The renegotiation of renewable energy power purchase agreements may sink the bustling green power industry in India
The Andhra Pradesh government recently asked for a revision of tariffs of wind and solar power. It encouraged Andhra Pradesh South Power Distribution Co Ltd (APSDCL) to renegotiate agreements to purchase and sale power signed by the previous government.
Such renegotiation of renewable energy power purchase agreements (PPA) set a terrible precedent and could sink the bustling Indian renewable energy industry.
However, an official at the Andhra chief minister’s office said: “It is the duty of any new government to re-evaluate the energy sector and ensure its viability.”
In case of renewable energy procurement, financially weak distribution companies (Discoms) have been known to default on payments. This has been a cause for concern since they add significant risk to investments in the sector.
The state said the tariffs the last government agreed upon are not competitive and the unfair advantage given to the power generators increased the financial distress on the discom.
On July 1, 2019, the YS Jaganmohan Reddy government released an order “to review and renegotiate exorbitantly priced wind and solar projects”.
The projects under audit are at various stages of construction and commissioning: Three solar PPAs with National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India Ltd (SECI) and another 21 wind power sale agreements (PSA) with Suzlon and Axis.
More than 5.6 gigawatt of installed RE capacity (1.75 GW solar and 3.9 GW wind) could be at stake, said a source close to the issue.
The solar projects were procured under the auction regime and the tariffs vary from Rs 2.72/units to Rs 3.15/unit. The wind projects were procured under the earlier FiT mechanism and FiTs were as high as Rs 4.83/unit.
These projects were awaiting approval from the Andhra Pradesh Electricity Regulatory Commission (APERC) and can, according to the July 1, 2019 order, be closed without penalty.
Under the auctioning regime, SECI and NTPC are vital intermediaries who help protect developers from the off-taker risk posed by the doiscoms. According to conditions in the PSA, SECI/NTPC have the option to take legal action if the matter persists.
So, representatives from Suzlon and Axis Energy Ventures India Private Limited are at the negotiating table hoping that the suggested tariffs do not leave them counting their change.
Reactionary petitions were raised in front of APERC on July 22, 2019 (solar energy) and then again on July 27 (wind energy). The proceedings have been stayed for the petitioners to gather evidence to prove their case.
The July 1 order ordered for a high-level negotiation committee to release a comprehensive report on the issue in 45 days. The scope of the study was extended to “projects completed or in progress and agreements in pipeline or in bidding process”.
The findings of the committee will be essential to establish if there was merit in the steps the state took.
Meddling with existing PPAs will negatively impact any project’s viability, but it is the impact on the industry that is the most worrying.
Industry stakeholders are worried that this could soon mushroom into a situation where the industry loses out on investors and the taxpayers are required to bail out SECI. There are rumours that Andhra Pradesh could be looking at as many as 88 PPAs, a little more than half of all renewable energy PPAs in the state.
But it is clear that tariffs need to be adjusted every now and then to reflect market costs and the likes. This is done both by the central and state electricity regulatory commission every couple of years. The auctions were introduced to ensure that the tariffs reflected current market sentiments.
Also, the current system is the best way forward. The problem, however, is going back on PPAs (and their conditions including tariffs) which impact the project financials. More importantly, it scares away the investors who cannot rely on states honouring their PPAs and making their payments, which affects the company balance sheet.
The Ministry of New and Renewable Energy (MNRE) is calling for quashing any claims for renegotiation. Industry stakeholders too are hoping that the sanctity of the PPA is established and any simmering distrust among investors assuaged. However, we must all wait till the committee releases its recommendations and the state decides on how to move forward.
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