India’s emission reduction commitments under the Paris agreement will lead to a sharp rise in renewable energy capacity, says Moody’s.As India is moving towards meeting its commitments under the Paris agreement on climate change, its renewable energy market is likely to witness a strong growth over many years, says Moody’s Investors Service.
“However, renewable energy projects face challenges related to the weak credit quality of offtakers, an evolving regulatory framework, as well as financing and execution risks,” Moody’s vice-president and senior analyst Abhishek Tyagi said in a statement issued here.
According to the rating agency, India’s emission reduction commitments under the Paris agreement will lead to a sharp rise in renewable energy capacity. India aims to achieve 40 per cent of cumulative installed capacity through non-fossil fuel sources by 2030 from the current 30% and also plans to grow its renewable energy capacity to 175 GW by 2022 from the current 57GW.
“Such growth will be driven by the public and private sector. However, the key offtakers for most renewable projects are state-owned distribution companies, and these firms typically demonstrate weak financial profiles. This situation poses a key challenge for developers. And, while there is no history of defaults under power purchase agreements, payment delays are quite common,” he said.
Moody’s also points out that the evolving policy framework for renewables presents a risk for renewable projects. “Adherence to renewable purchase obligations has been limited, leading to lower demand for renewable energy.
Nevertheless, the feed-in-tariff and competitive bidding guidelines for wind and solar projects are well established and improve revenue visibility over the life of purchase power agreements,” the agency noted. It further said the rise in renewable energy capacity will bring execution challenges, including land acquisition, establishing resource quality, grid connectivity and availability.
On the financing of renewable energy projects, India will need to invest close to $150 billion to meet its 2022 renewable energy targets. Since domestic banks are constrained in their lending to renewable projects, foreign capital will play an important role. However, foreign currency financing is constrained by the limited hedging products available to fully cover the rupee currency risk of purchase power agreements, it said.