Solar storm: AP govt’s bid to renegotiate renewable contracts could have serious repercussions

Updated on: Aug 02, 2019

If Andhra Pradesh can abrogate contracts, other States are likely to do the same

India’s renewable energy sector has made remarkable progress, particularly after Prime Minister Modi launched a big push on renewables during his first term. But its fortunes have fluctuated since prices began tumbling to a point where renewable-energy firms’ financials have become stretched. Now the industry finds itself locked in battle with Jaganmohan Reddy’s new Andhra Pradesh government which is determined to rework contracts struck by predecessor N Chandrababu Naidu. Reddy’s moves could wrong-foot the entire industry because almost all major players have operations in the State. Currently, the State has 3,500 MW of wind-power and a similar amount of solar energy. Reddy’s government is demanding the renewable-energy firms slash prices from ₹4.70-5 a unit to ₹2.40, which it maintains is the prevailing rate. After talks stalemated, the companies won a one-month stay from the Andhra Pradesh High Court. Despite the July 25 court order, the State government has been telling companies to cut their grid contributions by as much as 80 per cent on some days. That’s even though the firms have contracts stipulating they’ll get priority over thermal projects because renewable energy can’t be stored. Also, though a stay is in force, the Andhra Pradesh South Power Distribution Co has written to the State regulator to scrap the power-purchase agreements of 21 wind-power projects signed last year on the grounds it’s broke. The State discom currently owes several thousand crore to the renewable-power companies. Leading companies say when the contracts were signed, rates in Andhra Pradesh were comparable to those elsewhere in India. In fact, in 2014 the State struck a deal to buy solar energy at slightly over ₹5 which was considerably lower than prevailing rates then.

For renewable power companies, Reddy’s stand is little short of disastrous. The State’s been at the forefront of the renewable-energy drive and its projects account for 10 per cent of India’s total. Politics is also thought to be in play as Reddy’s keen to paint Naidu’s administration as corrupt and its projects tainted. The companies argue they commissioned projects and bought equipment like wind-turbines and solar-panels at a time when prices were higher and so their costs are higher. They can’t afford to reduce rates negotiated for 25 years in most cases.

At stake here is, quite simply, the sanctity of contracts and whether they can be unilaterally abrogated whatever the reason. Also, it’s a high-stakes fight for the renewable-power companies because similar situations exist elsewhere. If Andhra Pradesh can abrogate contracts, other States are likely to do the same. One result could be that India won’t reach its 2022 renewable-energy targets. Already ratings companies have downgraded some renewable-energy firms because of slow payments and recent developments have further strained their finances. Government contracts are supposed to be sacrosanct. The Andhra Pradesh situation puts that into question and the consequences could extend well beyond the energy sector. The Centre needs to step in.

Published on August 02, 2019
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