New Delhi, January 29, 2018

With prices falling at such a fast pace, financially beleaguered state-owned power distribution companies are reneging on contracts they had signed at higher tariffs

As tariffs tumble to record lows in both solar and wind power, there is also increasing concern of states going back on power purchase agreements (PPAs) signed at higher rates. Economic Survey 2018 has highlighted the need to revisit the current subsidy and incentive mechanism to avoid cases of PPA renegotiation.

"The discovery of very low tariffs through the auctioning process, though a welcome news, possibly contributed to some demands for renegotiation of the already signed PPAs. Some discoms have hinted at the possibility of renegotiating the PPAs signed by them at tariffs higher than those in the recent bids," said the survey.

During the past year, the solar tariff fell by 80 per cent to Rs 2.44 per unit, the lowest in six years. At the same time, competitive bidding was introduced in wind power, wherein tariff fell to Rs 2.43 per unit.

With prices falling at such a fast pace, financially beleaguered state-owned power distribution companies are reneging on the contracts they had signed at higher tariffs. In Tamil Nadu and Andhra Pradesh, discoms have cancelled PPAs signed just a year back. While Jharkhand is negotiating tariff, two years after awarding projects at ultra-high rates of Rs 6-9 per unit. Uttar Pradesh, on the other hand, has cancelled solar projects totalling 251 Mw citing high prices agreed to by the previous government.

The survey noted that renegotiation of PPAs was likely to face tough resistance from developers and might result in legal battles. "This introduces uncertainty for the sector, and banks, which are already facing the issue of NPAs, may become apprehensive of lending to the sector in the future. There are cases where the developers have already made huge investments into renewable energy projects based on the expected stream of revenue," it said.

The Centre has been pursuing the states to not cancel any further PPAs or rejig the tariff structure already agreed upon. Some states have been batting for short-term PPAs to insulate themselves from the long-term risk of fluctuating tariffs. The survey, however, has turned down this route citing increase in capital cost for power project developers.

It, however, said that affordable financing holds the key for financing sustainable energy projects. Risk-mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers could be a way forward, added the survey.

"Renewable energy has been placed under the priority sector lending and the bank loan for solar roof-top systems is to be treated as a part of home loan/home improvement loan with subsequent tax benefits. Currently, the levelised tariff is approaching grid parity. There is a case for revisiting the subsidies and incentives being given to the renewable energy sector," said the survey.

As more states take the route of revision of tariffs for renewable energy projects, as recent bids have gone ultra-low, the sector could see a major shakeup with close to 7 Gw under pressure. Ratings agency Crisil expects Rs 480 billion (48,000 crore) worth of project capacity to be under threat.

Many discoms have openly voiced their reservations in honouring the PPAs. These include Andhra Pradesh (1.1 Gw), Gujarat (250 Mw), Karnataka (900 Mw), and Tamil Nadu (500 Mw), which had signed PPAs/LoIs at feed-in tariffs or at much higher than the recently bid tariffs.

[The Business Standard]