Renewable Power Contract Renegotiations Continue to Affect Investor Sentiment

The renegotiation of tariffs under renewable power purchase agreements (PPAs) by quoting high tariffs is not an apparent option available with state discoms, says India Ratings and Research (Ind-Ra). Reportedly, state utilities have evinced interest in revisiting signed PPAs to capitalise on falling solar and wind tariffs. This has affected investor sentiments towards the fledgling renewable sector. Moreover, erratic counterparty behaviour has continued to reduce project cash in some states.

Ind-Ra considers PPA renegotiation or cancellation an event risk and a deviation from the normal course of business. Therefore, current ratings of entities do not factor in this risk.

Although solar cost per unit is higher than the average revenue requirement, wind cost procurement per unit is lower than the average revenue requirement, leading to an overall cash accumulation for discoms across the five sample states, except Telangana. With solar power tariffs rapidly declining and power procurement quantity from the solar space increasing in the next two years, the impact of earlier high solar tariffs on the financials of discoms could be completely eliminated.

The Ministry of New and Renewable Energy has instructed state discoms to abide by signed PPAs and not to create uncertainty. Some recent judgements of courts and regulatory commissions have tried to clear uncertainty over projects. However, disruptions through renegotiations in future cannot be completely ruled out.

Based on the contractual obligation and the firm nature of PPAs, many projects are keen to access the capital market independent of sponsors. Any signs of renegotiation or cancellation of PPAs would have an overriding impact on the fledgling infrastructure bond market.

The states see renegotiation as insurance against the rising cost of power procurement. Unlike road projects where debt and equity holders are covered through termination clauses, renewable project PPAs lack termination clauses and re-engagement of power sale is also not easy, thereby placing the loan recovery at risk for lenders. The upshot of state utilities' actions is a perfect recipe to turn performing assets into non-performing. Given that the debt service reserve is sufficient to meet not more than one quarter of debt service obligations in many cases, in the absence of working capital, the asset, would slip into the default category in less than six months, if payments are stopped by the utility.

India has a commissioned solar capacity of about 14GW and a commissioned wind capacity of about 30GW. Installed wind and solar capacity could entail a payout of about INR300 billion across several states, considering 80% of the power is bought by state utilities at INR5/kWh at a plant load factor of 20%. Therefore, the cash flow impact across states utilities may be immaterial for individual states.

Although there is no anecdotal evidence of cancellation of PPAs, there have been instances of lower-than-contracted payments or grid curtailments. There is no direct evidence of PPA cancellation due to higher tariffs, except in Uttar Pradesh. Be that as it may, the central government's efforts to maintain investor sentiment and direct state governments on the importance of renewable energy help mitigate the risk arising from negative sentiment. However, additional clarity will attract investments in the sector.

State utilities' aim to reduce the cost of power may be laudable. However, the achievement of the aim in a disorderly and rushed manner and in contravention of the signed agreements is not the right way. If one or two states undertake such actions, many others will be increasingly eager to follow suit, thereby leading to non-achievement of the central government's target of 175GW by 2022.

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