This could restore project returns by about 220 basis points (bps) and would be positive for credit quality, CRISIL added.
New Delhi, August 24: According to ratings agency CRISIL, the initiation of change-in-law payments by state DISCOMs and Solar Energy Corporation of India for the goods and services tax (GST) to solar power projects would lead to a cash inflow of ₹4,000 crore for the sector, adding that this could restore project returns by about 220 basis points (bps) and would be positive for credit quality.
CRISIL had, in July last year, said that the imposition of safeguard duty (SGD) on import of solar cells and modules increased the implementation cost of 5.4 gigawatt projects by as much as 15% and compressed the returns of developers by 160 bps.
“Add to this the hike in the GST levy on modules and balance of the plant, and returns reduced by a further 60 bps”, it said.
The counterparties have now started making payments towards the GST reimbursements for their respective projects, according to the ratings agency. To ensure that the returns don’t diminish because of delays in payment, the reimbursement is in the form of a 13-year annuity and also factors in a carrying cost of 10.4 percent on a retrospective basis.
“These annuity flows are not conditional upon project performance and receipt of payments by central counterparties from the underlying DISCOMs. This lends more stability to these cash flows and supports the credit quality of these projects,” Manish Gupta, senior director, CRISIL Ratings.
The GST reimbursement’s commencement has paved ways for similar disbursements towards SGD, which is about 75% of the overall change-in-law payouts, where the payment mechanism is also established on similar lines and submission and verification of cost documents by developers is awaited, which strengthens the sectors’ outlook as it demonstrates upholding of contractual terms in line with power purchase agreement, the research agency said.
“The demonstration of such regulatory support has helped lower the two critical risks the renewables sector faces, firstly, weak state counterparties and contractual uncertainties, and secondly, has been pivotal in upholding the sector’s resilience during the pandemic, which would need to continue for a stable credit outlook for renewables sector to be maintained”, according to Ankit Hakhu, director, CRISIL Ratings.
These developments come on the back of continued regulatory support such as the renewable energy ministry’s memorandum upholding the ‘must-run’ status of renewable energy amid the pandemic, and extension of completion timelines for under-construction projects by the authorities in view of the lockdown.
