India File

Andhra Pradesh casts its shadow

V Rishi Kumar | Updated on December 17, 2019 Published on December 17, 2019

YS Jagan Mohan Reddy, Andhra Pradesh Chief Minister. File photo   -  CH_VIJAYA BHASKAR

The YS Jaganmohan Reddy Government’s decision to review power purchase agreements (PPAs) of some of the renewable energy projects in the State, awarded by the previous regime, has put various stakeholders in the sector, including developers and lenders, in a quandary.

The State had terminated 21 PPAs, which was stayed by the Appellate Tribunal on Electricity. While most believe the move is political and intended to settle scores with Reddy’s rival Chandrababu Naidu, former chief minister during whose tenure the agreements were signed, the incumbent government maintains Naidu signed agreements offering high prices; the idea now is to negotiate down the prices for the benefit of the people.

Caught in the political pincer, the developers have run to the courts, where the matter lies today. The Andhra Pradesh High Court has directed the IPPs to approach the AP Electricity Regulatory Commission for relief, but has told the State to pay the developers, till the matter gets settled, at a rate of ₹2.44 a kWhr, the target price of the State government in the negotiations.

The developers of these independent power producers (IPPs), their lenders, foreign investors, diplomats and even the Central government are keenly watching the developments, after the AP Government appointed, in July 2019, a high-powered committee for renegotiation of PPAs. A notice was served by the Southern Power Distribution Company Ltd, calling for review of PPAs.

Centre reacts

Struck by the impact of opening signed contracts on future investment flows into the country, the Centre did the best it could do — wrote a letter to the State government cautioning it against the move. The letter was candid that “If an impression goes out that rule of law does not prevail or contracts are not honoured, then the investments will dry up.” But the Jagan Reddy government is not budging.

The Jagan Government believes that the PPAs inked during the N Chandrababu Naidu Government can create a loss of ₹3,000-4,000 crore per annum as these were inked at high tariffs against the trend of some of the tenders around the same period. AP officials pointed out that solar energy prices (in 2014) were in excess of RPPO at costs up to ₹6.99/ kWh. Further, power available to through thermal power stations at ₹4.2/ kWh was procured up to ₹8.09/kWh to facilitate solar power producers by paying ₹3.89/ kWh extra. In Rajasthan, the average rate of solar energy is available between ₹2 and ₹3/kWh, as was seen in Solar Energy Corporation of India’s bid. “This can cause a loss of ₹4,000 crore every year for the next 22 years,” noted the officials.

However, industry sources say that the AP government is unreasonable. “Wind power tariffs in 2014 across the country averaged around ₹6.20/ kWh and even there, AP’s PPA was agreed at ₹5.80/kWh,” say sources. It was one of the lowest tariffs in 2014 and allowed 3 per cent annual escalation for the first 10 years. Companies also argued that all these were long-term (25 year) PPAs, with investments in technology and done under competitive bidding practices. The IPPs believe that their projects achieved financial closure based on the tariffs at that time which made them bankable. And they believe that tariffs cannot be compared.

Meanwhile, the State’s dues to the power producers have piled up. Also, there emerged concerns that the government may not buy the power, or at least buy less of it, using certain covenants in the agreements. Discoms in India owe over ₹3,000 crore to renewable energy companies, according to data compiled by the Central Electricity Authority. “Under the garb of compliance with Renewable Power Purchase Obligations (RPPO), mandating renewable energy consumption of 5-11 per cent, AP procured about 23 per cent of high cost renewable power, which put a heavy burden on the State's finances,” Jaganmohan Reddy noted in a letter.

The Centre has mooted the idea of the developers supplying electricity under ‘letters of credits’, where the banks would pay them if the discoms didn’t. The scheme has failed to take off because of want of States’ buy-in.

Rating agencies such as Crisil and ICRA have put some of the developers under rating watch, and downgraded some. Earlier, Crisil stated that the AP move could lead to stress of about 5.2 giga watt (GW) of renewable projects with estimated debt of ₹21,000 crore. And, significantly, nearly half of this capacity is at risk of default since they lack liquidity. The State is keen and hopeful at bringing down the tariffs to ₹2.43 per unit for wind projects and ₹2.44 for solar developers.

Power experts are apprehensive that if the State succeeds in the renegotiation of PPAs, it would open a Pandora’s Box with other State discoms seeking similar relief, causing a cascading effect.

Legal watchers raise the issue of sanctity of contracts. Aakanksha Joshi, Partner, Economic Laws Practice, says: “So, what is the sanctity of a contract? And if it is subject to change with a change of government, it creates unwanted volatility.”

Andrew Hines, Co-founder, CleanMax Solar, points out that any move to revise tariffs, add new charges, or retrospectively change regulations will alarm lenders and investors who are otherwise enthusiastic about investing in renewables in India.

With inputs from Venkatesh Ganesh

Published on December 17, 2019
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