PPA renegotiation by state discoms to have adverse effect on RE sector

Mumbai: The recent attempts by the state discoms in Andhra Pradesh, Karnataka and Uttar Pradesh to renegotiate or cancel signed PPAs with wind and solar power developers are likely to have an adverse impact on the renewable energy (RE) sector, says ICRA.

According to the rating agency, if the decisions taken by these state discoms are implemented, it would also impact the credit profile of the independent power producers (IPPs) and investment interest from the private sector in this sector.

"Given the circumstances, significant uncertainty exists for wind-based IPPs, which have recently signed power purchase agreements (PPAs) based on feed-in tariffs. The resolution of the PPA renegotiation or cancellation issue remains crucial to retain investor interest in the sector," ICRA Ratings Senior Vice President and Group Head Sabyasachi Majumdar said.

The wind capacity in the states like Andhra Pradesh and Karnataka is around 830 MW and 490 MW, respectively. "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, the Central government is trying to dissuade state discoms from such unilateral action on PPAs," he said.

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 or grid curtailment, a situation which has occasionally been seen in a few states in the past," Majumdar said.

He further stated that 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.

ICRA noted the success of the reverse auction-based bidding mechanism in lowering the wind power tariffs under the 1,000 MW scheme by Ministry of New and 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.

"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," Majumdar added.