PPAs Rule

Andhra Pradesh High Court upholds the sanctity of contracts signed by renewable energy developers

Setting a precedent for other states and safeguarding the interests of re­newable energy developers and investors, the Andhra Pradesh High Court has, in a landmark order, upheld the san­ctity of power purchase agreements (PPAs) between developers and discoms. In its latest order, dated March 15, 2022, on the issue of PPAs being renegotiated by the Andhra Pradesh government citing poor discom health, the high court stated that the terms of the PPA cannot be alter­ed and that the tariff cannot be renegotiated unilaterally. The order overturns the previous order, dated September 24, 2019, whi­ch was passed by a single judge ben­ch of the Andhra Pradesh High Court, per­mi­tting the renewable energy developers to pay an interim tariff that was half the rate agreed to in their contracts for all future and pending bills.

The development comes as a big relief for renewable energy developers and puts an end to a long-drawn legal battle between them and the state discoms. Not only had payments for various projects been pen­ding since the PPA renegotiation procee­dings were initiated, but, reportedly, a few projects had also been declared non-performing assets by the lenders.

Key details of the current order

The current order sets aside the earlier order that had fixed an interim rate or in­terim tariff of Rs 2.44 per unit for solar power and Rs 2.43 per unit for wind po­wer for payment of all pending and fu­ture bills of the petitioners. Instead, the discoms have been directed to pay all pending and future bills at the rate mentioned in the PPAs. The payment of arr­ears/pending bills has to be made within a period of six weeks from the date of the order.

The high court noted that the financial difficulty of the government or the discom is no ground to allow modification of the PPA or to reduce the tariff. The previous order fixing the interim tariff did not app­ear to be proper and in accordance with the law, it further noted.

With regard to the maintainability of the petitions filed by the state discoms be­fore the Andhra Pradesh Electricity Re­gulatory Co­mmission (APERC) seeking tariff red­uc­tion and amendment to the applicable tariff regulations retrospectively, the high court noted that the tariff discovered th­ro­ugh the competitive bidding process ca­nnot be negotiated/mo­dified. “Determi­na­tion of tariff at a particular point of time is based on the Wi­nd Power Policy of the go­vernment, both central and state, as also other nodal ag­encies at the relevant point of time and the prevailing market conditions and a host of other factors. If the Tariff Order is su­bject to review, as and when some parameter or some market co­ndi­tion is changed, then, there will be policy uncertainty, discouraging inves­to­rs, inclu­ding global investors, to come forward for the development of renewable energy, whi­ch is one of the thrust areas to reduce carbon emissions and global warming,” the high court added in its latest order.

On the curtailment of renewable power, the high court has directed the discoms to not take any coercive steps, such as curtailing production and restricting re­new­able power evacuation, without pri­or due notice to the generators. Up­holding the de­cisions passed in the order dated Sep­tember 24, 2019, the court remarked that renewable energy plants have must-run status and are therefore not subject to merit order despatch.

Summary of the PPA dispute

Back in 2015, the discoms had entered into PPAs for 500 MW of grid-connected solar photovoltaic projects in Andhra Pradesh with bidders selected through the competitive bidding process, in line with Section 63 of the Electricity Act, 2003. The tariff adopted by the APERC in accordance with the PPAs was Rs 5.99 per kWh for the first year.

In 2019, the energy department of the Go­vernment of Andhra Pradesh constituted a high-level negotiation commit­tee (HLNC) to review, negotiate and bring down wind and solar power purchase prices on the grounds that the discoms were in a financial crisis with huge power purchase dues. The Andhra Pradesh government, in a review meeting of the energy department, decided to issue recovery notices for losses caused to the discoms and the government on account of the high tariff, to challenge the must-run status of solar power plants and keep thermal plants/other energy sources on sta­nd­by if there is any disruption in wind/ solar power supply during or after negotiations, among other things.

Taking cognisance of the decisions of the Andhra Pradesh government, the ce­­n­tral government, the Ministry of Power and the Ministry of New and Re­newable Energy is­s­ued a letter on July 9, 2019, urging the Government of Andhra Pra­de­sh to act in a fair and transparent ma­n­n­er, and in accordance with the law. The central government reiterated that PPAs are contracts that are binding on all signatories and it is against the law to cancel PPAs. Besides, dishonouring PPAs would inhibit investments in the state. Notwithstanding this, the energy de­partment in the state constituted an HLNC to review and negotiate the high wind and solar power purchase prices under the PPAs. The discoms also issued letters to the petitioners, dated July 12, 2019, seeking a reduction in tariff, failing which the PPAs would be terminated. Notably, however, the payment of energy bills continued to be neglected from May 2018 onwards and were kept pending.

Various solar and wind power developers approached the high court by way of writ petitions challenging the decisions of the state government. A single judge issued an order on September 24, 2019, upholding the prayers of the developers and qu­a­shing the instructions issued by the An­dhra Pradesh government to renegotiate the tariffs. The judge stated that the terms of the contract/PPA did not permit unilateral alteration or any al­teration at the be­hest of a third party. However, in order to deal with the issue of payment dues and the financial quagmire, the jud­ge directed the discoms to pay the pending and future bills at an interim rate of Rs 2.44 per unit for solar power and Rs 2.43 per unit for wind power till the dispute was resol­ved by the APERC.

Impact on the sector

Upholding the sanctity of the PPAs, the latest Andhra Pradesh High Court order is a big positive for renewable energy de­velopment in the country and inves­tor confidence in the segment. Girish­ku­mar Kadam, senior vice-president and co-group head, corporate ratings, ICRA, explains: “The order issued by the An­dhra Pradesh High Court up­holding the sanctity of the signed PPAs is a significant, positive development for the rene­wable energy sector and will provide major liquidity relief for the affected IPPs in the state. The pending resolution of the PPA tariff renegotiation matter has been a key concern for the renewable en­ergy sector and has, in turn, affected the credit profile of wind and solar IPPs in the state, especially entities belonging to relatively weak sponsor groups. How­ever, timely implementation of the high court order by the discoms remains a critical monitorable factor, given the weak financial profile of the discoms in the state, marked by continued losses and a large debt dependence.”

ICRA research estimates that based on the directive of the Andhra Pradesh High Court, the incremental impact on the po­wer purchase cost is estimated at about Rs 105 billion due to the build-up of dues arising out of the difference bet­ween the PPA rate and the interim rate over the past three years. While the discoms have been directed to make payments of the arrears/ pending bills at the rates mentioned in the PPAs within a period of six weeks, timely implementation remains to be seen.

Outlook

What will be crucial now is the on-ground implementation of the court’s directive in terms of timely payments of dues to deve­lo­pers. Also, in case the or­der is challenged in the higher court of law, the legal battle on PPA renegotiation could stretch further. These developments will need to be monitored closely.

That said, the decision of the Andhra Pradesh High Court will give a major fillip to investor confidence in the renewable energy sector as it reinforces the sa­nctity of PPA contracts. This will not only improve the liquidity position of developers but also deter other states from reneging on PPAs and payment delays.

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