Weak credit profile of Indian offtakers remains key challenge

India needs to invest nearly $150bn to meet its 2022 renewable energy target, a large part of which will be contributed by foreign capital as domestic lending is constrained.

While India’s renewable energy market is set to see strong growth in the coming years, structural hurdles threaten to put a spanner in the works, according to Moody’s. 

In a report, the rating agency said the impetus will be given by both the public and private sectors as the South Asian country commits to coping with climate change under the Paris agreement. 

India aims to have 40 percent of its total installed capacity generated from non-fossil fuels by 2030, up from 30 percent today, to help meet its emission reduction commitments. The plan also calls for having 175GW of renewable energy capacity installed by 2022. 

“However, renewable energy projects face challenges related to the weak credit quality of offtakers, an evolving regulatory framework, as well as financing and executive risks,” said Abhishek Tyagi, a Moody’s vice-president and senior analyst. 

He further explained that the main offtakers for most renewables projects are state-owned distribution companies, which typically have weak financial profiles. Although there is no history of defaults under power purchase agreements, Tyagi noted, payment delays are quite common. 

While feed-in tariffs and competitive bidding guidelines for wind and solar are contributing to improve revenue visibility, Moody’s pointed out that the evolving policy framework for renewable energy projects, for example the restrictive adherence to Renewable Purchase Obligations, poses a risk. 

Tyagi added that the rapid rise in renewable energy capacity will bring another lot of challenges, including land acquisition, grid connectivity and reduced margins from low tariffs. 

A hindrance on the financing side lies in the lack of hedging products to fully cover the currency risk posed by Indian rupee-denominated PPAs. As domestic banks are constrained in their lending to renewable projects, India’s funding gap of nearly $150 billion to meet its renewable energy targets will need foreign capital to play a significant role in the future.