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Andhra Pradesh needs to relook its stand on cancellation of PPA contracts on wind and solar power

The Financial Express
Andhra Pradesh, YS Jaganmohan Reddy, andhra pradesh chief minister, chief minister jagan mohan

The Andhra Pradesh government is not altogether unjustified in wanting to review and re-negotiate the PPA contracts for wind and solar power. After all, while the tariffs negotiated in 2014-18 were between `4.7 and `4.8 per unit, the rates at which renewables projects are being signed today are much lower. Whether or not the tariffs were gold-plated, as has been suggested, is not known. But it would not hurt to review them because it is abundantly clear the AP government can't afford them.

Worse, as the state has argued, it needs to continue paying the fixed charge for thermal power even if doesn't draw the power; this hikes the cost of renewable power even more. Indeed, wind and solar power producers in the state are receiving their payments 8-10 months late. Under the circumstances, the state has been forced to draw less power from wind farms and take the drastic step of serving producers a notice.

Yet, asking producers to lower their tariffs under threat of cancellation, were they to refuse to do so, amounts to reneging on a contract. This is a dangerous practice, one that will erode the sanctity of contracts. At the central level, India already has a poor track record when it comes to honouring contracts with governments resorting to retrospective amendments, if they get adverse rulings from the court, so as to get their way. Ideally the contract needed to have built in a clause that allowed it to re-work tariffs at intervals; after all, 25 years would see several business cycles and it is difficult to forecast price and demand trends over such a long period of time.

As of now, the courts have stayed the state government's order but even if the judges ultimately rule that the government must uphold the agreements, it is not certain the state will agree since it cannot afford the power. Ideally, the two sides need to settle with the state paying a fine; should the matter not be resolved, Crisil estimates 5.2 GW of capacity of solar and wind assets could be in trouble, putting close to `21,000 crore of loans under stress.

The ratings agency noted the problem could delay payments by discoms to banks and an estimated `10,600 crore of loans to renewables could be at risk of default immediately. The central government needs to facilitate the negotiation instead of just preaching the virtues of not reneging on a contract; it is not blameless in the sad state the power sector is in since it has encouraged reckless populism that has bankrupted state electricity boards.