Why Andhra power regulator’s steps should worry renewable sector

The Andhra Pradesh Electricity Regulatory Commission (APERC) put out a letter on February 27, 2019 asking the state to see if the duration of existing power purchase agreements (PPAs) can be reduced to five years from 25 years.

“It is requested to obtain the considered opinion of the learned Advocate General of Andhra Pradesh to advise on the legal feasibility and reviewing of PPAs in force and restricting the period of force of such PPAs to five years…” reads the APERC letter addressed to the principal secretary of the energy department of the state, Ajay Jain.

The letter follows on the heels of two state discoms in Andhra Pradesh protesting the requirement of procuring power from wind plants at high retail tariffs even as the sector transitioned to reverse bidding auctions that got significantly lower tariffs.

While the possibility of retroactively cutting short the PPA duration is not specifically limited to wind and solar plants, the context indicates that it is likely to raise more alarm in the renewable sector.

Andhra Pradesh is currently home to 4.07 gigawatts (GW) of wind and 3GW of solar capacity. It has been a preferred destination for renewable developers, wind and solar alike and this has boosted the state’s share of renewable procurement to one of the country’s highest.

However, overcoming the power shortages in the immediate aftermath of the bifurcation into Andhra Pradesh and Telangana, the former’s power supply currently outstrips its demand and this oversupply is posing challenges for the state when it comes to its growing renewable capacity.

Both wind and solar in India have proven to be a market success due to their falling tariffs. Both currently command a tariff between Rs 2.44 to Rs 3 per unit in reverse bidding auctions.

However, Andhra Pradesh’s wind capacity was almost entirely built under the older feed-in-tariff regime with rates averaging at Rs 5 per unit. Likewise, a significant fraction of the state’s solar capacity was also built between 2013 and 2016, with tariffs ranging from Rs 4 to 6 per unit.

Andhra Pradesh distribution companies (DISCOMS), like others in the country, are tied to existing coal power plants by two-part, long-term power purchase agreements. In the case of Andhra Pradesh, in 2017-18, 8.7GW of coal power was procured, according to CSE data compiled from MERIT India.

Of this, only 3.2GW falls in the tariff range that would be deemed “expensive” (variable cost ranging between Rs 3 to 4 per unit). Ironically, this “expensive” component is in all likelihood priced higher because it is operating at technical minimum and is required to stand-by to manage the variability of the renewable plants.  

The challenges faced by Andhra Pradesh serve as warning for other renewable-rich states who could find themselves with a similar dilemma in the near future. While a re-examination of pipeline plans for increasing coal and renewable capacity is in order in the longer term, as is the need to move away from long-term power purchase agreement (PPAs), deliberations on slicing up existing PPAs sets an alarming precedent for violating the sanctity of contracts.

The renewable sector already faces uncertainty and significant off-taker risk. Additionally, the current low tariffs discovered by wind and solar power in the auction processes may not be viable in the face of short-term five year contracts.

The lack of a clear long-term procurement contract raises the risks associated with the project and consequently, the costs. Moves such as this are anathema to developers and financiers and could raise the stakes for the entire sector going forward.

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