The recent order by Andhra Pradesh High Court setting aside the power purchase agreement (PPAs) tariff renegotiation by State government for wind and solar power projects will not only aid in restoring the sanctity of the PPAs, but also help in easing the liquidity concerns of renewable energy (RE) generators.

Even as the court’s order is viewed as a positive development, analysts have pointed out that time-bound implementation of the order needs to be seen in light of the weak financial profile of the State Discoms.

The High Court, on Tuesday, set aside its previous order by a single judge bench. The High Court in its September 2019 order had directed the AP State distribution utilities to make payments at an interim tariff of ₹2.43/2.44 per unit, instead of the PPA tariff. The High Court had set aside the order issued by the government earlier in July 2019, to form a high-powered committee to review the wind and solar power tariffs.

The High Court order has reinforced the sanctity of PPAs inked between the wind and solar independent power producers (IPPs) and State Discoms. The order also directs State Discoms to honour the terms of PPA and clear the pending payments, as per the agreed tariff under the PPA within six weeks from the date of the order, analysts pointed out.

‘A positive development’

ICRA, Senior VP & Co-Group Head (Corporate Ratings), Girishkumar Kadam, said, the order is a positive development for the RE sector and thus, will provide a major liquidity relief for the affected IPPs in the State.

“Pending resolution of PPA tariff renegotiation matter has been a key concern for the RE sector and in turn affected the credit profile of wind and solar IPPs in the State, especially the entities belonging to relatively weaker sponsor groups. However, timely implementation of the High Court order by the Discoms remains a critical monitorable, given the weak financial profile of the Discoms in AP marked by continued losses and large debt dependence,” he added.

Fitch Ratings said that the High Court order will help RE generators’ liquidity position. “Fitch believes that the ruling will also bolster investor confidence in the RE sector in India as risks of tariff renegotiation and payment delays are mitigated,” it added.

Fitch estimates that the receivables outstanding for Greenko Energy Holdings will reduce by 48 per cent, if the AP Discoms clear their outstanding dues in line with the PPAs within six weeks, as ordered by the court.

Fitch too raised doubts about the financial capacity of State Discoms to pay the charges. “However, we believe there may be delays in the payments and the generators’ receivables may improve only gradually. The State may also appeal the court ruling,” it added.

Direct impact

ICRA further said the HC order has a direct impact on the power purchase cost to be borne by the AP Discoms. “Tariff order issued by Andhra Pradesh Electricity Regulatory Commission (APERC) for FY22 has an approved annual revenue requirement (ARR) for AP Discoms which is based on average RE purchase cost of ₹2.55 per unit, considering the interim PPA rate. Based on the direction by the High Court, the incremental impact on power purchase cost is estimated at ₹10,500 crore, due to build-up of dues arising out of the difference between the PPA rate and interim rate over the last 3-year period,” it added.

ICRA noted that the RE sector outlook remains stable, aided by the strong policy thrust, improved tariff competitiveness of both solar and wind energy, as well as a supportive regulatory framework. The credit profile of the majority of the rated entities in the RE segment continues to remain supported by the availability of long-term PPAs, adequate liquidity buffer, support availability from the respective sponsor groups as well as strengths arising from a satisfactory operating track record and debt refinancing with favourable terms over the last one to two-year period.

In a July 2019 report, another rating agency CRISIL had said the government’s move to review and bring down the purchase cost of wind and solar energy could aggravate the problem of delayed payments from Discoms and stress around 5.2 gigawatts (GW) of renewable projects with estimated debt exposure of more than ₹21,000 crore.

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