Another blow to sanctity of contracts, Andhra Pradesh wants solar PPAs rewritten

Several state governments used to tinker with power purchase agreements (PPAs) between their discoms and power generators and this added to the latter’s woes.

The new government in Andhra Pradesh has buttressed this trend by forming a committee to revise “abnormally priced wind and solar” PPAs, saying these have “resulted in unjustified burden on the consumers of the state”, besides contributing to the financial woes of state-run discoms. The state will also request the Union government to bear the “additional financial burden” from buying renewable power.

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The YS Jaganmohan Reddy government’s decision is the latest among the series of steps it has taken since assuming power late May to undo the decisions of the previous government led by N Chandrababu Naidu. The AP government’s move also went against the need to enforce contracts and fast-track dispute resolution, one of the central themes of the Economic Survey 2018-19.

AP discoms losses in FY19 stood at Rs 1,563 crore. The state sourced 18% of its electricity from renewable energy sources in FY19; it houses about 12% of the country’s wind and solar capacity.

The development comes at a time when the pace of renewable capacity addition is slowing down. In FY19, it went down to 8.6 giga-watt (GW), against 11.8 GW in FY18 and 11.3 GW in FY17 as investors got wary of poor tender designs and cancellation of tenders. The other reasons of slow capacity addition were rising finance costs, government-mandated tariff caps in reverse auctions and transmission bottlenecks.

Andhra’s decision also coincides with falling renewable power prices, as the weighted average solar bid tariff in calendar year 2018 was only Rs 2.73/unit as against Rs 3.01/unit in 2017 and Rs 5.01/unit in 2016. The lowest wind tariff in the last auction held in March was Rs 2.82/unit, much lower than the Rs 5-6/unit range seen about three years ago.

According to the resolutions of the Andhra Pradesh power department meeting held on June 19, the state’s various utilities had decided to approach the power regulator to fix tariffs of several wind power projects at Rs 2.25/unit. State officials claim that shift in market dynamics and technological interventions hardly justified the Rs 4.84/unit tariff determined through the earlier mechanism. Many of these agreements were signed with “malafide intentions,” a senior state government official told FE.

The minutes of the meeting, reviewed by FE, also revealed that the state officials would write to NTPC and the Solar Energy Corporation of India (SECI) to reduce electricity price from solar power projects being implemented through these agencies, to Rs 2.50/unit.

Andhra Pradesh also decided to request the Union government to bear the additional financial burden from buying renewable power. Additionally, it wants the state government to revoke the orders to enter PPAs with Axis Energy and Siemens Gamesa for setting up wind-solar hybrid power plants.

The committee to revise tyeh renewable tariffs was formed despite the Union renewables ministry specifically asking the state in June to not to take such a step which will potentially shake investor confidence.

The announcement of revising renewable PPAs could create further stress in the lending sector as it would even delay the payments of the state discoms’ current outstanding dues, analysts noted. Andhra discoms owe Rs 16,648 crore to coal-based power producers. Estimated outstanding dues to wind and solar generators by stood at a whopping Rs 2,800 crore at the beginning of FY20.

Research firm India Ratings believes that uncertainty exists for wind and solar power projects whose tariffs are higher than the state’s FY18 weighted average power price of Rs 4.46/unit and “banks will be forced to recognise these assets as non-performing if payments are stopped”.