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Solar and wind power projects in Andhra Pradesh are unlikely to secure any immediate respite from cash flow-related pressure because of the recent order given by Andhra Pradesh (AP) high court, according to rating agency India Ratings.
The order to pay an interim tariff of ₹2.44/unit and ₹2.43/unit for solar and wind projects, respectively, will not be sufficient enough to debt service the entire 554MW capacity in Ind-Ra’s state portfolio with AP discoms as direct counterparties.
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In the absence of internal liquidity generation for the following six months at least, all these affected projects will have to necessarily lean on sponsor support or any balance liquidity available with the project (reserves, undrawn lines, cash balance etc.) for debt servicing till the projects start receiving full monthly tariffs as per power purchase agreements (PPA). Almost all of the projects that have direct or indirect exposure to AP state counterparties have already been kept on Rating Watch Negative (RWN) by the agency, and the cash flow stress can increase from here owing to non-recovery of full project tariffs in the coming months.
Read more: Renewable PPAs in Andhra Pradesh benefited 3 players, says Jagan
Also, the interim tariff judgment as per the order could set a dangerous precedent. If other discoms follow a similar course of action, it will endanger foreign as well as domestic investments, leading to an increase in the share of non-performing assets. In its earlier communication , Ind-Ra had highlighted the risk faced by solar and wind power projects in AP due to tariff renegotiations and payment delay risks.
The high court order has given three broad directions – 1) All the issues related to tariff are to be raised with Andhra Pradesh Electricity Regulatory Commission (APERC) and need to be resolved within six months; 2) A directive has been issued that power curtailment cannot be imposed without followed regulatory processes and giving required notice; 3) Payment of interim tariff at the rate of ₹2.44/unit and 2.43/unit will have to be made for solar and wind projects, respectively.
Hopes of immediate resolution of the matter by generators seem to be waning as the issue might not be resolved for at least six more months, as per timeline stipulated in the order, necessitating the need for additional liquidity injection by sponsors into the project or other working capital lines to fund burgeoning receivables (AP discom has made payments only till the month of July 2018, as per Ind-Ra rated portfolio).
Given the seriousness of the situation, lenders might become wary of increasing their exposure to these projects, forcing generators to depend on sponsors or group companies for their funding requirements. Sponsors that are already low on liquidity and have significant exposure to AP state discoms might find it increasingly difficult to keep supporting their projects.
A total 554MW projects in Ind-Ra’s portfolio that have been directly affected have an average tariff of ₹5.50/unit.
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