The Andhra Pradesh Government’s move to review and bring down the purchase cost of wind and solar energy could aggravate the problem of delayed payments from distribution companies.

This could lead to stress of about 5.2 GW of renewable projects with estimated debt exposure of over ₹ 21,000 crore, according to rating firm Crisil.

Nearly half of this capacity is at higher risk of default since they lack liquidity support beyond project level, Crisil stated.

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The order, issued on July 1, 2019, directs a high-level negotiation committee to use current rates, rates prevalent at the time of commissioning of projects, and the current opportunity cost of other sources of power to benchmark and renegotiate agreements. It has asked the panel to submit report to the state in 45 days.

Manish Gupta, Senior Director, Crisil Ratings, said “Around 5.2 GW projects out of 7.5 GW in AP are supplying power to State discoms under long-term power purchase agreements (PPAs) at pre-determined tariffs. They now face renegotiation risk given that their tariffs are above the recent auction prices of below ₹ 3 per unit for renewable projects and average power purchase cost of ₹ 3.8 per unit in AP in fiscal 2019.”

This excludes inter-state transmission system projects of about 2 GW, where the exposure is to central counterparties of NTPC Ltd. and Solar Energy Corporation of India and are relatively safe as the payments to the developers are from the counterparties’ pooled cash flows.

Assuming a typical debt funding per MW of ₹ 4 crore, this would put about ₹ 21,000 crore of debt at risk of default. That is because, in the event of any adverse recommendation by the committee, generators may take the legal route to stall implementation, which will prolong resolution and result in further delays in payment to renewable projects.

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AP discoms are already facing a significant resource crunch with revenue gap widening in fiscal 2019. Consequently, discoms have been delaying payments to generators by 6-12 months.

Ankit Hakhu, Associate Director, CRISIL Ratings, “Any prolonged delay would put 50 per cent of capacity (2.6 GW with ₹ 10,600 crore of debt) at immediate risk of default in debt servicing as these projects would have no other liquidity support apart from project-level liquidity reserves typically 6 months of debt servicing.”

The rest 50 per cent of capacity with ₹ 10,400 crore of debt may get a temporary lifeline being part of renewable groups or being part of corporates with strong financial flexibility. Such groups are prudently earmarking liquidity from recently raised capital at the holding company level, and may sustain debt servicing of such projects by another 6-12 months.