New Delhi: The distributed renewable energy (DRE) sector, which plays a key role in boosting energy access for rural India, is undergoing a crisis of sorts thanks to the COVID-19 pandemic which has dampened demand and squeezed equipment and funds for some of the largest companies operating in the space.
The market for distributed solar products for rural areas — such as solar lanterns, pump sets and mini-grids — was estimated to grow to Rs 10,117 crore by 2023 before the pandemic hit. It is now reeling under financial stress due to lack of liquidity to support operations and government schemes yet to make a visible impact.
“A lot of financiers are recalibrating, even when they have unutilised credit limits they are expecting the currently outstanding loans to be retired first,” Upendra Bhatt, co-founder and managing director at cKinetics, a sustainability advisory and investment firm, told ETEnergyworld in an interview. “The general concern over the extent of deterioration in the loan books is not getting reflected due to an extended moratorium,” he added.
Bhatt from Delhi-based cKinetics, which operates globally, also said the extension of project commissioning deadlines has only pushed the repayment periods for several of the loans to January next year creating further uncertainty on the overall cash cycle.
“Banks are now consolidating within their current borrowers and are not necessarily open to lending to newer borrowers at this time as they don’t know how long this situation would last and would like to conserve cash,” said Bhatt.
How bad is the situation?
Industry executives complained of major dip in revenue in the past few months after COVID-induced lockdown dampened sales. For Chennai-based E-hands Energy, that supplies off-grid solar systems for rural branches of public sector banks (PSBs) and first-time electricity users, orders slumped by 30-35 per cent within two months February and March 2020.
“All the projects related to sales of capital equipment were to come in February and March but they have been deferred. We did lose 30-35 per cent orders in that period. Our revenue for 2019-20 was down by almost 40 per cent as compared to 2018-19,” Founder and Chief Executive Officer Raghuraman C told ETEnergyworld.
He said the average monthly cash inflow for the company has dropped to around Rs 10 lakh now as against Rs 35-40 lakh last financial year. “If I compare the first quarter of 2020-21 with the first quarter of 2019-20, we are down by about 50 per cent, but if we take the annual average and the first quarter average then it is down by almost one-third,” Raghuraman added.
To make matters worse, a drop in revenue has made lenders cautious and financing difficult for companies. “The pipeline of money that we had lined up for the opex projects, much of that did not happen and now all of it has been put on hold including some international lenders,” Raghuraman said.
For Bengaluru-based start-up Alto precision, that manufactures small-scale solar-powered machinery for agriculture, the situation is no different. “In 2018-19 our turnover was Rs 1.94 crore, in 2019-20 till February it was Rs 1.74 crore. In March, we could not bill anything otherwise we would have touched Rs 2.10 crore,” Co-founder Asaad Jaffer said.
He said that the factory remained closed for Q1, which resulted in a decrease in their turnover by almost 80 per cent. “Before COVID-19 we were on track to do 25 units by August and we have done only 4 units till now, which is a 75 per cent drop in manufacturing,” Jaffer added.
Experts say the lockdown has led to closure of non-essential manufacturing activities impacting the execution of DRE projects across the country in the first quarter of the current fiscal. “This has adversely affected the revenues and profitability for the sector players, involved in manufacturing and EPC, thereby putting pressure on the liquidity profile,” said Sabyasachi Majumdar, senior vice-president at research and rating agency ICRA.
A look at the sector through data
According to cKinetics, based on the current momentum, the annual estimated market size, by value, for the solar lighting segment — covering mini-grids, SHS and solar lanterns — and solar pumps is $75 million and $700 million, respectively.
A study by cKinetics and the Shakti Foundation noted that UP, Bihar, Assam, and Jammu and Kashmir were the top states in the SHS segment, whereas, UP formed the largest market for solar lanterns, followed by Bihar and Jharkhand.
In the solar pumps segment, Rajasthan, Chhattisgarh, and Andhra Pradesh cumulatively formed more than 50 per cent of the total deployment. And in the mini-grid segment, projects were primarily set-up in Uttar Pradesh, Bihar and Jharkhand, the study added.
When it comes to the major segments with respect to sale of units, basic solar lanterns with an estimated annual sale of 7.32 million units took a large share, according to data quoted in a report released by global association for the off-grid solar energy industry, GOGLA, in January, 2019.
Basic solar lanterns were followed by solar lanterns used in mobile charging, radio, and back-up functions, with an estimated annual sale of 2.63 million units, the report noted. Estimated annual sales of SHS driven by government subsidies stood at 0.29 million units followed by the solar pumps segment with an estimated annual sales of 62,000 units.
GOGLA further noted that the multi-light system and the SHS by private players had an estimated annual sale of 53,000 units and 51,833 units, respectively.
Funding in times of Coronavirus
According to sector analysts, the key demand segments within the DRE space, particularly the small and medium enterprises (SMEs), are likely to face severe stress. “It is expected that after the moratorium period (on loans) is over the actual situation may be worse leading to rise in non-performing assets,” said Somesh Kumar, Partner at accounting and consultancy firm EY India.
He added that in other segments such as commercial and industrial (C&I), and residential, the ability to spend will be restricted but the rural demand segment may stay upbeat. “The government support to the SME segment would certainly help but after the moratorium period, DRE players would need to recalibrate their strategy and focus on demand segments and, as for 2020-21, the focus should be to sell on marginal costs and sustain,” Kumar said.
So far, various banks including SBI, Canara Bank, and Bank of Baroda have developed retail loan products, especially for financing of solar pumps. In addition, RBL Bank, Axis Bank and YES Bank have also provided end-user financing of solar pumps.
However, in the times of COVID-19 pandemic, the hardships for DRE companies to access funding continue. According to Bhatt from cKinetics, in the solar lanterns segment, fresh sales or credit has broadly come to a stop as the micro-finance institutions are not seeing any collections and expect these to commence only around September.
“Even though banks are asking us to go ahead and roll out solar branches there is no money supply for executing these projects,” said Raghuraman.
He added that the Finance Minister had announced that 20 per cent of current loan outstanding as on 29 February should be given as an ‘emergency credit line’ (ECLGS), but that is not materialising for his firm. “We have not received any help from existing private lenders. They say it (the scheme) is only for PSBs. When we go to a PSB to give us credit for new projects they ask us to come later. We do not have the bandwidth to handle fresh loans,” he said.
Commenting on the prospect for liquidity availability in the sector, EY India’s Kumar said business disruptions due to COVID-19 could lead to reduced demand in the next 6-12 months but the overall outlook would remain positive in the long run.
Dealing with uncertainty
Industry executives said that they would be able to sustain themselves for another six months after which it would be difficult.
“Segments where procurement is done by the government, such as solar pumps, may have gone through a slowdown in April-May but now there are some green shoots due to recent fresh tenders. People are recognising that this uncertainty would stay and everything cannot be stalled. The third quarter, market benchmarks on fulfillment cycles etc. might start evolving,” said Bhatt.
In order to tide over the period of crisis, firms are also planning to diversify their businesses in line with COVID-related products such as Alto Precision which is working on UV sanitisers.
In the post-Covid scenario in the DRE sector, Asaad Jaffer of Alto Precision believes that solar pumps segment is likely to witness an upswing while solar B2B customer segments could be hit, but only to be back on track after around a year.
According to ICRA’s Majumdar, the focus on capital investment in rooftop systems might take a back seat in the near-term as an impact of the lockdown but the projects under the KUSUM scheme, driven by subsidy support, might support demand for the DRE players to some extent.
In the long run, the DRE space will become more and more vital as the cost of generating locally, coupled with storage, goes down further and at some point it will achieve parity with the cost of grid power, according to Kumar from EY India.
He added that with a good monsoon and post-harvest demand kicking-in during September-October, DRE players, particularly in the solar products market, should focus on this segment to find sustenance.
Analysts also said, despite the cvid-related hiccups, the long-term outlook for DRE remains promising owing to its role in the decarbonisation and decentralisation strategy and the potential to meet the energy requirement of regions without access to the grid apart from the role it plays in reducing system losses by keeping the generation sources closer to the demand centres.