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Offtake risk has become a blanket term that scares investors away from #power sector projects in India. We break it down to understand why that is? 1/n
Offtake risk is the risk posed by the off-taker (also called credit risk, counterparty risk or risk on receivables). In India, the counterparty is almost always a discom or a central government offtaker (SECI/NTPC) buying on behalf of the discoms. 2/n
The power purchase agreement (PPA) is the contract between the power generator and the purchaser (discom/SECI/etc) For RE the PPA mandates that all power generated must be purchased/paid for as per the must run clause. Exceptions are allowed only if there is technical trouble 3/n
So back to the risk then - offtake risk is a catch-all term for the risk posed on the terms of the PPA - both in the letter and spirit of the law. These have three major components. 1. payment delays, 2. curtailment of power, 3. risk of renegotiation/default of PPA 4/n
Payment delays are the lion's share of the risk. As this #CEFAnalysis shows payment delays to RE projects average at 11 months based on data up to Q2 of 2019. Things will definitely get worse as #discom finances worsen in light of #covid… 5/n
Looking at the financial health of #discoms these delays are unlikely to be resolved soon. But we cannot keep trying to optimise for LCOE of #renewableenergy without systemic means to correct for these delays. Where are the IPPs going to cover this cash flow delay from? 6/n
#IPPs have no choice but to accept these delays, but their #financiers don't accept them. So they either don't lend, or IPPs keep working capital buffers to assure them of debt servicing. This raises tariffs! we explain -… 7/n
Beyond payment delays, the risk of curtailing #renewable power for technical reasons is rising. As the share of RE increases, the grid may face technical integration challenges which are best (read: most easily) resolved by curtailing renewables. There is no penalty for this! 8/n
Even as this is not rampant across states, it does have a seasonal surge during the #monsoon as the #wind and #hydro peaks coincide. This needs to be addressed before it becomes chronic. We propose a #guarantee for tail end curtailment risk… 9/n
And last, the risk of renegotiation. Low likelihood, high impact, right? Not anymore. @AndhraPradeshCM changed the probability equation when he wanted to renegotiate 7.4 GW of operational RE projects in July 2019. The matter is still in court… 10/n
But in the meantime, we have debunked premise of renegotiation that #renewables are hurting the discoms' financial viability -…. Renewables aren't their enemy, the cost of finance is! What a full-circle moment. 11/n
Proposed amendments to the #ElectricityAct can go some way in providing a systemic solution but till then we have to use interim solutions,use public money to keep the #investment coming and the tariffs low! @mnreindia @SECI_Ltd @RajKSinghIndia @MinOfPower @ntpclimited @IREDALtd
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