To what extent can MSMEs turn its attention to Renewables?

There is endless debate in favour and against the fruitful outcome of the recent Rs. 20 Lakh Cr package announced by the Government. However, concerning the package of Rs. 90,000 Cr to DISCOMs the opinion is quite unanimous with a thumps-up. Many agree that the package would help generator segment including the Renewable Energy (RE) generators.

In the last few years, the (RE) sector has been fragile and has nearly matched other conventional plants, thanks to the over-ambitious race for increasing capacity among investors in a competitive (reverse bidding) tariff regime. Had this package not been announced, even a 2-3-month delay in payment from DISCOM might have brought in survival issue. Gone are the days when the MSMEs had a small investment in RE as diversification had sailed through the toughest time even when payment delays have peaked up to 16-20 months.

There is fund allocation for MSMEs also by way of funding and other reliefs. This is a change to bring back the golden era of MSME investment in RE like in the decade of 2000-10. The last financial year ended on the 31st of March 2020 and the sector clocked approximately 2.1 GW of wind energy and about 5.7 GW of solar energy installations in the country. However, in the last 5-7 years, MSMEs share in the RE installation has been moving to the negligible category especially about Wind energy investment. A new trend which has been evolved with a lesser share of MSMEs, which are called ‘Retail investors’ by Industry Jargons is now not a trend but a concluding reality.

The share of retail investors in wind projects this year came down to below 5% which was as high as up to 90% from 2005 to 2010. In the same way, solar also started with 60%+ share of MSME investors which now is below around less than 15% today.

Who are the retail investors?

MSMEs and small companies typically invest with 0.5 MW to 5 MW renewable energy project and avail of the various incentives available inclusive of accelerated depreciation, tax-free income, and preferential tariff especially if they sell power to a local utility or use the power for the captive purpose for their factory while paying wheeling charges for the same. These companies typically take the project in their books and term loan is also availed by strength in the parent’s balance sheet.

What happened to MSME investment in the last 10 years?

Small renewable investors moved out from the market slowly, especially from the wind sector for several reasons, such as the increase in the average size of wind turbines or the unavailability of the generic standard feed-in tariff with long term PPA. This year, the average turbine size installed has crossed 2-2.5 MW. During 2005-2012 the average turbine size was below or near 1MW. A typical retailer has an option to invest in small WTG of 0.6 or 0.8 MW with 3-5 Cr. investment and prudently do his planning, and now if an investor has to go for a bigger size the minimum investment required is gone up from Rs. 3 Cr. to Rs. 11 Cr. Further, in the present scenario neither any supplier offers a single turbine nor any state signs PPA for a single turbine. Thus, the availability is restricted to a very narrow band of the captive user and that too is limited to few states as a feasible option.

Although the problem of minimum Rs. 10-11 Cr. investment is not there in case someone is opting for a solar project. Even a small 0.25 MW solar project (ground-mounted or roof-top) is also possible. Still, there is no generic long-term feed-in tariff available for a small investor to make bankable investments with predictable cash flow. Investors have to wait for government tender /RFP, then apply for it, and hence it fulfils so many terms and condition & then he may win (or lose) a PPA. These are big-ticket investments and the process also requires so many deadlines and gives a very small window for anyone to make financial planning.

Another challenge is funding. Several IPPs which emerged as multi MW investor in Indian RE market have engineered the new equity and debt funding model which allows them to leverage more, and pump in less equity for a large project, get longer repayment schedule, ECB funding at a lower rate and even bridge funding for equity in some cases. On the contrary, a small retail investor has to go with conventional 30:70 term loan at a coupon rate of not less than 11.5%-12%. Now in reverse bidding kind of tender (typically ground-mounted Solar and Wind) a Large IPP can aggressively bid a tariff which a small investor can never match (even while considering depreciation benefit which IPPs cannot use and neither have they bothered for it!).

Big size IPPs with penetration of foreign equity fund into their books, get more importance and access to detailed information from the supplier/project developer due the size of their contract and the ‘carrot’ they show for the future multi-billion contract. On the contrary, a 0.5 MW investor has to settle only with the ‘leftover.’

How can these MSMEs ride the wave?

With all challenges listed above coupled with the COVID-19 triggered slowdown, there is still a new window of opportunity for MSMEs and small investors to again turn their face to renewables and relive the glorious past. The requirement is to prudently plan the investment and scout for innovative funding ideas. Few new policy decision and package announcements are going to support re-entry of the MSMEs in the sector:

Low-cost funding and equity infusion:

One can always argue that if the general business sentiment is as such negative and the working capital is drying up how can an MSME think of diversification into renewables. The fact is, not all MSMEs are in trouble. As per the public data available for India’s largest bank, only 20% of the accounts have opted for a moratorium so there must be many MSMEs in 80% who have not opted. Though, it is just one indicator. As per the announcement, banks and NBFCs will offer up to 20 per cent of entire outstanding credit as on February 29, 2020, to MSMEs. Units with up to Rs 25 Cr. outstanding in credit and Rs 100 Cr. turnover are eligible for taking these loans that will have four-year tenor with a moratorium of 12 months on principal payment. Also, Rs. 20,000 Cr. is announced for subordinate debt and Rs. 50,000 Cr. for equity infusion. Overall, for a good company which follows corporate governance funding should not be a challenge.

Captive Project opportunity:

Even with access to funding, some challenges are to be seen ahead as explained above. However, there are opportunities available only with MSMEs having small-small plants and factories. By tying-up wind/solar power for the captive purpose, the power cost of the factory/production is frozen for 25-years. Renewable projects become an integral part of the production process and it safeguards plants form the annual increment in the tariff to the tune of total generation. Further, new tariff policy 2020 which is expected to be announced anytime from now the challenges for open access transmission and permissions etc. will be removed.

Solar Rooftop: Here, the dominance still rests with MSMEs as such. Roof-top solar is expected to complement & not supplement the captive market as both are very different from the application point of view. With the cost of solar modules going down and the access to funds at its high time small factory setups to explore this viable option as prudently make a growth plan. New Ideas like ‘integrator’ approach should have experimented wherein a company make various tie-ups for using the roof and sell the power to another company (at a discounted rate) which has provided roof. MNRE also recently announced some policy amendments which will go in favour of MSMEs.

Solar Pumps: Agriculture is largely unaffected by COVID-19 and with a bumper crop and a favourable monsoon; solar pumps are going to get a big boost. Further, along with the package announced in favour of DISCOMs, there is a condition of gradually reducing cross-subsidy surcharge. This means there might be some increment in the agriculture power tariff. In that case, solar pumps make all the more sense. Many small companies can play a role from supplier to dealer to the integrator to cash-in on this low hanging fruit.

MSMEs are growth Engines:

The country has seen a debacle of UMPPs, and it has also witnessed the absolute disappearance of all big investors (especially backed by foreign fund) from the market during the 2008 meltdown. Even during those days, these MSMEs continued small-small invest & the ball kept rolling. When double-digit growth is being targeted, Govt. should also take some more sector-specific initiatives so that these MSMEs remain in the game.

Sankalp Ved, B.E. – Electrical, PGDFM. He is a Certified Energy Manager with 17+ years’ experience in the Energy sector especially Renewable Energy. He is presently heading the renewable energy and infrastructure, business vertical at Ruchi Infrastructure Ltd. – a company devoted to the wind and solar power projects and other infrastructure assets. He was also instrumental in the execution of the country’s most diversified Captive Wind Power Portfolio at 10 Locations in 4 states and Execution big size solar Project in 2010 as the first mover. He was part of the team which achieved the country’s first Carbon Credit project.