Tariff cloud over Rs 48,000 crore renewable projects

Aggressive bidding for renewable energy capacities appears to have started recoiling on the industry at large as distribution companies (discoms) call for renegotiation of the power purchase agreements (PPAs) they have signed in recent years at higher tariffs.

Also, discoms are known to use measures such as grid curtailment and payment delays to compel developers to offer discounts.

Bid tariffs quoted were as low as Rs2.44 / unit for solar power in May 2017, down 45 per cent compared with Rs4.43/unit in March 2016. While for wind power, the quoted bid tariff of Rs3.46 / unit in February 2017 was 17 per cent lower than the lowest feed in tariff of Rs4.16/unit in India.

This has prompted many discoms to openly voice their reservations on honouring the power purchase agrements (PPA) / Letter of intent (LoI) for nearly 3 GW. 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 recent bid tariffs.

Crisil Research has analysed factors such as the difference between PPA tariffs and average power purchase cost (APPC) in a state, the renewable penetration of a state and the financial health of discoms to assess the extent of the renegotiation risk.

Says Prasad Koparkar, senior director, CRISIL Research, ''In all, ~7 GW of solar projects tendered / awarded at tariffs of Rs5-8 / unit over fiscal 2015-2017 could be at risk. PPAs or letters of intent for these capacities, in Uttar Pradesh, Andhra Pradesh, Karnataka, Telangana and Punjab, were inked at tariffs 12-66 per cent higher than the APPC of these states. Even in wind energy, 2-3 GW of projects which were allotted or had PPAs signed over Q3-Q4 fiscal 2017 at feed-in tariffs are at high risk of renegotiation. Taken together, CRISIL Research believes, investments worth Rs48,000 crore are currently at risk.''

Crisil Research believes wind-based capacity additions are likely to fall to 1.5-2GW in fiscal 2018 compared with 5.5GW in fiscal 2017. Growth in solar capacity additions, too, is expected to be below the potential.

If discoms have their way, downward revision of PPA tariffs would adversely impact the returns of wind and solar energy projects already constructed. A 10 paise/unit reduction in tariff impacts equity internal rate of return by 80-90 bps for wind power and by 150-160 bps for solar power.

Concurrently, this could spark a spate of court cases and the essence of the National Solar Mission may be lost in delays. Banks, too, would be more cautious in lending to renewable energy projects, considering even discoms relatively strong financially are renegotiating PPA tariffs, without any legal grounds or force majeure conditions.

It also casts doubt on enforceability of contracts. This, at a time when India needs a whopping Rs6 trillion investments to meet its commitment of 175 GW of renewable energy power by fiscal 2022.

That said, Crisil Research believes there is a glimmer of hope in the decision of the Appellate Tribunal of Electricity, which had in 2013 struck down a petition of Gujarat Urja Vikas Nigam Ltd seeking to lower the PPA rates for commissioned solar capacities in Gujarat.

Says Rahul Prithiani, Director, CRISIL Research, ''Our analysis of standard PPAs in major states indicates contract termination is not legally allowed if there is no delay in project commissioning. Global experience, too, suggests as much. In Germany, for instance, despite, a fall in feed-in-tariff, there has been no instance of such renegotiations on long term contracts. It is in the sector's interest that the rates discovered through competitive bidding in a PPA already executed be honoured, given that it is a legally binding contract between two parties. Further, future PPA contracts need to be watertight, with specific clauses to safeguard developers from renegotiations.