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View Points | October 2017

Investment Peril

<span style="font-weight: bold;">Animesh Damani,</span> Managing Partner, Artha Energy Resources speaks about how renewable energy investors in the country are being squeezed because of non-payment of dues by discoms. <p></p> <p> Under India's federal system of governance, there is a clear distinction between the roles of the state and the Centre. For the renewable sector, the latter is majorly engaged in policy making and tackling those issues which are not resolved by the state electricity boards (SEBs). </p> <p>For example, the UDAY scheme is an initiative of the Central Government to bring the state discoms out the their current financial mess by gaining operational efficiencies, reducing the cost of power generation, aiding development of renewable energy and indulging in energy efficiency and conservation.</p> <p>There are two major issues being faced by the renewable energy generators from the state discoms, i.e. delayed payment and arm twisting while the other is the grid curtailment. The current issue of delayed payment and arm twisting by the state discoms is primarily a state level issue. </p> <p>Most the discoms are reeling under massive financial losses and are heavily indebted. Their poor financial situation was created by state policies that allowed for free power or heavily subsidised power to the underprivileged sections of the society. Rampant misuse of this subsidy has accounted for 40 per cent of the power produced in that state. </p> <p>There are certain sections of the society that get power at a flat price of Rs 500 per month irrespective of its consumption. Hence, these sections tend to install televisions, fridges, as well as two air conditioners in a room of 300 sq ft. All of these devices combined would have accounted for a bill that is much higher than the flat rate being charged. The burden of providing this kind of subsidy was on the state discoms which went into massive losses.</p> <p>Hence, to turn around the situation the UDAY scheme was launched. The loans of the state discoms were transferred to the respective state in order to strengthen the balance sheet of the state discoms. The discoms have now raised or are in the process of raising fresh loans which are being used to pay the outstanding dues of renewable energy generators.</p> <p>However, this demand of waiving 50 per cent interest is unheard of and without any grounds. It is a case of a debtor offering the creditor an amnesty scheme. In the desperation created by the state discoms due non-payment, many renewable energy generators with loans against the asset have taken this scheme in order to save their house from being possessed. They received their payment on March 31, 2017 while those who refused to sign the undertaking were held up only to be paid last week.</p> <p>It had been over 15 months after which Artha received a payment from our energy consumer, Ajmer discom - owned by Rajasthan government. The outstanding payments added up to 20 per cent of what Artha paid for the asset.</p> <p>Luckily our investors paid in full for the asset and hence there weren't any loans to repay but not every renewable energy generator was as lucky as us. Many took loans, have run from pillar to post to get paid and after exhausting all available options they have finally been forced into looking at other avenues to repay the loans. </p> <p>The gut-wrenching stories range from mortgaging familial properties, dipping into their savings or in worst cases selling the property to keep the loans current ù this is the state of renewable energy investors in India, a segment that is dying under the weight of the outstanding dues.</p> <p>We used to assure our investors that the invoices are with a government entity that has to pay penalty interest of 15 per cent in the past due amounts which are as good as keeping the money in a high yielding bond. Our faith was vindicated last year when under the direct order of the Rajasthan High Court, the discoms immediately paid the delayed interest amounts and we (like many others) did get the money!</p> <p>This year, however, the discom is extracting more than it is pound of the generators flesh by first delaying payments to generators even though it has received funds from the Central Government under the UDAY restructuring scheme. Also, asking renewable energy generators to back down their sub-stations when they are in the middle of producing their maximum energy.</p> <p>The second issue is of the grid curtailment. When renewable energy was initially being promoted in our country, it was given the status of 'must run'. This meant that any unit of electricity produced through renewable energy must be fed into the grid and paid. </p> <p>However, as the sector developed and we reached a total installed capacity of 50 GW, the status of renewable energy projects across the country have now been subject to 'merit order dispatch', which is a way of ranking available sources of electrical generation based on the ascending order of price together with amount of energy that will be generated.</p> <p>Hence, renewable energy which is highly seasonal and more expensive than thermal sources is subject to frequent grid curtailments due to its low ranking on the merit order list. Such grid curtailments were rampant in 2016 with Tamil Nadu recording almost 30 per cent grid curtailment. The situation this year has improved on the aggregate basis with discoms in Rajasthan, Maharashtra, Gujarat and Karnataka showing a grid availability above 95 per cent. However, this figure is highly misleading and more of a statistical eye-wash.</p> <p>Around 70 per cent of wind energy is generated in the monsoon season which lasts four months in India. The state discoms keep the grid availability at 100 per cent during the low seasons which is eight8 months of the year. Smartly, the state discoms shut-off the grid during the monsoons and on windy days. Thereby, ensuring the electricity generation from wind turbines is kept low citing merit order dispatch. While at the same time, they are able to show a grid availability of 95 per cent for the year.</p> <p>This issue of grid curtailment also has its roots in the subsidised cost of power given to certain section of the society. The cost of this subsidy is borne by everyone else in this country through high electricity prices. When the average cost of power procured is less than Rs 4.50 per unit, why is it that residential, commercial and industrial consumers pay rates of Rs 8-14 per unit? Why is that large industries have set-up their own captive thermal or renewable units? Its because the price of power is too high.</p> <p>Hence, such high rates results in aggregate reduction in demand of power which in turns comes at the cost of grid curtailment for renewable energy generators. The investors have been living with these issues for years now and most of those risks have been priced into the financial models for these projects. The blow that broke the camels back is the discom newest proposal: sign an undertaking giving the discom a 50 per cent interest discount. So with that, the debtor is offering the creditor an amnesty scheme. </p> <p>The 50 per cent discount would mean that the interest paid to the bank (around 10-12 per cent) is higher than the interest received from the discom. It is less than the yield of 12 months fixed deposit at a nationalized bank. This leads to a negative IRR situation for the investor. </p> <p>Does the Government intend on building its 100 GW plan on the with no renewable energy investors? The banks don't want to lend to this sector, the investors don't want to invest new capital in this sector and it is easier for us to find people who want to sell their renewable power projects than those that want to buy them.</p> <p>The PMO and the Ministry of Power are fully aware of what is going on and this is evident because in the last couple of months we received a letter from Maharashtra discoms offering the Rajasthan amnesty scheme to its creditors. The model is here to stay and will be replicated till all renewable energy investors are discouraged.</p>
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