandemic and, more recently, the Russia-Ukraine war. Both wind turbine generator producers and solar module manufacturers have been hiking prices as materials, freight, and labour needs coming out of the pandemic and geopolitical risk weigh down on critical raw material prices. Fresh trade barriers have emerged with the imposition of a basic customs duty (BCD) on the import of solar modules and cells in India. To top it all, sharp, seemingly uncontrollable inflation is making global central banks suck out the system’s liquidity, leading to a steep increase in interest rates.
These challenges are unlikely to have an impact on India’s renewable power story. The report’s co-author states that “We believe India will continue its trajectory to add renewable energy capacity as the supply chain challenges decrease in the short- to medium-term, and the industry can absorb these downside risk,”. Shantanu Srivastava, Energy Finance Analyst, IEEFA.
“Central and state agencies should continue their auction pipeline for renewable energy, as major companies are expected to continue,” Ankur Saboo (co-author and guest contributor at IEEFA), an infrastructure finance specialist, says.
This report outlines the various options that major renewable energy companies have to increase their return on equity. It would be a great help to them meet these challenges.
Srivastava & Saboo state that large renewable energy developers can use bond markets to refinance their debt at lower rates, and benefit from a zero-amortization period for debt repayments. This results in the expected stock return load.
Margins on in-house procurement, engineering, and construction are also driving returns.
Developers can also sell stakes in projects that are under construction to strategic investors like global oil and gas majors or financial investors like infrastructure investment trusts to increase their returns.
Finally, developers are increasingly seeing the sale of carbon credit to developed countries as a viable source for additional revenue, further increasing their returns.
The report examines how these measures can improve the return on equity of a hybrid wind-solar power project or a solar power plant. Refinancing at a 100-basis point lower interest rate can increase the internal rate return on equity for a hybrid wind and solar project by 2%.