Fitch Rating: Indian Renewable Power Generators face modest gains from spiking power demand

Supply factors are likely to limit near-term growth opportunities for Indian renewable power generators stemming from the country’s current heat wave and high fossil-fuel prices, says Fitch Ratings. Nonetheless, their medium-term prospects remain strong and are supported by government policies to diversify India’s energy base away from fossil fuels.

Rising power demand as India’s economy recovers from the Covid-19 pandemic has been accentuated by high temperatures that have afflicted large regions since March. This has added to electricity shortages and prompted official efforts to increase power generation from coal- and gas-fired plants, including restarting older plants. However, domestic coal supplies have struggled to meet demand and high imported coal prices, further spurred by Russia’s invasion of Ukraine, pose additional challenges for coal-based power generators.

These dynamics imply potential upside in near-term demand growth for renewable power generators, and Fitch believes that strong electricity demand should reduce curtailment risk. However, generators’ cash profiles could suffer if state utilities face added financial pressure, due to an inability to promptly pass on elevated power purchase costs, and delay paying outstanding dues to renewable generators.

Moreover, we expect supply factors to constrain the renewable sector’s capacity to boost output in the near term. High global commodity prices have increased the cost of materials and equipment, such as for solar modules and wind turbines. This situation has been aggravated by the Indian government’s efforts to localise the renewable power equipment supply chain, particularly for solar energy. For example, tariffs of 40% on imported solar modules and 25% on imported solar cells came into effect in April 2022, although implementation of a new system of approved solar-module models and manufacturers, which could further restrict imports of certain equipment, has been pushed back from April to October 2022.

India’s large industrial companies are increasing their investments in domestic solar-equipment production. For instance, Reliance New Energy Solar Ltd acquired Norwegian solar photovoltaics manufacturer REC Group in October 2021, which should support its investments in this area. However, it will take at least two to three years to fully develop India’s solar supply chain, with the sector remaining reliant on imported equipment in the interim. Even with expanded domestic production of equipment, we expect some reliance on imported raw materials to persist.

Financing challenges could also hinder greater domestic renewable equipment production and installed generation capacity. ReNew Power Private Limited (BB-/Stable) and Greenko Energy Holdings (BB/Negative), through issuing entities, raised US dollar notes in January and March 2022, respectively. However, other planned offshore issuance has been disrupted by developments around the Ukraine conflict. We believe the disruption to issuance will be only temporary, even if the conflict continues, but issuance costs may rise during the period of delay and affect capital raising plans. India’s central bank raised its policy repo rate by 40bp to 4.4% on 4 May 2022, and we expect further rate hikes in coming months.

We believe medium-term growth prospects for Indian renewable power generators remain strong, despite the near-term constraints on increasing output. They will be underpinned by the government’s goal of meeting half of the country’s energy requirements from renewables by 2030.