AP High Court order upholding the sanctity of solar PPAs a positive news but timely implementation remains critical, says ICRA


In the matter of power purchase agreement (PPA) tariff renegotiation, the High Court of Andhra Pradesh (AP) has set aside its previous order fixing a reduced interim tariff for solar and wind power and has instead directed the State Discom to pay the developers at the rate mentioned in the power purchase agreement.

The AP High Court, in its order dated September 2019, had ordered the AP state distribution utilities (discoms) to pay the RE developers at a reduced interim tariff of INR 2.44/kWh for solar power and INR 2.43/kWh for wind power instead of the PPA tariff. 

The HC, in its latest order, has thus reinforced the sanctity of PPAs signed between the wind and solar power producers and state discoms. It has directed the state discoms to honor the terms of the signed PPAs and clear pending payments as per the agreed PPA tariff within six weeks from the date of the order. 

Girishkumar Kadam, senior vice president and co-group head – Corporate ratings, ICRA, says the AP High Court order upholding the sanctity of the signed PPAs is a significant positive development for the renewable energy sector as it will provide a major liquidity relief for the affected independent power producers (IPPs) in the state. Pending resolution of PPA tariff renegotiation matter has been a key concern for the RE sector and, in turn, affected the credit profile of wind and solar IPPs in AP, especially the entities belonging to relatively weaker sponsor group.

He, however, flagged timely implementation of the HC order by the discoms as a critical monitorable, given the weak financial profile of the discoms in AP marked by continued losses and large debt dependence.

The HC order will directly impact the power purchase cost to be borne by the AP discoms. The tariff order issued by Andhra Pradesh Electricity Regulatory Commission (APERC) for FY2022 has an approved annual revenue requirement (ARR) for AP discoms based on an average RE purchase cost of INR 2.55/unit, considering the interim PPA rate. Based on the direction by AP High Court, the incremental impact on power purchase cost for AP discoms is estimated at about INR 10,500 crore, due to the build-up of dues arising out of the difference between the PPA rate and interim rate over the last three-year period. 

Commenting on the demand from the industrial segment, Vikram V, vice president and sector head – Corporate Ratings, said, “Assuming this additional power purchase cost is approved as a regulatory asset to be amortized over five years, the incremental impact on the cost of power supply for AP discoms is estimated at 54 paise/unit, thus reflecting an upward pressure of 8.5% on average retail supply tariff for AP discoms. As a result, timely and adequate tariff determination by the APERC for AP discoms also remains a critical monitorable. Notwithstanding the pressure on the cost of power supply, the average retail tariffs have remained unchanged for AP discoms as per the tariff orders issued since FY2019.”


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