- Demonetization of some denominations of Indian currency may be a positive sign for the Indian renewable energy sector, according to Mercom Capital
- With distribution companies allowed to accept old notes of 500 INR and 1,000 INR until December 31, 2016 for payments of pending utility bills, these payments might help the financially struck entities quite a bit to manage financial turnaround
- With this new flow of income, the government may be able to fund new projects
- Lending rates may fall giving incentives to developers to bid more aggressively and secure finance at lower interest rates
Since the Indian government stripped notes of 500 INR and 1,000 INR denominations of their legal status on November 8, 2016, the entire nation has been wondering if it would turn out to be the best thing that has happened to the country or the worst. But for the Indian renewable energy sector, it may act as an ‘unexpected stimulus’, according to Mercom Capital Group.
The clean energy research and communications firm points out that Indian distribution companies (discoms), which have been facing a major cash crunch, now might see light at the end of the tunnel. The government has announced that people can pay their outstanding dues for unpaid power bills using old notes until December 31, 2016. Discoms should be very happy about this favor as this money might help them to clear huge backlog of unpaid bills.
Discoms in India have earned the notorious distinction of not paying solar power developers their dues citing their monetary troubles and also pushing for grid curtailment of solar power (see MNRE Backing Solar).
However, now their coffers might be at least partially filled, things might turn to the better in the renewables field. An Official in the Ministry of New and Renewable Energy (MNRE) was quoted by Mercom as saying, “India is largely a cash economy so in the short-term demonetization is going to hurt installations as small developers will find it tough to pay for land acquisition, but in the long-term, it will be beneficial as discoms will get paid, lending rates will fall and foreign investment will increase in the face of a falling rupee and rising dollar.”
The Maharashtra State Electricity Distribution Company Limited (MSEDCL) reportedly garnered 1 billion ($14.74 million) in the week following November 8, 2016.
The government can use this money to fund infrastructure projects like the ‘Green Energy Transmission Corridor,’ which is aimed at improving India’s power transmission grid.
An industry source told leading business daily The Economic Times (ET) that if the banks can bring down interest rates from the current 11%, solar power projects developers will find it easier to procure financing for their projects in a business environment that is quickly getting tougher as PPA levels are falling rapidly.
Mercom says the lending community is not sure of the fate of the money deposited in the banks as there has been no word from the government so far. Raj Prabhu, CEO of Mercom said, “Demonetization, though chaotic, is turning out to be an overall positive event for the renewable sector in the long run. This combined with the rapid decline in solar component costs is making a lot of low questionable bids feasible. However, we have to wait and see how government agencies handle the situation – especially payment issues – going forward.”
But another PV consultancy, Bridge to India, believes this clean-up drive from the Indian administration will not have any significant effect on the renewable sector of the country. It stated in a blog post on November 14, 2016, “We do not believe that demonetization will have any material impact on the Indian renewable sector as most leading project developers are backed by reputable Indian and international sponsors with robust corporate governance practices.” However, it did add, “Indian lenders can help in curbing unethical practices in the sector by improving their risk assessment capability and tightening credit criteria.”