Unilateral Termination of PPAs By DISCOMs Is Against Public Interest – Supreme Court

The Supreme Court of India, in a recent order, has rebuked the Andhra Pradesh distribution companies (DISCOMs) attempting to terminate the power purchase agreement (PPA) unilaterally after the project developer had set up the project.

The Apex Court has said that the state regulatory commission must be guided by public interest while approving the tariffs for power purchase. It also added that DISCOMs must not be terminating PPAs, considering huge investments made by project developers. DISCOMs need to be mindful that valuable public resources, including thousands of acres of land, would go to waste. Such a decision by DISCOMs to terminate PPAs is against public interest and the public good.

The state DISCOMs had filed an appeal with the Supreme Court challenging the ruling passed by Appellate Tribunal for Electricity (APTEL). The APTEL had directed the state Commission to pass an order to determine the capital cost as requested by Hinduja National Power Corporation (HNPCL) and approve the amended and restated PPA.

Background


The Andhra Pradesh State Electricity Board (APSEB) had signed an initial PPA with HNPCL on December 9, 1994. Later, the parties agreed to amend the PPA, and the amended and restated PPA was signed on April 15, 1998, to procure 1,040 MW of power from HNPCL.

From 1998 to 2007, the amended and restated PPA for the sale of power by HNPCL to APSEB was not implemented. Then, in 2007, HNPCL approached the Andhra Pradesh government to revive the power project, structuring it as a merchant plant, offering 25% of the power generated to the state and the remaining 75% to third parties.

After that, in 2012-13, the Central Power Distribution Company of Andhra Pradesh, on behalf of the state’s DISCOMs, started the process of procurement of power to meet the baseload requirements.

In the bidding process, HNPCL emerged as the second-lowest bidder. In December 2021, the Andhra Pradesh government accepted HNPCL’s proposal to purchase 100% power from the project per the amended and restated PPA.

Later, on June 2, 2014, the Andhra Pradesh Reorganisation Act came into being, and the state of Andhra Pradesh was bifurcated into Andhra Pradesh and Telangana.

Then, in 2015, HNPCL filed an application, increasing the project’s capital cost to ₹80.87 billion (~$1.08 billion), which the DISCOMs disputed.

Later, in 2016, the state Commission fixed the provisional tariff of ₹3.61 (~$0.048)/kWh for the supply of power by HNPCL to the state DISCOMs. Thereafter, the state Commission dismissed the petition filed by HNPCL for the determination of tariff.

Aggrieved by this, HNPCL approached APTEL, which directed the parties to maintain the status quo prior to January 2018.

The DISCOMs, in their appeal, submitted that the PPA was not a valid document until the state Commission approved it. The DISCOMs added that HNPCL’s contention that it had made huge investments based on the assurance given by the DISCOMs was erroneous. The DISCOMs further argued that since the reinitiation of the project in 2007 as a merchant power project, HNPCL was free to sell power to third parties in the market.

Supreme Court’s analysis

The Court observed that after the bifurcation of Andhra Pradesh, a continuation agreement was signed between the DISCOMs and HNPCL in 2016. The DISCOMs had agreed to amend the restated PPA as per the continuation agreement. Later, the state government in 2016 approved the procurement of 100% of power from HNPCL at a tariff of ₹3.82 (~$0.051)/kWh from August 1, 2016.

The Court added that the state Commission would take into consideration all the factors while approving the tariff at which the DISCOMs would procure the power from HNPCL.

The Apex Court said that HNPCL had revived the project as a merchant power project in 2007 and had offered 25% of the power to the state. But it was the state which offered to purchase 100% of power from HNPCL.

The Court added that the determination of the capital cost and tariff would always be in the regulatory control of the state Commission.

The Court ruled that the state DISCOMs of Andhra Pradesh should start purchasing 1,040 MW of power from HNPCL at ₹3.82 (~$0.051)/kWh as per the order passed by the APTEL until the state Commission decides the case.

The Apex Court directed the state Commission to decide the case regarding the capital cost and the approval of the amended and restated power purchase agreement (PPA) within six months from the date of the order.

Speaking on the Supreme Court order, Aditya K. Singh, Associate Partner at Link Legal, said, “This order will have a significant impact on the renewable industry as well. The Supreme Court has given a different angle to the definition of ‘public interest.’ Various electricity commissions have been using the term’ public interest’ to pass orders against developers without realizing that a developer’s interest is also linked to ‘public interest.’ The Supreme Court has also rightly recognized that the termination of PPAs by DISCOMs also goes against the ‘public interest.’

The Supreme Court order acquires more relevance for the renewable industry. It clarifies that once signed PPAs cannot be terminated, it becomes a binding document for all the parties.

Previously Punjab and Andhra Pradesh have set bad examples of trying to renegotiate PPAs.

Last November, the Punjab Government passed a Bill to revise the long-term PPAs between the Punjab State Power Corporation and the renewable energy generators. The Bill seeks to reduce the tariffs for renewable energy projects approved by the state electricity regulatory commission.

In 2019, Chief Minister of Andhra Pradesh YS Jaganmohan Reddy had announced that the government would review the PPAs signed between the state’s DISCOMs and power generators. The decision had alarmed power producers, investors, policymakers, and legal experts.

However, the Andhra High Court had quashed the state government’s order and letter issued to renewable developers to reduce their quoted tariffs. Considering the health of DISCOMs in the state and the fact that developers need liquidity to keep the projects in operation, the High Court had directed them to immediately pay ₹2.43 ($0.034)/kWh and ₹2.44 ($0.034)//kWh to wind and solar developers respectively. However, this is only an interim relief. The Court has said that the interim arrangement is being suggested to balance the interests of both parties.

But the court case is yet to be settled, and developers are yet to receive the payments per the tariffs signed in the PPA.

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