Don’t renege on PPAs; Room for renegotiation may be created, but with penalties

After all, states could default on the payments for power purchased, leaving the companies no better off.

After Andhra Pradesh, Gujarat and Uttar Pradesh, Punjab has reportedly had a run-in with producers of renewable energy. While AP is looking for a sharp cut in tariffs, Gujarat, while not cancelling a PPA outright, has suspended the signing of PPAs with winners for about 700 MW of capacity of solar capacity. In June, UP refrained from signing PPAs for 150 MW of solar power with the winners of the reverse auction held in February last year.

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Now, the Punjab Electricity Development Agency (PEDA) is reportedly trying to negotiate a reduction in tariffs with producers of wind and solar energy. To be sure, the tariffs negotiated by PEDA via the PPAs between 2013 and 2016 are much higher—closer to Rs 7 per unit—than the rates of Rs 2-2.60 per unit currently being discovered via competitive bidding. But these business decisions need to be honoured, the sanctity of contracts must be upheld. In the case of Punjab, revenues on close to 1,000 MW of solar capacity would be hit and so would be the finances of producers; it could lead to debt defaults to lenders.

A repeat of the events in Andhra Pradesh in mid-2019 is avoidable. At the time, the newly-elected government had unilaterally sought to revise PPAs (power purchase agreements) with producers of renewable energy with the objective of getting them to slash tariffs. In fact, even after the court’s stay the AP government did not back off and decided to go ahead with the review of some 8,000MW of capacity. The courts have taken way too long to resolve the matter; the matter is pending before the Amaravati High Court.

We need to respect capital, foreign and local; its absence could stall the target of 175 giga-watt of renewable energy capacity by 2022. It is not just renewable power, the Punjab government is understood to be looking to re-work PPAs for two thermal power plants. At one level, it does not seem altogether unreasonable that states want to renegotiate tariffs, given they are strapped for resources. Moreover, tariffs have collapsed in the past three or four years. But this poses a huge risk for the business, and companies would do well to provide for such risks in the agreement. After all, states could default on the payments for power purchased, leaving the companies no better off.

In this context, the Centre has shown resolve in disciplining state-run discoms that have failed to make their payment obligations on time. The power ministry recently invoked the rarely-used tripartite agreements between itself, RBI and the respective state governments. This was done on behalf NTPC to recover the power dues to the genco from Karnataka, Tamil Nadu and Jharkhand. This was a much-needed rap since states have, for long, have taken it for granted that the delays would be forgiven.

Despite several schemes to revive the health of discoms—all bankrolled by the Centre—the states have failed to reform themselves. Much like the state-owned gencos, private sector players too deserve to be protected. While room for renegotiations can be created in the agreements, some penal provisions need to be pencilled in. States must pay for wrong decisions, reneging on agreements is unacceptable.