PPA revisit in Andhra Pradesh will impact solar investment: India Ratings

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According to India Ratings and Research, Andhra Pradesh discoms have accumulated payables of over eight months for 474 MW of power purchased from solar and wind projects in its portfolio. If the projects continue to be unpaid, the tariff renegotiation process will further delay payments until the renegotiations conclude.

The Fitch Group owned ratings agency considers PPA renegotiation or cancellation to be an event risk and a deviation from normal business proceedings, as these are not embedded in the contracts.

Andhra Pradesh, one of the leading states in using renewable energy, has more than 7,700 MW of solar and wind projects. “Given the already weak funding atmosphere for infrastructure assets, any misstep such as renegotiation of contracts not only creates anxious times for the sector but also magnifies the risk a project could undergo during its PPA tenure,” Ind-Ra stated.

Notwithstanding the outcome of the committee decision, reopening of PPAs will dent investor sentiments. Additionally, banks will be forced to recognise these assets as non-performing if payments are stopped, thereby creating further stress for the lending sector.

IPPs face greater uncertainty

Andhra Pradesh Electricity Regulatory Commission (APERC) in its FY20 tariff order has approved average power procurement cost of Rs4.00/kWh. Renewable energy constitutes 24% of approved FY20 power purchase at the rate of Rs4.59/kwh.

While it is unclear from the state government order whether the negotiations will be done for feed-in tariff projects or for reverse-bidding based projects or both, Ind-Ra believes that significant uncertainty exists for wind-based and solar-based independent power producers, whose tariffs are higher than the weighted average power procurement cost of discoms (Rs4.46/kWh in FY18).

However, such cancellation or renegotiation, if finalised by discoms along with the state government, may be legally challenged by the affected IPPs. Legal notices and law suits from either party will aggravate the obstacles faced by the projects and affect the financial profile of the emerging renewable energy sector.

The government order                                                                    

The Government of Andhra Pradesh, though its order dated July 1, decided to constitute the committee after reviewing the financial crisis of Southern Power Distribution Company of Andhra Pradesh Limited and Eastern Power Distribution Company of Andhra Pradesh Limited—discoms with power purchase dues amounting to Rs200 billion. The government order adds that the need to review and renegotiate the exorbitantly-priced wind and solar PPAs arises to provide affordable power to consumers and to pull discoms out of their financial distress.

The two discoms have not sought any tariff hike for FY20 and the same has been approved by APERC. FY20 is the second successive year without any tariff hike. The increasing dependence on subsidy has rendered Andhra Pradesh discoms vulnerable to the finances of the state.