Global analytics company CRISIL estimates around 5.2 GW of renewables capacity are 'under stress' if the Andhra Pradesh (AP) state government is able to go ahead with its move to review and bring down purchase cost of wind and solar power in the Indian state. This would escalate the problem of delayed payments from distribution companies (discoms) and expose the 5.2 GW capacity to an estimated debt of over INR 210 billion ($3.04 billion).
It fears that close to half of this capacity around 2.6 GW is at higher risk of default as it lacks liquidity support beyond project level.
"Around 5.2 GW projects out of 7.5 GW in AP are supplying power to state discoms under long-term power purchase agreements (PPAs) at pre-determined tariffs," said CRISIL Ratings Senior Director Manish Gupta. "They now face renegotiation risk given that their tariffs are above the recent auction prices of below INR 3 ($0.043) per kWh for renewable projects and average power purchase cost of INR 3.8 ($ 0.055) per unit in AP in fiscal 2019."
Projects of around 2 GW under interstate transmission system (ISTS) – where central government agencies as the National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India (SECI) are counterparties – are relatively safe since the latter pay developers from their pooled cash flows.
If the state government goes ahead with its plan, it is likely to be dragged to the courts where judgements may take time and eventually leading to further delays in payment for renewable power generation. CRISIL recommends a quick resolution as a necessity 'to prevent vitiating of investor confidence in the sector, which is crucial to achieving the central government's goal of 175 GW renewables capacity by fiscal 2022'.
The Reddy government has directed a high-level negotiation committee to renegotiate agreements and submit its report to the state in 45 days.
As per the Indian Ministry of New and Renewable Energy (MNRE), total grid-connected renewable capacity of Andhra Pradesh till June 30, 2019 was over 8 GW with solar adding over 3.3 GW and wind another 4.09 GW.
Background
Elected to power post May 2019 elections, Andhra Pradesh's new Chief Minister YS Jagan Mohan Reddy ousted incumbent Chief Minister N Chandrababu Naidu and his party from power. In an announcement made on July 1, 2019 that surprised one and all, the state government said it will review power purchase agreements (PPAs) and tariffs negotiated with power generators and compare these with power prices at the time of awarding contracts under the administration of the previous government.
Its explanation is that state discoms are already under financial stress to pay more. At the same time it alleged the previous government developed more than 5% renewable power purchase obligation (RPPO).
According to Mercom India Research, Andhra Pradesh's government claims that state discoms have unpaid dues to renewable power generators going up to INR 200 billion ($2.9 billion) with accumulated losses of about INR 150 billion ($2.2 billion).
Pleas and warnings from RK Singh, heading the central Ministry of New and Renewable Energy (MNRE), to the state government to refrain from any such move has been ignored.
Nonetheless, NTPC and SECI have reportedly denied renegotiation of tariffs from solar power plants and threatened to sue the state discoms.
Mercom Capital Group CEO Raj Prabhu sees the 'entire mess' heading to the courts if the state government does not heed the advice of the MNRE head which would mean the judiciary will have to step in to reiterate the sacrosanct nature of signed contracts. It will allow the industry and investors to go about doing their business without 'clouds of uncertainty'.
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