Attempts by states to scrap power purchase agreements or renegotiate tariffs to take advantage of falling prices will hit the renewable energy sector hard and may trigger prolonged legal wrangles.
The tough bargain will affect the credit profile of independent power producers and is likely to dissuade the private sector from investing in solar and wind-based generation projects, credit rating agency ICRA said in a statement on Monday.
Andhra Pradesh and Karnataka are currently trying to strike off agreements with power suppliers or revise rates downward, Bloomberg had reported. In June, Uttar Pradesh cancelled deals with seven power projects with a cumulative capacity of 7,040 megawatts.
Given the circumstances, uncertainty exists for wind-based IPPs (independent power producers), which recently signed power purchase pacts based on feed-in tariffs, said Sabyasachi Majumdar, senior vice-president and group head, ICRA Ratings. Companies collectively supplying 1,320 MW to these southern states are going to be hit by this move.
Such cancellation or renegotiation by discoms may be legally challenged by the affected power producers and its resolution “could be a protracted affair”, said Majumdar.
The cost of electricity at spot exchanges is currently about Rs 2.5 per kWh (kilo watt hour), which is much lower than the average rate of Rs 4 per kWh finalised in the power purchase agreements between state-run distribution companies and new suppliers, according to Kotak Securities analyst Murtuza Arsiwalla.
The absence of a termination penalty clause has also pushed many wind and solar power producers on the back foot, said ICRA. Also, the agreements are usually linked to actual generation, another factor that affects their competitiveness now. In a worst-case scenario, such projects may be forced to opt for third-party sale, said the the rating agency.
In this context, the potential of wind-based capacity addition remains weak in near term, said Majumdar. Long-term demand drivers remain intact due to an improved tariff competitiveness of the wind and solar energy against conventional energy sources, large untapped renewable potential and a strong policy and regulatory support, he said. “The resolution of the PPA renegotiation/cancellation issue remains crucial to retain investor interest in the sector.”
Earlier, Piyush Goyal, power, coal, new and renewable energy and mines minister, had told BloombergQuint that some of the power purchase agreements had been executed in the past at very “irrational” prices. “States will have to discuss it with power suppliers and regulators and take a final call on that.”
The Indian Banks’ Association has also expressed concerns over a spike in bad loans due to the power push by states. Responding to the association’s request for his ministry’s intervention, Goyal recently said, “There is a legal process. They are concluded power purchase agreements and we will respect the rule of law. Every PPA will be respected in it.”
The agreements are state-specific and linked to state-owned tariff composition, said Ashok Khurana, director general of Association of Power Producers. “For any decision, the power companies will be following a due process of law.”
Source: bloombergquint
