Renegotiation of Power Sale Contracts in Andhra Pradesh Exerts Added Cashflow Pressure and Impairs Investor Confidence
India Ratings and Research (Fitch Group) – Renegotiation of Power Sale Contracts in Andhra Pradesh Exerts Added Cashflow Pressure and Impairs Investor Confidence
Indian: India Ratings and Research (Ind-Ra) believes the recent constitution of High Level Negotiation Committee (HLNC) by Government of Andhra Pradesh to review and renegotiate the signed power purchase agreements (PPAs) with wind and solar power developers has the potential to impair the cash flows of projects and may impact investor sentiments in the sector. State discoms have accumulated payables of over eight months in Ind-Ra’s portfolio and if continued to be unpaid, the tariff renegotiation process will open an avenue for further delay in the payments until the renegotiations conclude. Generally, stoppage of payments either precedes or succeeds a renegotiation process. Ind-Ra will, thus, monitor cashflows, liquidity buffers and the available sponsor support to the project developers and take rating actions accordingly. Ind-Ra’s portfolio has solar and wind projects selling 474MW power to Andhra Pradesh discoms.
Ind-Ra considers PPA renegotiation or cancellation to be an event risk and a deviation from normal business proceedings, as these are not embedded in the contracts. Andhra Pradesh, one of the leading states in using renewable energy, has more than 7,700MW of solar and wind projects. Given the already weak funding atmosphere for infrastructure assets, any misstep, such as renegotiation of contracts not only creates anxious times for the sector but also magnifies the risk a project could undergo during its PPA tenure. Notwithstanding the outcome of the committee decision, reopening of PPAs will dent investor sentiments. Additionally, banks will be forced to recognise these assets as non-performing if payments are stopped, thereby creating further stress for the lending sector.
Usually, states see renegotiation as insurance against the rising cost of power procurement and increasing power purchase dues. While it is not established by the government order G.O.RT.No.63 (GO) whether the negotiations will be done for feed in tariff projects or for reverse-bidding based projects or both, Ind-Ra believes that significant uncertainty exists for wind-based and solar-based independent power producers (IPPs), whose tariffs are higher than the weighted average power procurement cost of discoms (INR4.46/kwh in FY18). Andhra Pradesh Electricity Regulatory Commission (APERC) in its FY20 tariff order has approved average power procurement cost of INR 4.00/kwh. Renewable energy constitutes 24% of approved FY20 power purchase at the rate of INR4.59/kwh. However, such cancellation or renegotiation, if finalised by discoms along with the state government, may be legally challenged by the affected IPPs. Legal notices and law suits from either party will aggravate the obstacles faced by the projects and affect the financial profile of the emerging renewable energy sector.
As per the GO dated 1 July 2019, the Government of Andhra Pradesh took the decision to constitute the committee after reviewing the financial crisis of two discoms – Southern Power Distribution Company of Andhra Pradesh Limited (APSPDCL) and Eastern Power Distribution Company of Andhra Pradesh Limited (APEPDCL) – which have power purchase dues amounting to INR200 billion, as on 1 July 2019. The GO further adds that the need to review and renegotiate the exorbitantly-priced wind and solar PPAs arises to provide affordable power to consumers and to pull discoms out of their financial distress.
APSPDCL and APEPDCL have not sought any tariff hike for FY20 and the same has been approved by APERC. FY20 is the second successive year without any tariff hike. The increasing dependence on subsidy has rendered Andhra Pradesh discoms vulnerable to the finances of the state. Ind-Ra had highlighted these developments in Receivable Disruption from Counterparties More Frequent, to Impair Renewable Progress.
The GO has mandated that the HLNC be guided by benchmarks during negotiations that include: a) the lowest wind and solar energy rates in the corresponding years in the country, b) rates prevailing currently, and c) the opportunity cost for power from Andhra Pradesh Generation Company (APGENCO) projects, existing thermal contracts, and central generating stations allocations. The committee has been given 45 days to complete the negotiation and to submit its report to the government at the end of this period.
Just like Karnataka, Uttar Pradesh, Gujarat and Madhya Pradesh, Andhra Pradesh, too, has made various attempts in the past to revisit and renegotiate power purchase contracts. Earlier this year, state utilities of Andhra Pradesh had moved a petition before the APERC seeking consent for revisiting PPAs already signed with wind developers and to truncate the length of PPAs to five years from the existing 25 years. The distribution utilities also sought relief in the terms and conditions for tariff determination for wind power projects in the state between FY15-FY16 and FY19-FY20 and the tariff fixed by APERC. In March 2017, Andhra Pradesh discoms requested the state regulatory commission to not adopt the tariffs of 41 completed power projects (totalling over 800MW).
Earlier, in June 2019, Ministry of New and Renewable Energy (MNRE) instructed the Government of Andhra Pradesh to not revisit contractual agreements without any bonafide reason and to not create any uncertainty. However, the current proposal of state-supported disruption in PPA tariffs through renegotiations will adversely affect the investment climate in the state by dampening investor confidence and undermines the sanctity of PPA contracts.
PPAs are signed either under Section 62 or under Section 63 of the Electricity Act 2003. As per Section 62, the tariff is determined by the state regulatory commission in line with the Central Electricity Regulatory Commission (CERC). As per Section 63, the tariff is arrived at through a transparent, public, and competitive bidding process as per the bidding guidelines laid down by the MNRE.
Generally, renewable energy PPAs tied up with state-owned discoms lack termination penalty clause, do not have any deemed generation clause and are based on single part tariff which is linked to actual units of generation. Resultantly, renewable energy projects with PPAs at a relatively higher tariff, vis-à-vis average power purchase cost of the off-taker discom, remains exposed to a risk of forced back-down/grid curtailment – a situation that has been a common occurrence in a few states in the past.
In the worst-case scenario of PPA renegotiation or termination, such projects may be forced to sell either via merchant route or via group captive route. The viability of this sale route would depend on multifold factors like the ability to identify third-party customers or provide discount on the prevailing grid tariff and open-access charges in the state.
The renegotiation of PPAs is understandable, provided the utilities commence it prior to the lending by banks and investments made by project developers. However, for a project with significant operational track record, the renegotiation could dent its long-term debt serviceability and would necessitate additional liquidity buffers in the short term.
Given the central government’s ambitious target of installing 175GW of renewable energy capacity before FY22, these radical moves by state governments are sending confusing signals to the market. The renegotiation risk, if it becomes rampant across states, could pose a risk to generators, paving the way for the conversion of a healthy asset to non-performing asset.
Source: indiaratings.
