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Opinion | Revisiting PPAs- Déjà vu

Opinion | Revisiting PPAs- Déjà vu

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  • The utility in citing public interest for revisiting a contract must adhere to the basic principle of negotiation- making out its case

  • The larger systemic concern however should be balancing utility interests with those of renewable IPP’s

New Delhi: Its gloom and doom once again. Another state, this time Andhra Pradesh (AP), wants to terminate renewable energy power purchase agreements (PPA’s) citing comparatively high cost, inability to pay and system issues related to grid stability and idling conventional capacity. While the courts have rightly restored status quo for now its an opportunity to address the issue once and for all as India embarks on an energy transition.

A prima facie look at the government order (GO) and a carte blanche approach to renegotiation is not just arbitrary but devoid of any due process. Specifically, the PPA’s on wind and solar do not have a direct clause for renegotiation and projects awarded through a competitive auction have price discovery through a defined and pre agreed process. This leaves the feed-in-tariff (FIT) projects and competitively awarded projects where due process or discrepancies in award, commissioning , delays and/or extensions could provide a just ground to not only renegotiate but penalize and /or terminate PPA’s provided the state/utility is able to make its case on a project or developer specific basis and prove so in a court of law.

The utility in citing public interest for revisiting a contract must adhere to the basic principle of negotiation- making out its case. Citing high cost and inability to pay doesn’t hold ground because the cost of renewables is a pass through in the average revenue requirement (ARR) by the State Electricity Regulatory Commission (SERC). Idling thermal capacity applies equally and grid related challenges could open up a pandoras box around system planning and approval processes. Yet, AP in this case and other renewable energy endowed states in the future would have to find a solution to absorbing and paying for renewables.

As a start, the utility should first and foremost look into the FIT projects and the due process followed in allocation from MoU signing to PPA. If the utility can make and substantiate a project, site or developer where due process in allocation or commissioning was not followed it would be well within its rights to not only cancel but seek damages. This should include timelines, particularly commercial operation date (COD) extensions and transfers of ownership rights where explicitly restricted in terms of capacity allocation. Similarly, on the competitively awarded projects timelines and equity dilution are explicit PPA grounds for termination and a thorough diligence would help the state make a case for project specific relief than a systemic one. The revisiting of imported coal PPA’s is a precedent and the state needs to demonstrate its commitment and intent to see it through.

Lest this be misconstrued for a witch hunt it would also worthwhile to examine why the process of FIT was adopted and pushed particularly when the central and state programs with auctions at the same time was a success. The discretion in site allocation, interconnection approvals and commissioning flexibility exercised without due process must not be wished away and documented as reference for future and now.

The larger systemic concern however should be balancing utility interests with those of renewable IPP’s. The states largely been unable to provide the subsidy to utilities and resultant shortfall should lead to many more such challenges across states. It is ironic that while the state would like to renegotiate PPA’s there is considerable demand and investor appetite for renewable PPA’s in the similar price band. Similarly, just like AP there are other states where the renewable procurement exceeds renewable purchase obligations (RPO) and despite the pass through the noises are all too familiar. To be fair to AP, the state has tried to address a systemic issue of legacy costs and intermittent power head on but wrong in its approach, rather than protracted approaches of reduced grid availability or delayed payments cycles to tide over utility working capital. Long term renewable contracts are not only between us the living but also those yet to be born and the least we could do is try and make it full proof.

Source: livemint
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Anand Gupta Editor - EQ Int'l Media Network