India's renewable energy projects suffer financing and execution risks: Moody's

No thanks to "weak credit quality" of offtakers.

Moody's Investors Service says that the renewable energy market in India will likely see strong growth over many years, as the country moves towards meeting its commitments under the Paris agreement on climate change.

"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," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.

Moody's analysis is contained in its just-released report titled "Renewable Energy — India: Strong growth prospects, but challenges from offtakers, evolving policy framework," and is authored by Tyagi.

Here's more from Moody's:

Moody's report explains that India's emission reduction commitments under the Paris agreement will lead to a sharp rise in renewable energy capacity.

Specifically, the country aims to achieve 40% of cumulative installed capacity through non-fossil fuel sources by 2030 from the current 30%.

It also plans to grow substantially its renewable energy capacity to 175GW 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," adds Tyagi.

"This situation poses a key challenge for developers such as Neerg Energy Ltd. And, while there is no history of defaults under power purchase agreements, payment delays are quite common."

Moody's also points out that the evolving policy framework for renewables presents a risk for renewable projects. For example, 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.

Moody's report notes that the large 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, Moody's explains that India will need to invest close to $150 billion to meet its 2022 renewable energy targets. Because 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 INR currency risk of purchase power agreements.