Optimal Tariffs and Efficient Forecasting Mitigate Project Financing Risks: Interview
Lenders factor in the tariff viability over the long term as well as through various market fluctuations
Better forecasting and optimal and buffered project tariffs reduce the risks and make it easy for lenders to finance renewable projects over a longer term, P K Sinha, ED Projects at Power Finance Corporation (PFC), said in an exclusive interview on the sidelines of the Mercom India Renewables Summit 2023.
He also added that stricter regulations around financing had been one of the driving factors behind the considerable improvement in the otherwise sluggish performance of state distribution companies (DISCOMs).
Below are some excerpts from the interview –
Tell us more about PFC’s role in improving DISCOM’s financial status.
DISCOMs’ financial conditions are a major concern, and the government has identified PFC as one of the nodal agencies to work on this. We have a dedicated team for monitoring all the programs coming through the government of India.
We monitor the RDSS (Revamped Distribution Sector Scheme) program that is presently under implementation and the loss reduction trajectory agreement the utility has signed with the government. We frequently emphasize the contracts that have been signed between the DISCOMs and other different agencies.
The DISCOMs must sign a trajectory agreement promising a definite reduction in AT&C (Aggregate Technical and Commercial) losses and ARR-ACS (Average Realizable Revenue-Average Cost of Supply) gap. This is then monitored and evaluated every quarter by the Ministry in a review meeting that lasts for two days. The minister and senior officers interact with the utility heads to identify challenges and ways to improve their performance.
Under RDSS, grants worth ₹3.3 trillion (~$40.35 billion) will be disbursed to state DISCOMs for energy efficiency. But the government has now placed a clause for the DISCOMs to reduce their AT&C losses to 12% from 15% to be eligible for these funds. If the efficiency parameters aren’t achieved, the grants are converted into loans, which has made the utilities more vigilant.
With heavy penalties coming into the picture, DISCOMs have improved their payment mechanism over time, benefiting the power generators in the process.
What are the criteria that PFC considers for financing private sector companies?
We look at two aspects in any proposal; the developer and the promoter. First, we analyze the contracts for capacity, tariff, and costs. The second is the entity aspect, where we examine the promoter’s strength/capacity to bring in the equity; let’s say it’s a ₹10 billion (~$121.39 million) project, and we are looking at a 70:30 debt-equity ratio, so ₹3 billion (~$36.42 million) has to be brought in by the promoter then ₹7 billion (~$84.97 million) would be provided.
We also ensure clear visibility of these funds brought in by the entity. We work on the project part simultaneously to check the preparedness of the developer to start the project, the land acquisition progress, the evacuation system plan, and the contractual agreement with the panel and inverter suppliers.
The supply contracts are essential to determine the project cost in light of fluctuating module costs. Based on that, we work out our financials to decide if the project would stay viable even with low tariffs and is attractive to the general public. Projects with higher tariffs might not find off-takers in the long term, so we look for projects with optimal tariffs.
What is your take on the local manufacturers looking for financing options outside of PLI?
There is huge potential in the local manufacturing market, and we need to develop it well enough to meet the market demand eventually. We cannot just have one or two major players but multiple so that there is competition in the market.
The technology implementation needs to be foolproof and efficient. Our funding condition is that the supplier needs to be a Tier 1 supplier and enlisted by the Ministry of New and Renewable Energy as a quality product; otherwise, we don’t see any issue in funding manufacturing projects.
Which are the other sectors other than solar are you focusing on?
Electric vehicles (EV) and energy efficiency technologies are the other areas that we are working on. Industries implementing energy efficiency mechanisms to manage their energy demand effectively are supported through our programs. We are also working on a few storage projects, especially pumped storage; for example, we have funded Greenko, a major pump storage project developer.
How do you forecast situations like the pandemic and inflation for your financing decisions?
It has a major impact as commercial issues arise, including low tariffs discovered. This makes projects unviable to developers as the land costs are pretty high, and there are various constraints in evacuation with frequent policy changes.
Before funding projects, we ensure that the projects have factored this into their project tariff to manage such fluctuations. With no cushioning, the projects become risky for lenders. As a lender, 70% of our funds are blocked for the project, so later, if a developer comes to us stating that new taxes or local issues have rendered the project unviable, it will be a problem.
The interest rates are not always fixed; they are variable; today, it might be 8.5% or 9%, but if the Reserve Bank of India increases the repo rates tomorrow, interest rates will also change. So, you don’t know if the product will support that change, but the cashflows are fixed as you have a fixed tally for 15, 20, and 25 years, so all of this has to be appropriately forecasted; it is all mathematics.
(Note: Sections of the interview have been paraphrased for better reading. Check out the video for a full chat)