Honouring PPAs

APERC disallows withdrawal of 41 wind contracts

Bringing relief to wind power developers in the state, the Andhra Pradesh Electricity Regulatory Commission (APERC) has issued an order, dated December 13, 2017, clarifying the status of 41 wind power purchase agreements (PPAs) signed with Southern Power Distribution Company of Andhra Pradesh Limited (APSPDCL). The PPAs had been signed for projects to be commissioned in 2016-17 for supplying power at the feed-in tariff determined by the commission.

On a request from the discom, the commission had allowed the former to withdraw the PPAs as they had been signed at a much higher tariff than that discovered in the reverse auction-based bidding undertaken by the Solar Energy Corporation of India (SECI). Against a tariff of Rs 3.46 per unit discovered in the auction, APSPDCL had signed the PPAs at Rs 4.84 per unit without accelerated depreciation (AD) benefit and Rs 4.25 per unit with AD benefit. However, in the December 13, 2017 order, the commission has stated that the developers should not be asked to put the clock back.

The commission has noted that it is not justifiable to withdraw the 41 wind PPAs aggregating over 800 MW of capacity as these are already injecting power into the grid. Moreover, the projects, set up under the state government’s Wind Power Policy, are supplying power at the tariff determined as per the APERC (Terms and Conditions for Tariff Determination for Wind Power Projects) Regulations, 2015.

Further, APERC has stated that any modification to the PPAs can be implemented only when it has been agreed upon by both the parties (discoms and developers) and approved by the commission. The order also states that the parties are at liberty to undertake any modification within the scope of the PPA. The commission has further directed the state discoms to not enter into any fresh PPAs for power supply based on any source, without the permission of the commission.

Background

In a letter dated March 3, 2017, APSPDCL had requested the commission to permit it to withdraw 41 PPAs that were awaiting the commission’s consent. The discom had stated that owing to technological advancements, the capacity utilisation factor of wind projects has become higher than that considered in the APERC (Terms and Conditions for Tariff Determination for Wind Power Projects) Regulations, 2015. Further, while wind power developers, Mytrah Energy and Inox Wind Infrastructure Services had both quoted a tariff of Rs 3.46 per unit in the reverse auction, they entered into PPAs with APSPDCL at tariffs of Rs 4.83 and Rs 4.84 per unit respectively.

Subsequently, the commission had allowed the discoms to withdraw the PPAs without considering them for consent. However, Orange Uravakonda, one of the 41 wind power developers whose PPAs were withdrawn, filed a case in the high court challenging the discom’s action, following which the high court directed the commission to resolve the issue within three months.  Apart from Andhra Pradesh, discoms in states such as Karnataka and Uttar Pradesh are also seeking PPA renegotiation. In October 2017, the Karnataka government had invoked Section 108 of the Electricity Act, 2003, and directed the commission to approve PPAs at the old rate of Rs 4.50 per unit.

Taking cognisance of the need to honour PPAs, the Ministry of New and Renewable Energy in a letter to principal secretaries, energy of various states stated that it is not appropriate to go back on contractual agreements as it would create uncertainty in the wind segment. The NITI Aayog too reiterated that governments should not go back on contractual agreements and that state governments should issue directions under Section 108 of the Electricity Act, 2003, to honour the PPAs.

Implication

Regarding the cancellation of PPAs by APERC, India Rating and Research has in its recent report stated, “The abrupt move to halt the payments stressed the liquidity profile of a project and has possibly wiped out its debt service reserve. Plants that commissioned operations after the Andhra Pradesh discom request in March 2017 continue to supply power without payments. Given that the wind season concluded recently, continued payment delays could eventually result in debt servicing delays.”

Dishonouring PPAs could adverselyimpact investor sentiment and result in the building up of non-performing assets in the renewable energy sector. Since a PPA signifies the commitments that must be respected by the parties (buyer and generator), banks and lenders lend on the basis of these agreements. Besides, the majority of PPAs allow for the termination of agreements only when the generator fails to deliver the quantum of power indicated in the PPA for a continuous period of time or fails to pay the dues to the offtaker. However, the option of PPA termination owing to the cost of power is usually not present. Further, power producers may legally challenge the cancellation of PPAs by discoms and its resolution could involve prolonged proceedings.

To conclude, honouring of signed contracts is of utmost importance to maintain a positive sentiment among investors and private developers in the renewable energy sector. It is also essential to do so in order to ensure that the country’s ambitious renewable energy targets are met.

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