Winds of change: Assessing risks and emerging

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mitigants in wind-power companies

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Somasekhar Vemuri Ramesh Karunakaran Darshan Lad

© 2015
Senior Director Director Associate Director Ratings

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CRISIL Ratings CRISIL Ratings CRISIL Ratings

July 09, 2015

Key messages
 Wind power requires Rs. 1 lakh crore of funding by 2020
– Capacity has grown five-fold in the last 10 years
– Capacity additions of 4,000 MW per annum likely in the medium term

 Wind power sector is in the midst of a structural transformation

– Convergence towards grid parity and a scalable business model has attracted focused players

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– Lending is shifting from strong sponsor support to project centric; sharp focus on risks and risk
mitigants is evolving

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 CRISIL fine-tunes its criteria to reflect evolving trends

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– Extensive stakeholder interactions to understand the risks and risk mitigants

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– Proprietary simulation models to test efficacy of mitigants against wind variations and counterparty

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payment risks

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 Risk mitigants are simple but effective
– P90 PLF based DSCR, liquidity in various forms, debt sculpting and portfolio diversification are the
risk mitigants
– Cost and efficacy varies across various risk mitigants

 Application of CRISIL’s sector specific criteria has resulted in minimal rating changes
– One upgrade, one downgrade and one outlook revision to positive
– Reassessment of liquidity in relation to the risks has been the key driver for the rating changes
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structural transformation
Wind power sector is in the midst of

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Wind power sector to continue its growth trajectory
Wind capacity additions in MW
Accelerated depreciation (AD) Introduction of Withdrawal of Restoration of AD in
benefits GBI AD and GBI FY14,and GBI in FY15
3,800
3,500
3,197
3,100

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2,349 2,300

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2,126

1,716 1,742 1,663 1,699

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1,565
1,485

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CRISIL
1,112

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615

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242

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16p FY17p FY18p

• Wind capacity additions have exhibited sharp growth in the past; through it has been policy-elastic

• Annual capacity addition of 4,000 MW can translate into investments of Rs.1 lakh crore by 2020

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Sector undergoing structural transformation

Tariff
approaching
grid parity

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5

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Lending
shifting from

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2
sponsor Healthy returns

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support to

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project centric

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Professional
Scalable model
management
4
leads to strong
with a strong
investor
focus on
interest
operations 3

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 2
risk are the two major risks
Wind variation and counterparty payment

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Risks: Wind variation
A. Wind power (PLF) is not constant through the years B. Wind power varies within a year
Peak season
7 years
No of years

4 years

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3 years

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2 years 2 years

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1 year 1 years

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Lean season
15-18% 19-21% 22-23% 24-27% 28-31% 32-35% 35-38%

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PLF distribution over a 20 year period April May June July Aug Sep Oct Nov Dec jan Feb Mar

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A) Wind power generated is not constant through the years but statistically follows a normal curve
B) Wind power is not constant within a year; 70% of wind power is generated in 4-5 months resulted in weak
cashflows during lean months

Note: Both the graphs do not represent any CRISIL rated wind asset and are drawn based on prototype simulations output

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Risks: Counterparty payment risk
High

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Counter Counter

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party A party B

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Low

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Credit risk

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<30 days 30-60 days 60-120 days 120-180 days 180 days+

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Payment pattern

 Credit profile of counterparty (ability to pay the debt on time) is different from the counterparty payment
risk (the extent of delays that we can expect from the counterparty)
 For instance, counterparty A and B may have the same credit risk profile but different payment risk
 CRISIL assess the Counterparty payment risk based on a combination of counterparty credit profile and
payment pattern

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key risk mitigants
P90 PLF based DSCR and liquidity are the

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CRISIL held multiple stakeholders interactions
CRISIL’s rating experience with 21 wind power S&P’s rating experience with wind energy companies
companies

Issuer Standard & Poor’s

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Funding CRISIL Consultants

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Lenders, NBFC, Private

CRISIL
equity

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Research organization
National Institute of wind energy (NIWE)

Interaction with multiple stakeholders enabled CRISIL to assess the risks and risk mitigants in the wind
power projects

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Simulation model to test the efficacy of risk mitigants

Annual Wind Payment

Seasonality
variations delays

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Liquidity P-90 DSCR

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Capital goods
Cash flows are modelled using the simulation engine by generating various
Hotels
combinations of the above variables

Simulation output is “default or non-default” at various combinations of

DSCR, liquidity and payment delays

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Framework linking the credit drivers and ratings
C. Counterparty payment risk

CRISIL’s wind
simulation

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model

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A. DSCR from P90 PLF B. Liquidity

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Default probability over the tenure of debt based on “inter-play” between wind pattern,

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Capital goods
payment
Hotels delays and liquidity

Rating

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Big picture: Framework for assessing wind energy projects
1. Project risk
1) Implementation risk
2) Funding risk
3) Technology risk
4) Offtake and pricing risk

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2. Management risk Standalone credit profile Final Rating
External
1) Integrity 1) Project assessment Parent/Group for wind

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credit
2) Risk appetite 2)Operating risk notch-up power
enhancement
3) Competency 3) Will be constrained by Management risk project

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4. Modifiers

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For Operational projects with track record
3. Operational risk
1) PLF track record
1) Power generation risk
2) Counterparty payment track record
2) Counterparty payment risk
3) Liquidity at parent level
3) Liquidity at SPV level
4) Portfolio diversification
5) PPA tenure and renewal risk

 Framework is similar to rating any other project finance

 However, the operational risks and modifiers are unique to wind assets

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 3
criteria has lead to minimal changes
Application of CRISIL’s sector specific

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CRISIL’s rated wind portfolio
Rating distribution post criteria Rating impact due to sector specific criteria
 1 rating upgrade
13
 1 positive outlook
 1 downgrade

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5

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2

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1 1
Reassessment of liquidity in relation to the risks

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A BBB BB B D has been the key driver for the rating changes

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CRISIL currently has 13 companies in the A category in a portfolio of 22 companies

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CRISIL’s rated wind portfolio – Impact analysis
Sr.
Name of wind energy company Previous Rating Current Rating# Rating action
no.
1 Bindu Vayu Urja Private Limited Not applicable CRISIL A-/Positive Rating assigned after
application of sector specific
2 Baidyanath Power Private Limited Not applicable CRISIL A-/Positive criteria
3 Inox Renewables Limited CRISIL A-/Stable CRISIL A-/Stable Rating reaffirmed

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4-12 Leap group ## CRISIL A-/Stable CRISIL A-/Stable Rating reaffirmed

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13 ReNew Wind Energy (AP) Pvt Ltd CRISIL BBB+/Stable CRISIL A-/Stable Rating upgrade

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14 Rugby Renergy Private Ltd CRISIL BBB/Stable CRISIL BBB/Positive Outlook revision

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15 BLP Vayu (Project 1) Private Ltd CRISIL BBB-/Stable Rating downgraded
Negative

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16 ReNew Wind Energy (Jath) Pvt Ltd CRISIL BBB/Stable CRISIL BBB/Stable Rating reaffirmed

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17 DJ Energy Private Ltd CRISIL BBB-/Stable CRISIL BBB-/Stable Rating reaffirmed
18 Uttar Urja Projects Private Ltd CRISIL BBB-/Stable CRISIL BBB-/Stable Rating reaffirmed
19 Sarayu Cleangen Private Ltd CRISIL BB-/ Stable CRISIL BB-/ Stable Rating reaffirmed
20 Malaxmi Wind Power CRISIL B-/Stable CRISIL B-/Stable Rating reaffirmed
21 VBM Power and Infrastructure Pvt Ltd CRISIL D CRISIL D Rating reaffirmed
22 Surana Green Energy Ltd CRISIL D CRISIL D Rating reaffirmed

# Refers to the rating after the application of the sector specific criteria
## 9 companies of Leap group are evaluated together

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Shift to project cash flow based lending

Lending approach shifting from sponsor support to cash flow centric

Strong recourse to the sponsor Limited or moderate recourse to the sponsor

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Weak focus on data collection and risk Strong focus on data collection and risk

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assessment assessment

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No risk mitigation strategies adopted Risk mitigation strategies adopted

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Passive management of receivables from Active management of receivables from

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counterparty counterparty

Management style is passive and reactive Management style is pro-active and long term

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Tariff approaching grid parity is a key driving factor
4.77

4.74
4.31

3.76
Rupees per kWh

3.95

Distribution
3.75

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3.40 3.42

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2008-09^ 2009-10 2010-11 2011-12 2012-13

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Average Power Purchase cost of Discoms CERC Tariff (Wind Zone 3- PLF 25%)

Before 2010-11, zone based tariff not available

Increase in power cost in conventional power sources has resulted in wind power moving towards grid parity

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Attractive returns for wind power projects
Returns in different states for preferential tariffs (Rs/ kWh)
Unfavorable
7.0
6.5 MP (20%)
6.0 Maha (22%)
Wind-3rd Party
Captive (27%)
Customer’s perspective

5.5 Raj (21%)

Tariff (Rs/ kwh)

AP (25%)

Distribution
5.0

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4.5
4.0 Kar (PLF 27%)

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Guj (24%)
3.5
TN (32%)

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3.0

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2.5

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2.0

© 2015
9% 14% 19% 24% 29%

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IRR (%)
Favorable

Unfavorable Investor's perspective Favorable

 Returns under preferential tariff depends on the PLF and the preferential tariff in the state
 Captive model is attractive in states where there is high industrial tariff (Rs. 7 per unit) or power deficit

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Strong investor interest for wind power companies

Equity commitment Rs. 12000 cr Capacity 4300 MW

CLP Group

GIC, EIG
Global

981 India
Rs.1,600 cr
Infrastructure
Fund, PTC
India, GS, ADB,

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Sembcorp SACEF
Capacity in MW

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Rs.470 cr Morgan
JP
Rs.1,051 cr Rs.2,200 cr Stanley^
Morgan,
Airro Fund Hero

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DEG,
543 Rs.1,200 cr
PROPARCO, Group
516 500 498 IFC and others
Rs.700 cr Rs.500 cr

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GE
381 Energy

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Financials

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241 239
213 200

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CLP Mytrah Green Infra Greenko ReNew Leap Green Continuum Atria Power Inox NSL Hero Future
Renewable Renewable Energies
Power

Backed by private equity and industrial houses, wind power companies are building a scalable model

^Acquired by SunEdison for Rs.4000 crs; Source: Company website, news clippings

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