In 2014, in an effort to increase foreign investments in the Indian renewable sector, the Ministry of New and Renewable Energy (MNRE) proposed the concept of solar parks. Their roadmap envisioned 20 GW of solar capacity to be developed across 34 solar parks in 21 states in India.
Despite infrastructure and site preparation issues causing delays, the MNRE extended the initial plan to 40 GW of capacity in February of 2017, and subsequently modified the timeline for implementation the following year.
Solar parks were seen as an effective way to de-risk a project, with land and transmission infrastructure being developed by either the solar park developer or state nodal agency and project developers free to focus on project development. This plug and play model of project development has proven successful with 10.6 GW of solar capacity allotted across solar parks, as of February 2019. Solar park tenders have also witnessed active participation from foreign developers and an improved risk profile has led to record low tariffs in the Indian solar sector.
Although responsibility for land acquisition and transmission infrastructure has been passed on to the solar park developers and state nodal agencies, developers are now exposed to the risk presented by execution abilities of these parties. This risk along with other extraneous factors such as cost of equipment and financing conditions, present a unique challenge for project developers to commission projects on time and within budget.
Solar park capacities are typically tendered before land acquisition, solar park development, or transmission infrastructure is completed. Timelines for project development are usually 12-18 months after a project has been awarded. This timeline includes 6 -7 months for arranging finance and the remaining period for actual construction. If the solar park is not available by the time construction is to start or the transmission facility is not ready when the construction is completed, it will have a direct cost impact on the project.
In case of a delay, several factors contribute to the resultant cost impact. Project delays affect the economics of the project in terms of pricing of modules. Project developers typically procure modules 4-6 months before project commissioning. Delays inevitably lead to delay in procurement of modules. While developers have been able to capture upsides due to fall in module prices by procuring modules later, increased volatility in module prices have forced developers to procure modules at a higher cost than contemplated during the bid submission. Since the modules are imported, adverse movements in the exchange rate also increase the project cost.
Delay in land acquisition and associated processes such as mutation of land and execution of the land lease agreement affects the creation and perfection of security under the financing agreements. This may lead banks to withhold disbursement or levy penal interest on the project company. Both these measures will increase the project costs.
Delays in completion of park facilities or transmission infrastructure will delay the commissioning of the project. Since financing documentation and debt repayment schedule is linked with a specific date, delayed commissioning may lead to defaults under the financing agreement or require sponsors to infuse additional equity.
Liquidity constraints in the current scenario have greatly reduced the financing options available to the project developers. This has resulted in multiple projects chasing limited capital. As a consequence, developers have very little room to absorb any uncertainties arising out of other project factors.
The development of solar parks has indeed resulted in de-risking the land acquisition process in the Indian power sector and has helped in attracting foreign investments in India and accelerating renewable capacity additions in the country. But this model presents challenges of its own, especially for foreign developers who are exposed to risk of a falling rupee in addition to project-specific risks.
Specific risk due to the execution capabilities of park developers need to identified as a risk and should be addressed within the current contractual framework. A liquidated damage regime, as prevalent in other project contracts, will ensure that project economics are not impacted by delays and cost overruns due to delays in allocation of land and construction of transmission infrastructure.
Alternatively, project tendering can be aligned with the completion of ancillary infrastructure so as to avoid any uncertainties after the project is awarded to a developer. This might lead to a brief delay in tendering but will provide better risk allocation and will enhance the profile of India’s power sector in the long-run.
Authors Ankit Chaturvedi and Varun Dave of Synergy Consulting have advised several foreign developers in successfully developing solar and wind projects in India.