Renewable energy sector’s growth may be hit adversely if power distribution companies implement renegotiation or cancellation of signed power purchase agreements (PPA) with developers, rating agency ICRA has said.
The recent attempts by state-owned distribution utilities (discoms) in states like Andhra Pradesh, Karnataka and Uttar Pradesh to renegotiate or cancel signed power purchase agreements (PPAs) with wind and solar power developers are likely to have an adverse impact on the renewable energy (RE) sector, ICRA said in a statement.
If implemented, this would also impact the credit profile of the independent power producers (IPPs) and investment interest from the private sector in this sector, it added.
“Given the circumstances, significant uncertainty exists for wind-based IPPs, which have recently signed PPAs based on feed-in tariffs. The same is estimated to be about 830 MW in Andhra Pradesh and 490 MW in Karnataka,” Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings said.
However, Majumdar said that such cancellation or renegotiation if finalised by discoms may be legally challenged by the affected IPPs and the resolution of the same could be a protracted affair.
Besides, ICRA understands that the central government is trying to dissuade state discoms from such unilateral action on PPAs.
This apart, several PPAs tied-up by wind and solar power developers with state-owned discoms do not have any termination penalty clause related to any discom event of default.
Further, these PPAs usually do not have any deemed generation clause and are based on single part tariff – which is linked to actual generation.
As a result, the wind and solar energy projects with PPAs at a relatively higher tariff in comparison with average power purchase cost of the off-taker discom remains exposed to a risk of forced back-down / grid curtailment, a situation which has occasionally been seen in a few states in the past.
In the worst case scenario of PPA termination, such projects may be forced to opt for third party sale and/or sale to group captive customers.
The viability of this sale route would depend on the ability to identify third party customers, ability to provide discount on prevailing grid tariff and open access charges in the state.
The success of the reverse auction-based bidding mechanism in lowering the wind power tariffs under the 1000 MW scheme by Ministry of New & Renewable Energy (MNRE) has prompted the state-owned discoms to stop signing PPAs based on feed-in tariff and instead opt for the auction route.
However, the tendering process as announced by discoms in Gujarat and Tamil Nadu and the second 1000 MW scheme by MNRE is yet to be concluded, ICRA said.
“In this context, the visibility for actual wind-based capacity addition remains quite weak in near term. Nonetheless, long term demand drivers remain intact due to an improved tariff competitiveness of wind and solar energy against conventional energy sources, large untapped renewable potential and strong policy and regulatory support. However, the resolution of the PPA renegotiation / cancellation issue remains crucial to retain investor interest in the sector,” Majumdar added.