Andhra Pradesh decision a small victory for project developers

21 March 2022 |

Thirty two months after the Andhra Pradesh government’s flagrant attempt to renegotiate over 7,500 MW of renewable power PPAs, the state High Court has finally restored status quo. The High Court has, in an order dated 15 March 2022, directed the DISCOMs to honour contracted tariffs and clear all outstanding dues within six weeks. It has also definitively ruled that once projects have been duly allocated under a transparent process, tariffs may not be unilaterally revised by the state government, DISCOMs or even the state regulator. It has further directed the DISCOMs to not curtail power from renewable producers unless there is a risk to the grid.

Background
In July 2019, the then newly formed government in the state had sought to: i) reduce tariffs of all renewable projects; ii) cancel ‘must run’ status of renewable projects; and iii) cancel all renewable power procurement initiatives in pipeline. Subsequently, the High Court issued an order in September 2019 asking the DISCOMs to pay an interim tariff of INR 2.43/ kWh and 2.44/ kWh to solar and wind power producers respectively as against average contracted tariff of INR 4.30/ kWh.

Affected project developers
The impasse has been a major strain on finances of developers to the tune of INR 72 billion (USD 948 million) in aggregate pushing smaller developers to the brink of default. Total project portfolio, selling power to DISCOMs in Andhra Pradesh is estimated at 7,569 MW (split between solar – 3,907 MW and wind – 3,662 MW). Greenko (1,616 MW operational capacity), ReNew (777 MW), Adani (604 MW), Mytrah (364 MW) and Tata (305 MW) are the worst affected private developers.

Figure: Leading project developers in Andhra Pradesh, MW

Source: BRIDGE TO INDIA research
Note: Capacity excludes open access projects.

Implications for the sector
The High Court decision is being widely reported as a “significant positive” for investment sentiment in the sector. However, as we maintained in 2019, there was no justifiable basis for the state to renegotiate tariffs and it was only a matter of time before legal sanctity of contracts was held. The exercise was a mere political gimmick and an outrageous attempt to buy some respite for the financially struggling DISCOMs (rated B and C respectively by the Ministry of Power).

On the contrary, the fact that it took the High Court nearly 2.5 years to resolve such a black-and-white case is a blemish on the Indian legal system. Moreover, there remains considerable uncertainty for the affected developers. The DISCOMs will have to find an estimated INR 72 billion (USD 935 million) for past compensation and INR 27 billion (USD 350 million) for annual incremental payments to power producers. Being unable to clear all dues to power producers within six weeks as directed by the High Court, they may seek more time from the High Court or drag the process by appealing to the Supreme Court.

It is not even certain that other states would learn from the Andhra Pradesh precedent. After all, Andhra Pradesh chose to renegotiate PPAs despite failure of all such precedents. In the long run, the permanent cure lies in restoring financial health of DISCOMs by improving their governance and granting them operational autonomy. However, so long as state governments see an opportunity to curry favour with the masses by offering them cheaper power, they will keep meddling in the sector.  


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