7 GW PV In India Face Renegotiation Risk

Renewable Energy Projects Worth 480 Billion INR ($7.5 Billion) In India Face Risk Of Tariff Renegotiation From DISCOMs, According To CRISIL
06:55 PM (Beijing Time) - 29. August 2017
n_mar_Asia_India_7 GW PV In India At Risk

As much as 3 GW of renewable energy capacity is currently stuck as DISCOMs in some Indian states are not willing to honor the original PPAs or letters of intent signed for power projects, according to analytics and research company CRISIL. In total, 7 GW of tendered/awarded PV projects could face the risk of tariff renegotiations in India.

Key Takeaways

  • Renewable energy projects worth 480 billion INR ($7.5 billion) are at risk of tariff negotiations in India, according to CRISIL Research
  • Solar PV capacity of 7 GW (tendered/awarded) at tariffs of 5 to 8 INR ($0.078 to $0.124) per kWh in fiscal years 2015-2017 might not get tariffs as planned
  • For wind energy, 2 to 3 GW of projects which were allotted or had PPAs signed in Q3-Q4/FY2017 are at high risk of renegotiation
  • CRISIL research says legally these PPAs can’t be terminated if there is no delay in project commissioning
  • CRISIL suggests honoring PPAs in their present form is in the interest of both parties

In what can be termed as another clarion call for the Indian government, analytics and research agency CRISIL Limited has warned that as much as 480 billion INR ($7.5 billion) worth investment in renewable energy projects is at risk in the country thanks to the threat of tariff renegotiations by electricity distribution companies (DISCOMs).

For its analysis to assess the extent of the renegotiation risk, CRISIL has taken into account factors such as the difference between PPA tariffs and average power purchase cost (APPC) in a state, the renewable penetration of a state and the financial health of DISCOMs.

CRISIL’s warning comes soon after ratings agency Moody’s forecast that PPA cancellations and renegotiations may adversely affect the growth of India’s renewable energy sector (see Moody’s Warns About Retroactive Cuts In India).

The Indian solar sector has seen tariffs coming down as low as 2.44 INR ($0.037) per kWh in the Bhadla Solar Park auction (see ACME Wins 200 MW At 2.44 INR Record). This is 45% lower than what was quoted in March 2016. The wind power industry recently also saw a record low tariff of 3.46 INR ($0.054) per kWh, coming down 17% than the previous low of 4.16 INR ($0.065) per kWh.

With tariffs decreasing to such low levels in such a short time period, DISCOMs in some states are not willing to honor the original PPAs or letters of intent signed for almost 3 GW of renewable energy capacity. The fate of 1.1 GW capacity hangs in balance in Andhra Pradesh, 250 MW in Gujarat, 900 MW in Karnataka and 500 MW in Tamil Nadu, according to CRISIL.

According to Prasad Koparkar, Senior Director at CRISIL Research, “In all, about 7 GW of solar projects tendered/ awarded at tariffs of Rs 5-8/unit over FY2015-2017 could be at risk. PPAs or letters of intent for these capacities in Uttar Pradesh, Andhra Pradesh, Karnataka, Telangana and Punjab were inked at tariffs 12 to 66% higher than the APPC of these states. Even in wind energy, 2 to 3 GW of projects which were allotted or had PPAs signed over Q3-Q4 FY2017 at feed-in tariffs are at high risk of renegotiation. Taken together, CRISIL Research believes, investments worth Rs 48,000 crore are currently at risk.”

If tariff renegotiations do take place, these would adversely impact the returns of wind and solar energy projects already constructed. According to CRISIL analysis, a 10 paise/unit reduction in tariff impacts the equity internal rate of return by 80 to 90 bps for wind power and by 150 to 160 bps for solar power.

All this could translate into lengthy court cases, a cautious approach of banks in lending for solar and wind projects and uncertainty in enforceability of contracts, cautions CRISIL.

However, the Government of India has apparently realized these issues and recently enforced new guidelines for solar power projects awarded through competitive bidding to ensure fairness and streamlining processes for all projects (see MNRE Issues New Guidelines For PV Projects).

CRISIL also points out the judgment of the Appellate Tribunal of Electricity in favor of PV project developers in 2013, which rejected Gujarat Urja Vikas Nigam Ltd.’s petition to lower PPA rates for commissioned solar capacities in Gujarat.

“Our analysis of standard PPAs in major states indicates contract termination is not legally allowed if there is no delay in project commissioning,” said Rahul Prithiano, director, CRISIL Research. Adding, “It is in the sector’s interest that the rates discovered through competitive bidding in a PPA already executed be honoured, given that it is a legally binding contract between two parties. Further, future PPA contracts need to be watertight, with specific clauses to safeguard developers from renegotiations.”

Anu Bhambhani

Anu Bhambhani is the Senior News Editor of TaiyangNews

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Anu Bhambhani