Pandemic’s influence on countries’ access to foreign currencies

The economic shockwaves from the COVID-19 pandemic have hit emerging countries much quicker comparing to 2008 global financial crisis. COVID-19’s impact on project financing will vary widely, country to country and sector-to-sector. As per a recent analysis by UN, it is estimated that COVID-19’s economic impact and revisions of earnings of the largest multinational enterprises could lead to downward pressure on FDI flows that could range from -30% to -40% during 2020-2021.

There is broader understanding that in the current scenario (or in the post-pandemic scenario), securing international financing for power projects will get tougher. International lenders will be more averse to lend to projects in emerging markets whose economies are severely hit. International lenders will weigh the strategic importance of the project to host country, and will scrutinize projects based on the financial strength/ background of the developer. Projects promoted by international developers or promoters could score well.

• In general, project promoters/lenders will re-do their risk assessment exercise. New risks shall be identified, as specific to host country and the possible mitigations shall be listed. A lot to time and energy will be spent in re-classifying and prioritizing the risks, especially for new projects and projects in due-diligence stage.

• Additionally, as the pandemic has affected many economies, the demand risk and creditworthiness of the power procurer/customer will have to be reassessed again. The hardest hit sectors include oil & gas, and mobility (comprising airlines, automobiles). As utilities, including electricity come under necessary requirements, some countries may consider investment in the electricity sector as a means to boost stakeholders’ confidence and restore the economic activity. In such countries, power sector capacity addition programs will be restored quickly.

• Foreign lenders &official development agencies (ODA) might now request power procurers to produce additional guarantees in case the project cost is high. This is to manage the downside risk. Smaller and distributed projects face high downside risk. Securing international financing for such projects will turn difficult in emerging economies – unless the project developer is credit-worthy, and willing to absorb downside risk on balance sheet.

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• Another trend noticed is that the values of several local currencies against USD have fallen between 5% and 25% since the beginning of 2020.

Risk on convertibility/transfer of funds from emerging countries

Operational projects might face defaults in payment in emerging markets.

• During the Covid crisis times, most of the governments have announced electricity duty cuts, allowed delayed payment from customers, removed peak time pricing etc.

• In many countries, the distribution companies are not yet commercially standalone. These distribution companies are the large power procurers (i.e. counter-party) and they are dependent on the support from local government in the form of subsidies. During the crisis times, governments are exposed to huge expenditure on health care and public safety leading to credit crunch situation. With uncertainties around collection from customers and subsidy support from governments, there are increased chances for the distribution companies to default their payments to generators/ operational projects. However, this shall affect all the projects, not just IPPs or foreign investors owned. Legally, distribution companies cannot issue force majeure (FM) notices in such circumstances, as FM doesn’t apply to non-performance payment obligations.

• Most of the lockdown countries witnessed a decline in the power demand. This is a short-term effect. Once the lock-down is revoked, when the industries start to operate, the demand for electricity will get back to normal, while in a gradual manner. Hence fewer chances for the operational projects to turn idle or stranded.

• New projects might face new challenges in the post-pandemic situation. Some countries pose moderate risk. As per United Nation’s analysis, the depression due to COVID-19 will have rigorous impact on emerging nations, exempting China and India.

• Governments and federal banks have taken steps to reduce interest rates, relax financing norms. Despite this, domestic lenders in the credit crunch situation will be less eager to finance new power projects. Unless the domestic lenders are interested, foreign lenders will not show interest in such projects.

• Some of the apex organizations and regulators are still having inadequate capacity due to lockdowns. So, approvals and permits will take more time compared to the usual case. Hence there are increased chances for the projects in due-diligence and feasibility stage being held up or suspended.

• From international lenders’ perspective – distributed and commercial projects might pose more risk than utility-scale projects.

• Government mandated quarantines and lockdowns are already having a significant economic cost on the countries. In this scenario, development of supporting infrastructure – say transmission lines, substations, and railways etc. will suffer. This will down turn the attractiveness of power projects.

Supply Chain risks in RE projects in Europe

Most of the suppliers will be in a precarious situation now, having issues with working capital. Government agencies of established markets in Europe are working on financial assistance to small suppliers, primarily to provide loan guarantee to secure working capital. Some renewable projects might face temporary difficulty due to such suppliers; however a realistic prospect for long term returns of the project has to be considered.

In established markets, new equipment procurement contracts to be entered, shall be highly negotiated, especially the provisions for renegotiation and FM events.

In cases where orders are placed, delayed deliveries shall be new normal. Considering the reputational risks and any negative impact on the long-term relationships with foreign buyers and suppliers, either parties might get flexible to amend, restructure (typically – new delivery dates, discounted prices) the contract to accommodate the aggrieved party. Constraints in domestic logistics and ocean freight shall also be counted into the restructuring terms. In certain cases, either of the parties may invoke FM clauses. In cases where the essential purpose of the contract could not be achieved in foreseeable time period, the contract shall be terminated by either party, as a result of the event of FM.

• Solar projects – Chinese modules account for 80% of global demand. Official sources in China claim that solar module manufacturers have resumed production. As per official statistics – in the first two months of 2020 (during peak time of corona spread), module exports saw decline of ~25%. Impact in the month of March is unknown. There shall be delay in sourcing and logistics in module supplies, and an increase in cost if sourced from other Southeast Asian countries. There are adequate local supply sources for inverters in Europe and Americas.

• Wind projects – Wind equipment supply chain was already constrained in 2019. In March 2020, some of the manufacturers/ suppliers have claimed the FM clauses. Outcome of such projects depends on the terms and conditions of the equipment supply & construction contracts. The positive aspect is that major wind OEMs headquartered in Spain and China have resumed production.