Renegotiation of PPAs in Andhra may exert cash-flow pressure, impair investor confidence: Ind-Ra

V. Rishi Kumar Hyderabad | Updated on July 04, 2019

The high-level negotiation committee constituted by the Andhra Pradesh government to review and renegotiate the signed power purchase agreements (PPAs) with wind and solar power developers, has the potential to impair cash flows to projects and may impact investor sentiment in the sector.

According to India Ratings and Research (Fitch Group), state discoms have accumulated payables of over eight months in Ind-Ra’s portfolio and if they continued to be unpaid, the tariff renegotiation process would open an avenue for further delay in payments, until the renegotiations conclude.

Generally, stoppage of payments either precedes or succeeds a renegotiation process. This calls for monitoring cash-flows, liquidity buffers and the available sponsor support to project developers, and to take rating actions accordingly.

PPA renegotiation or cancellation is an event risk and a deviation from normal business proceedings, as these are not embedded in the contracts.

Andhra Pradesh, one of the leading states in use of renewable energy, has more than 7,700 MW of solar and wind projects. Given the already weak funding atmosphere for infrastructure assets, any misstep such as renegotiation of contracts, would not only create anxious times for the sector, but also magnify the risk a project could undergo during its PPA tenure.

Notwithstanding the outcome of the committee’s decision, reopening PPAs will dent investor sentiment. Additionally, banks will be forced to recognise these assets as non-performing if payments are stopped, thereby, creating further stress for the lending sector.

The Andhra Pradesh Electricity Regulatory Commission in its FY20 tariff order has approved an average power procurement cost of Rs 4.00/kwh. Renewable energy constitutes 24 per cent of the approved FY20 power purchase at the rate of Rs 4.59/KwH. However, such cancellation or renegotiation, if finalised by discoms along with the state government, may be legally challenged by the affected IPPs. Legal notices and law suits from either party would aggravate obstacles faced by projects and affect the financial profile of the emerging renewable energy sector.

According to the GO, the state discoms power purchase dues amount to Rs 20,000 crore. Just like Karnataka, Uttar Pradesh, Gujarat and Madhya Pradesh, Andhra Pradesh, too, has made various attempts in the past to revisit and renegotiate power purchase contracts.

In June 2019, the Ministry of New and Renewable Energy (MNRE) instructed the Andhra Pradesh government to not revisit contractual agreements without any bonafide reason and to not create any uncertainty. However, the current proposal of state-supported disruption in PPA tariffs through renegotiations will adversely affect the investment climate in the state by dampening investor confidence and undermining the sanctity of PPA contracts.

Renegotiation risk, if it becomes rampant across states, could pose a risk to generators, paving the way for the conversion of a healthy asset into a non-performing asset.

Published on July 04, 2019

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