In a surprise announcement on July 1, 2019, the Andhra Pradesh government said it was going to review the power purchase agreements (PPAs) signed between the state’s electricity distribution companies (DISCOM) and power generators to renegotiate tariffs. This decision has alarmed power producers, investors, policymakers, and legal experts. Ever since the announcement, a political back and forth has unfolded between the state and the center.

Andhra Pradesh currently has more than 7 GW of wind and solar energy projects installed, which now seem to be under the impending threat of tariff negotiations.

After the state’s unexpected announcement, the Ministry of New and Renewable Energy (MNRE) wrote to the Andhra Pradesh government expressing its apprehensions about their decision. However, the Andhra Pradesh government, without paying any heed to the advice, said that it would go ahead with the review of these PPAs. At that point, the Minister of Power, R.K. Singh, sent a letter cautioning Chief Minister Jaganmohan Reddy against the decision, asking him to exercise restraint and warned that such a move could seriously dissuade investors from investing in the Indian renewable energy sector. However, the state appears adamant on its decision so far.

Background

The new government in Andhra Pradesh led by Jagan Mohan Reddy said it would cancel the PPAs for wind and solar projects signed by the previous administration, which was led by Chandrababu Naidu unless the PPAs are renegotiated. Mr. Reddy has claimed that the PPAs signed during this period were far higher than what was prevalent in the country at that time and has alleged irregularities and possible corruption as the reason behind these high tariffs.

According to Mercom India Solar Project Tracker, over 3 GW of large-scale solar projects are operational in Andhra Pradesh with approximately 1.7 GW of projects under development, and about 200 MW tendered pending auctions.

DISCOMs in duress

The state government has justified its decision by citing the financial troubles faced by DISCOMs in Andhra Pradesh. Unpaid dues to the renewable power generators stand at around ₹200 billion (~$2.9 billion) with accumulated losses of about ₹150 billion (~$2.2 billion). In a communique, the state government further stated that the previous administration had allowed the DISCOMs to bear the fixed costs in purchasing renewable power due to the backing down of available thermal power in favor of expensive wind and solar power during 2014-2019. The state government also justified the renegotiation of PPAs alleging that the previous administration developed more than the mandated 5% Renewable Power Purchase Obligation (RPPO).

Stating these facts, current Andhra administration believes that the tariffs should be negotiated down to present low bid levels for projects that were developed 3 to 4 years ago.

Using this logic, if governments retroactively start negotiating old contracts demanding current prices, most of the industries in India would collapse.

A large-scale project developer told Mercom, “Renegotiation of PPAs is not the solution to the problem. There are other ways to deal with the poor financial condition of DISCOMs. Most DISCOMs in the country are in a similar or worse financial situation, but that should not enable them to revisit signed PPAs. By invoking these discussions, the state government is undermining the judgment and capabilities of government institutions such as the Andhra Pradesh Electricity Regulatory Commission (APERC) and NTPC.”

Solar tariffs have declined along with project costs

In the solar sector, for example, project costs and tariffs have continued to fall since the inception of the National Solar Mission along with a decline in component costs around the world.

Large-scale project costs in India have fallen from about ₹70-75 million (~1.1-1.2 million)/MW levels in the first half of 2015 to just under ₹40 million (~$0.6 million)/MW in the first half of 2019. Matching solar tariffs retroactively is not financially feasible.

IPPs Nervous, but hopeful

Independent power producers with projects in Andhra Pradesh were already not receiving payments for power supplied, which is now being compounded by threats of tariff renegotiation, making developers question when they will get paid.

An executive at a renewable independent power producer (IPP), said, “We were hoping that the center’s advice to the Andhra Pradesh government would make a difference. However, the state government is going ahead with the review of power purchase agreements. This is definitely not good news for the renewable energy sector. In my opinion, this is a case of politics and not economics.”

Last week, The Andhra Pradesh Southern Power Distribution Company (APSPDCL) wrote to the Solar Energy Corporation of India (SECI) asking to revisit the tariff for 400 MW of grid-connected solar PV projects.

On July 12, 2019, the APSPDCL wrote a letter to the NTPC stating that it was supplying bundled solar power from a 1,000 MW solar park project to DISCOMs in the state at a weighted average tariff of ₹4.61 ($0.067)/kWh. This tariff, according to APSPDCL, discovered through a transparent bidding mechanism, was not the “correct market price.” Further, the letter mentions that NTPC “swayed” the APERC to approve the tariff. The letter went on to ask the NTPC to revise the tariff to current bid levels of ₹2.44 ($0.035)/kWh.

Looking at the auctions conducted in 2015, the lowest bids in Andhra in 2015 were actually on the lower side comparatively in the country at that time.

This development is a nightmare for investors because, at these tariffs, projects will yield lower than expected returns or worse – become unviable.

On being asked about the impact on current business operations of renewable energy companies, the executive from a large IPP said “As of now, these are just talks, and we are reasonably confident that the tariffs will not be revised. As far as the payments are concerned, wind and solar developers have not been paid in the last one year, but we are hoping that better sense will prevail and things will go back to the way they were a few years ago.”

Legal experts weigh in 

On the talks of tariff renegotiation, a source at a leading law firm told Mercom, “The Andhra Pradesh government is well within its rights to issue letters to discuss tariff renegotiation. However, a unilateral amendment in the PPA or a case of dishonoring the PPA would be unlawful. Therefore, whatever is happening at the moment is on non-actionable grounds. The more worrying issue is that sentiments around the sacrosanctity of such agreements will take a hit. Technically, the developers can approach the courts right now and seek a pre-emptive injunction, but the developers are not doing that. From our experience, courts have ruled in favor of developers in scenarios where there has been a unilateral amendment.” 

Solar generation is not the same everywhere

In his letter to the Andhra Pradesh government power minister RK Singh said: “The tariff for solar and wind generation in different states will be different depending upon the solar insolation for solar energy and the capacity utilization factor (CUF)/wind speeds for wind energy.” This is true for solar projects in any part of the world. Solar insolation varies by regions, and so does the generation.

Investor confidence low 

Usually, the developers account for the risk of any delay in payments in the financial model. However, a risk of reduction in tariffs is not something developers have anticipated. Although talks of PPA renegotiation have only just begun, rating agencies have started downgrading the credit ratings of renewable energy developers. This could make matters much worse for the sector as lenders are going to become more cautious of loaning money to developers in an economy which is already going through a rough patch due to the NBFC crisis following the collapse of IL&FS.

Andhra Pradesh is a significant contributor to India’s renewable energy sector. However, over the past year, investors are becoming wary of the state. A source at a leading financial and investment services provider, told Mercom, “We are becoming increasingly cautious of investing in solar or wind projects in Andhra Pradesh. The backlog of payments and talks of revision of PPA tariffs has shaken investor confidence. Today, the state government is talking about revising tariffs of utility-scale projects; tomorrow, the state might want to increase transmission charges for open access projects.”

There is no doubt that the Andhra Pradesh DISCOMs are in a financial mess, but most DISCOMs in India are in the same boat due to mismanagement and election politics. The Andhra Pradesh government is setting a bad precedent for other states by opening this Pandora’s box. States such as Telangana, Tamil Nadu, and Rajasthan which have also reportedly delayed payments to wind and solar developers could start citing similar reasons and may want to renegotiate their PPAs. It seems that in the best case scenario developers can seek relief in the form of a swift yet effective ruling from courts in their favor so that it does not set a precedent for other states to take a similar route.

In one such case in a recent ruling, the Appellate Tribunal for Electricity (APTEL) has put a stay order on the implementation of APSDPCL’s letter seeking a revision in the PPA for grid-connected solar photovoltaic projects executed by SEI Green Flash Private Limited, SEI Aroshi and SEI Rain Coke, which are special purpose vehicles of developer Greenko.

Meanwhile, both SECI and NTPC have turned down the state’s direction to lower the tariff for their projects. When contacted, a government official told Mercom, “As of now, the finer details of our communication cannot be shared, but it should be known that SECI and NTPC will not be revising the tariff as requested. The tariff was found to be correct, then according to the system costs, land costs, and other variables. Yes, the market saw a huge decline after two years or so, that doesn’t mean a contract bound by law can be breached.”

“The current situation in Andhra Pradesh is unfortunate and alarming. Wind and solar have been growing in India despite multiple challenges over the past year, and this is the last thing the industry needs right now. The MNRE and the Power Minister have provided good advice that the Andhra government should heed. If not, this entire mess will end up in courts and judiciary will have to once and for all send a clear message that contracts are sacrosanct in India so that that industry can move on and investors can continue to invest in the Indian renewable sector without clouds of uncertainty,” said Raj Prabhu. CEO of Mercom Capital Group.