In a move that spells bad news for the power sector, the Punjab government has issued a bill to renegotiate tariffs with independent power producers (IPPs) in the state. The state cabinet, in November 2021, unanimously passed the Punjab Energy Security, Termination of PPAs and Redetermination of Power Tariff Bill, 2021. The bill provides for referring renewable energy contracts totalling nearly 1 GW of capacity to the state regulator for tariff redetermination as well as the likely termination of agreements with the Nabha Power and Talwandi Sabo power plants. The bill has dampened investment sentiment in the state at a time when the central government is taking steps to encourage the development of renewable energy capacity to meet its ambitious COP26 targets. It has largely been termed unconstitutional by legal experts as it goes against the provisions of the Electricity Act, 2003, and is likely to be challenged in courts.
As per a note by Fitch Ratings, “Fitch believes that any attempt by a state government to renegotiate tariffs in its power purchase agreements will be unsuccessful and that such a move would deter private investment and derail the central government’s target of increasing renewable capacity in India to 500 GW by 2030. Nevertheless, the country’s judicial process can be drawn out, exerting liquidity pressure on developers.” The Punjab government’s stated objective to pass the bill is to provide affordable electricity rates to consumers, especially in the wake of declining renewable energy tariffs (the lowest solar tariff of Rs 1.99 per unit was discovered in Gujarat Urja Vikas Nigam Limited’s auction last year in December 2020). However, with elections round the corner in the state, the move seems to be largely aimed at appeasing the local populace without any consideration for contractual sanctity and investor sentiment.
Reportedly, PPAs with solar projects aggregating 886 MW and biomass projects totalling 97.5 MW will be impacted. These include assets owned by Azure Power, Adani Green and Acme Solar, which had signed PPAs with the state generation and distribution utility, Punjab State Power Corporation Limited (PSPCL), between 2013 and 2016. The bill asserts that the state electricity regulatory commission can redetermine renewable energy tariffs in the interest of consumers and determine provisional tariffs until they are finally redetermined.
However, this is not the first time that a state government has initiated tariff renegotiation. In 2019, the Andhra Pradesh government had issued similar orders for the review and renegotiation of existing PPAs between discoms and renewable energy generators. The government held that costly renewable PPAs financially drained discoms in the state. Currently, the state is mired in legal battles with a number of gencos. The power ministry has also written to the state government to respect the existing PPAs.
Industry response
As expected, the industry has negatively reacted to the bill and several affected companies are likely to soon initiate legal proceedings. Industry bodies have also condemned the move and written to the state government. The Association of Power Producers has written to the Punjab governor, stating that the state government’s efforts to renege on power contracts will jeopardise investments of Rs 270 billion as projects would be classified as bad loans or non-performing assets.
The National Solar Energy Federation of India (NSEFI) has also written to the President to withhold approval for the bill as it will render operational projects financially unviable. There are about 900 MW of operational solar projects in the state, entailing an investment of about Rs 70 billion. The long-term PPAs signed for the projects help the developers to repay their loans, vendors and staff, etc. Therefore, any change in tariffs now would mean a default in their contractual obligations. As per NSEFI, the landed purchase cost of solar is Rs 6.50 per unit, against the overall total power purchase cost of Rs 4.30 per unit. The overall energy generation from solar is only over 4 per cent of the total power consumption and the purchase cost impact works out to about Rs 0.06 per kWh, which is insignificant against the negative impact that breaching the sanctity of contracts would have on the overall sentiment of investors across the state.
Currently, sufficient information is not available on the proposed termination of PPAs or tariff redetermination under PPAs with Talwandi Sabo Power Limited and Nabha Power Limited. The two IPPs operate 1,980 MW and 1,400 MW coal-based power plants in the state respectively. There have been reports over the past few months that high fixed charges are being paid by PSPCL to IPPs despite not drawing commensurate power.
Conclusion
Punjab is the second state after Andhra Pradesh to initiate PPA renegotiations in recent years. The trend is a perilous one with a potential to jeopardise investment in the power sector. Since the returns of developers are directly linked to tariffs fixed under PPAs, a downward revision at a later date can lead to undue financial stress for project owners and deter future investment by IPPs. The courts may eventually rule in favour of IPPs, but lawsuits seldom deliver speedy judgments. Therefore, there is a need for frameworks that deter states from reneging on contracts.
Neha Bhatnagar
