Regulatory constraints pose headwinds for open access renewable energy projects

Regulatory constraints are posing headwinds for open access-based renewable energy (RE) projects, said ICRA on Thursday.

Independent power producers (IPPs) in the renewable energy sector selling electricity in the open access route (third-party or group captive mode) are faced with increasing regulatory constraints such as upward revision of open access charges, denial of open access approvals, and tightening of energy banking norms, ICRA said in a statement.

Further, it stated that with improving tariff competitiveness of renewables, particularly in the solar and wind power segments, the renewable power policies in several states have been amended over the past 3-4 years.

States have either completely withdrawn or reduced the concessions or incentives on open access charges, in respect of procuring power from solar and wind power projects under the open access route, it added.

ICRA Senior Vice-President and Co-Group Head (Corporate Ratings) Girishkumar Kadam said in the statement, ''The overall open access charges for third-party-based IPPs vary widely across the key states ranging between Rs 2 and Rs 5 per unit, and have shown an increasing trend over the period.'' He added that limited progress has been recorded in tariff rationalisation for the grid tariffs set by the state electricity regulatory commissions for the state-owned distribution companies (discoms).

Further, state-owned discoms in most cases show a passive resistance, due to apprehensions of losing cross-subsidising or high-tariff-paying commercial and industrial (C&I) customers, Kadam added.

This poses regulatory headwinds for capacity addition in open access segment for the renewables over the medium term, Kadam said.

However, demand for such PPAs with C&I customers is favourable, supported by tariff attractiveness, given the extent of discount offered in such PPAs against the applicable grid tariffs as well as growing voluntary sustainability initiatives of corporate customers, as seen recently, he said.

As per ICRA, the tariff competitiveness for group captive projects is relatively superior due to non-applicability of cross-subsidy surcharge and additional surcharge (except in Maharashtra) as against third-party sale under open access.

However, policy clarity on the proposed amendments in the eligibility criterion of the ownership and equity structure for group captive projects is still awaited and thus, the same remains a monitorable,it explained.

ICRA Vice-President and Sector Head (Corporate Ratings) Vikram V said, ''Despite these challenges, the credit profile of renewable projects in the open access segment remains supported by a mix of factors, such as relatively better tariff expectations by about Rs 1-1.5 per unit against the tariff discovered in the utility segment and their ability to ensure tariff competitiveness for the C&I customers.'' He added that the presence of diverse and credit-worthy C&I customers remains another supporting factor for the credit profile of most open access-based IPPs in the ICRA-rated portfolio.

Notwithstanding the regulatory headwinds in the open access segment, the outlook on the renewable energy sector remains stable, it stated.

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