Compensation mechanism for RE proj good for developers: Ind-Ra

India Ratings and Research (Ind-Ra) today said the proposed compensation mechanism for existing renewable energy projects, if adopted, will be positive for wind and solar energy developers.
"The government has proposed a compensation mechanism for existing renewable energy projects, which will protect the cash flows to an extent from grid curtailments," Ind-Ra said in a statement.
Ind-Ra said that it believes if the proposal is adopted, it will also ensure a favourable operational environment for renewable energy projects.
The absence of clarity of two possible reasons for grid curtailment - 'low system demand' and 'grid security'- could pose new challenges for developers.

Further, clarity by the authority/utilities to define the terms and spell out when these measures will need to be opted for could allay possible apprehensions of the developers and make the process more transparent.
Ind-Ra had highlighted the issue of grid curtailment in the report 'Market Wire: Grid Curtailment Contagion Puts Pressure on Credit Profiles of Renewable Energy Projects' and 'Market Wire: Strong Payment Mechanism Partly Contributes to Solar Tariff Free Fall; Solar Projects Funding To Ease'.

"Historically, Power Purchase Agreements (PPA) signed for renewable energy projects have failed to address the grid issues and lacked a mechanism to compensate for energy loss. Ind-Ra estimates that the annual debt service coverage ratio (DSCR) slips by 0.12x for 10% of energy curtailment and the 50% proposed compensation at PPA tariff, will restrict the fall by half (at 0.06x)," it said.

The developers have bridged any cash flow shortfall in debt service through a combination of, or individually tapping debt service reserve or drawing working capital limits or sponsor support.
At the conference of Power, Renewable Energy and Mines, Ministers of States and UTs held earlier in the month, the same was proposed as the framework for awarding compensation for existing renewable projects in case of grid curtailment.
The compensation is suggested to be part of the PPA provision for future projects. Decisions on curtailment are recommended to be made on considering the balancing cost for accepting renewable energy in the grid, where major balancing cost will be additional cost to run thermal plants below their technical limits.

For existing projects, the compensation mechanism may be notified by the respective Electricity Regulatory Commission.