Banks have redflagged the threat of renewable energy plants becoming nonperforming assets if states continue to arm-twist project developers to cut tariffs for old contracts that were signed when costs were higher.
In an August 9 letter to the secretary, ministry of power, the Indian Banks’ Association has urged prompt intervention on behalf of the developers and cautioned the government that such actions by state distribution companies (discoms) would discourage domestic and foreign investors as well as lenders in the sector. ET had on August 7 reported that the IBA may seek the Centre’s immediate intervention in the issue.
‘Renegotiation of PPA Worrying ’
At stake is the ambitious target to add 100 Gigawatts of solar energy capacity by 2022, which is required to fulfil India’s commitments in the Paris Climate Accord, the association said.
The problem arose following recent auctions for both wind and solar energy, which saw tariffs drop sharply, falling to Rs 3.46 per kwH in the case of wind in an auction conducted in February and Rs 2.44 per kwH for solar in an auction in May.
Since then discoms in Gujarat, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Karnataka and Jharkhand have been trying to renegotiate earlier power purchase agreements (PPAs) they had signed – or were about to sign – seeking lower tariffs, while developers have been resisting.
“After the recent auction for wind power projects, some states have started renegotiating for downward revision of tariffs,” VG Kannan, chief executive at Indian Banks Association, said in the note to the government.
He expressed concern at reports that state discoms were trying to renege on their commitments to solar projects awarded in the past at a higher tariff.
“Such action of states could result in a larger problem as solar projects implemented in the past at higher cost are not viable at lower tariffs being discovered in recent auctions,” Kannan said in the note.
“This is a worrying trend and would have serious negative consequences for several operational and viable projects as well as the sector at large. The loans taken by developers to set up capacity may become non-performing after cancellation/renegotiation of PPAs, adding to the burden on banks.”
The letter also referred to the Uttar Pradesh government’s decision in May to cancel PPA for setting up 3,800 MW of thermal power projects in the state. Association of Power Producers director general Ashok Khurana said discoms had no legal ground to walk out of a PPA. “Nowhere in the PPA is there a provision for termination on the ground of high/low tariff approved by the regulator,” he told ET.
The Indian Banks Association said cancellation of PPAs would lead to a spate of court cases. “Cancellation/renegotiation of PPAs is contrary to the basic premise of long-term loans extended on the strength and security of the PPA at a fixed price,” it added.“Banks have assessed the viability of a project at the price contracted in the PPA. If state governments backtrack on their PPA commitments, the related projects would become unviable and the underlying loans may not be serviced, rendering useful productive assets wasted.”
The letter urges the ministry of power to intervene with state governments and state discoms and get them to “honour their commitments” and stop trying to renegotiate signed PPAs.
“Developers should not be pressured to voluntarily offer reduction in tariff as it affects loan payments,” it said.