10 July 2019 | BRIDGE TO INDIA
The new Andhra Pradesh government led by Chief Minister YS Jagan Mohan Reddy of the YSR Congress Party has made a sensational announcement seeking to renegotiate all renewable energy PPAs, review ‘must run’ status for the sector and cancel all under development projects. The move was part of the party’s election campaign promise, which also included free power and a host of other sops to the poor and farmers. It is nonetheless a surprise that the government has actually gone ahead with the announcement and that too despite a counter-advisory by the central government.
- The state DISCOMs are struggling financially and unable to meet the cost of the new government’s generous election promises;
- The move mainly affects the 6,953 MW of utility scale solar and wind projects commissioned and/ or contracted during the last five years;
- While there is little chance of any successful renegotiation, the case again highlights the perilous state of India’s distribution utilities and consequent risks for the private investors;
Andhra Pradesh has two state government owned DISCOMs, rated A and B+ respectively in July 2018 by the Ministry of Power on a mix of operational and financial criteria. But tariffs have not been revised for two years and their financial condition is believed to have worsened. Dues to power generators now stretch up to eight months.
Andhra Pradesh has been one of the leading renewable states with a commissioned capacity of 7,257 MW (solar 3,279, wind 3,978). Another 1,500 MW of solar capacity is under construction. Weighted average tariff for all contracted solar and wind PPAs is INR 4.16/ kWh and INR 4.41/ kWh for solar and wind projects respectively, largely in line with tariffs across the country.
Figure: Renewable capacity addition in Andhra Pradesh
Source: BRIDGE TO INDIA research
The state government has not stated any reason why it believes the tariffs can be renegotiated. We see no apparent financial or market merit in this exercise other than simply to keep tariffs low and support the struggling DISCOMs. The project owners are obviously bound to reject any government attempt. The case would therefore be referred to the Andhra Pradesh Electricity Regulatory Commission (APERC) (which has already approved all the projects/ tariffs), Appellate Tribunal for Electricity and ultimately, the Supreme Court of India if the state government persists. The only eventuality in which tariffs could be reduced is where the government can prove some wrong doing in project allocation and/ or determination of tariffs. But this is highly unlikely as all projects have been sanctioned by the state government agencies and approved by the state regulator under standard processes consistent across the country.
We therefore see no likelihood of success for the state government. This is an arbitrary government attempt to renegotiate PPAs. Similar moves in the past including Gujarat have failed.
The Andhra Pradesh move will no doubt spook investors and again raise the bogey of renegotiation risk in the sector. But there is a silver lining here. If the state government chooses to pursue its case vigorously, a final decision in favour of the investors would provide a useful template for similar cases in future. The risk of delayed payments and curtailment, however, is real and growing, and would continue to test investors.