India’s attempt to renegotiate PPAs threatens investor sentiment

The state of Andhra Pradesh is expected to fail in its attempt to renegotiate PPAs, but market sources fear a drawn-out court battle could still prove damaging.

Plans to renegotiate PPAs for renewable projects in the Indian state of Andhra Pradesh could damage investors’ confidence in the overall Indian renewables market, according to analysts.

“Investor sentiment has been impacted quite badly by the push from the [Andhra Pradesh] government to renegotiate PPAs,” Girishkumar Kadam, senior vice-president and sector head at credit rating agency ICRA, told Infrastructure Investor.

“The apprehension mainly comes from the fact that similar moves can be replicated by any other state.”

Last month, the state executive created a committee to renegotiate offtake agreements between independent power producers and state-owned distribution companies signed by previous governments, local media reported.

“Should the [Andhra Pradesh] government remain a silent spectator to the burden of [hundreds of billions of rupees] imposed annually on the state treasury?” the government said, according to reports.

The state, which has been at the forefront of India’s booming renewables market, currently has 7.7GW of installed wind and solar capacity.

As of July, the two state-owned distribution companies involved in the renegotiation talks accumulated payment delays for power purchases amounting to 200 billion rupees ($2.8 billion; €2.5 billion), a report from credit rating agency India Ratings & Research said.

PPAs that include tariffs above the weighted average power procurement cost of 4.46 rupees per KWh for 2018 will be targeted, the report said.

Despite this, an industry source said independent power producers were unwilling to revise subsidies agreed in previous years.

“Renewable companies have been very clear that they will not negotiate, and we expect the matter to be resolved judicially or through the intervention of the central government,” the source said.

The source argued that tariffs from previous years, decided either by an independent regulator or through competitive bidding, were adequate at the time. “The technology costs have gone down since then and comparing them with tariffs being issued today is not fair,” this person added.

The state’s high court has blocked the government’s push to scrap PPAs and scheduled a hearing on the case for 22 August.

Although the sources believe the judiciary will ultimately rule in favour of the renewables industry, they warn that a lengthy court process that could reach India’s Supreme Court will have a negative impact on the industry.

“There is going to be a receivables build-up for the IPPs, impacting their liquidity,” Sabyasachi Majumdar, senior vice-president and group head at ICRA, said.

The industry source similarly said smaller energy producers operating in the region, with a less diversified portfolio, could be facing bankruptcy if the situation doesn’t improve soon.

According to data from ICRA, payments to independent power producers from local offtakers in the state were delayed by as much as eight to 10 months by the end of June.

Majumdar said the only sustainable solution to improve the financial position of state-owned distribution companies requires timely payment of subsidies from the government and increasing consumer rates. “[The latter] decision is more politically challenging than renegotiating the contracts [with IPPs],” he added.

The source warned that current efforts to renegotiate offtake agreements in Andhra Pradesh might derail the Indian government’s efforts to reach its target of 175GW of renewable energy by 2022. “Regulatory issues raised by the Andhra Pradesh state can ultimately become an obstacle to the [central] government target,” the source said.

The Indian government said in July that the country has 80.4GW of renewable energy capacity, including 29.5GW of solar energy and 36.3GW of wind energy, local media reported.