Renewables Roadblock: Discoms’ reluctance to sign PSAs slows down project development

Discoms’ reluctance to sign PSAs slows down project development

India has set an ambitious target of developing 175 GW of installed renewable energy capacity by 2022 and 450 GW by 2030. To achieve these targets, a lot of work needs to be done, especially in the wind and solar sectors. Currently, the cumulative installed capacity of wind and solar power in India stands at around

39 GW each. Further, about 50 GW of clean energy capacity is at various stages of implementation and another 27 GW is in the tendering process. The pace of development over the past three years may not be enough to meet the country’s ambitious targets. Thus, there is a need to remove the bottlenecks in India’s renewable energy set-up.

One of the major deterrents to the development of new solar and wind projects is delays in signing power sale agreements (PSAs) by distribution companies (discoms). Intermediary procurers, such as the Solar Energy Corporation of India (SECI), sign power purchase agreements (PPAs) with developers well before the signing of PSAs with discoms. In recent years, however, intermediary procurers  have been struggling to find end buyers. This is because the state utilities have been reluctant to sign PSAs (and PPAs), anticipating a further reduction in tariffs.

Further, state-owned discoms remain far behind on their renewable purchase obligations (RPOs) set by the central government due to technical and economic challenges. JMK Research’s latest report titled “India’s Power Sale Agreement Hold-Up: Fixing a Renewable Energy Bottleneck”, presents the reasons for delays in signing PSAs and suggests potential solutions that could improve the pace of renewable energy development in India.

Renewable Watch presents highlights from the report…

Going back on tariff terms

In the past couple of years, there have been several instances where projects have been retendered or even cancelled due to seemingly high tariffs. As per JMK Research, seven projects by SECI with a cumulative capacity of 18.9 GW remain suspended indefinitely due to unsigned PSAs. Solar plus manufacturing tenders represent 63 per cent of this capacity, followed by plain vanilla solar, hybrid and storage-integrated renewable energy projects, which represent 17 per cent, 11 per cent and 7 per cent of the total suspended capacity respectively.

The first notable instance of the trend was in July 2019, when the Andhra Pradesh government announced that it would review PPAs between the state discoms and power generators to renegotiate tariffs. The government justified its decision by citing the poor financial status of state discoms with unpaid dues to renewable power generators of about Rs 200 billion and accumulated losses of about Rs 150 billion. Eventually, in February 2020, the Appellate Tribunal for Electricity ruled that discoms were prohibited from revising the tariffs. The Punjab government, in June 2020, requested a discount on power tariffs from solar power developers with effect from the subsequent month citing financial troubles due to the Covid-19 lockdown.

With solar and wind projects in Gujarat discovering record lowest (L1) tariffs at regular intervals, state discom Gujarat Urja Vikas Nigam Limited (GUVNL) has been involved in a fair share of contract renegotiations. Two months after GUVNL awarded capacities under its auction for 1,000 MW of wind power projects (Phase II-R) in the state, the discom asked all the bidders to match the L1 tariffs discovered in the auction, failing which the letter of award would be withheld. More recently, GUVNL rescinded a power purchase contract for the 700 MW Dholera solar park auction, which recorded winning tariffs of Rs 2.78-Rs 2.81 per kWh. The discom has now retendered the capacity to discover lower tariffs.

Slowing down progress

Delays in signing PSAs have impacted the entire value chain as the schedule and activities of all players in the market were disturbed. For developers, delays in execution or the possibility of project cancellation increase business uncertainty. The viability of projects may be severely threatened if hedging risks owing to delays in the execution of PSAs are not accounted for in determining the bid price, especially if there is currency depreciation during the delay period. Further, fluctuations in the module price during and post the delay period could adversely impact project viability. With discoms accepting only record low power tariffs, developers need to revaluate their risk appetite. This also makes it difficult for developers to secure debt financing from relevant institutions. Debt financiers, too, are reluctant to invest in the Indian renewable energy sector owing to past experiences of delays in project execution. Similarly, equity investors have been concerned about the performance of future renewable energy investments.

The biggest reasons for the delay or cancellation of tenders are falling tariffs and the poor financial performance of discoms. Solar tariffs in India have fallen by 75 per cent over the past seven years, largely driven by falling module prices, increased availability of low-cost funds, and the introduction of competitive bidding. As ceiling tariffs were removed for new solar and wind tenders in February 2020, the bids quoted in auctions fell from the range of Rs 2.50-Rs 2.87 per kWh to Rs 1.99-Rs 2.97 per kWh.

Potential solutions

To avoid delays in the signing of PSAs, discoms must be incentivised. In 2018, the Ministry of Power mandated that all state discoms must purchase 21 per cent of their total power demand from renewable energy sources (10.5 per cent each from solar and non-solar power) by 2021-22. Most utilities are well behind on this target as the current penalties for the non-fulfilment of RPOs are ineffective, which have resulted in non-compliance in many states. The amendments proposed to the penalties in the draft Electricity Act (Amendment) Bill, 2020, could potentially improve compliance. As per the document, a penalty of Re 0.50 per kWh of shortfall in generation will be imposed for failure to meet RPOs in the first year. This penalty will be increased to Re 1 per kWh for shortfall in the second year of default and to Rs 2 per kWh from the third year. The proposed amendments also aim to ensure the sanctity of contracts. This involves the setting up of a central enforcement authority, which will be responsible for enforcing the purchase, sale, or transmission of power between generating, distribution, and transmission companies. This will ensure that all parties carry out their respective contractual obligations.

Although several SECI tenders have been delayed, a few strategies have worked for the nodal agency. For example, taking the weighted average of tariffs discovered in auctions every six months to determine a composite pooled tariff has proved to be a desirable prospect for discoms. Further, based on the MNRE guidelines for tariff-based competitive bidding for the procurement of power from grid-connected wind-solar hybrid projects, SECI has included a clause that allows the agency to cancel a project if a PSA is not signed within six months of the issue of the letter of award. This could potentially limit delays in project execution. If there is a change in the market scenario that could significantly impact the average cost of generation, tariff renegotiation can be viewed as a solution. However, these specific market conditions must be well defined to ensure that the option is not misused.

Going forward, prior planning can go a long way in avoiding a large backlog of incomplete projects. It will ensure that the power is purchased and requisite approvals from discoms and state electricity regulatory commissions are obtained well before the auction is conducted. Further, the issuing agency, before launching new tenders, must ensure that any existing unsigned PSAs are closed. An integrated renewable energy planning system can go beyond RPOs to improve the integration of renewable energy into the national grid by distribution utilities. This would require each discom to present a long-term plan highlighting the total renewable power capacity it wishes to purchase each year based on electricity demand projections in its area.


Delays in signing PSAs by discoms have led to a slowdown in the pace of renewable energy capacity addition in India. As it stands, the country will find it difficult to meet its ambitious target of 175 GW of renewable energy by 2022. Although intermediary procurers like SECI have led the way in greening the grid, almost 19 GW of projects have been suspended as the agency has failed to sell the power to the state discoms. There is a constant expectation on the discoms’ end that tariffs can always fall further due to the declining module prices. This expectation is driven by a level of caution in signing PPAs due to their poor financial status. This has lowered the morale of developers and investors.

Discoms can be incentivised to sign PSAs/PPAs with stricter penalties and better planning. Further, there must be an option for tariff renegotiation when justified. It must also be noted that with the recent mandate of 40 per cent basic customs duty on imported solar modules and 25 per cent on imported solar cells from April 1, 2022, tariffs are expected to increase to 45-50 paise per kWh in the short term. Further, with an expected increase in electricity demand in 2021 and the shutting down of old thermal power plants, delaying renewable energy projects will be a huge lost opportunity for discoms. Thus, discoms need to revaluate their expectations while purchasing power. It is equally important for the central government to implement effective policies that incentivise discoms to purchase power from SECI and other intermediary procurers.

Based on JMK Research’s report, “India’s Power Sale Agreement Hold-Up: Fixing a Renewable Energy Bottleneck”