Creating political risk

Andhra Pradesh should maintain the sanctity of contracts

The Andhra Pradesh government, under Chief Minister Y S Jagan Mohan Reddy, wants to renegotiate various agreements decided under the previous Telugu Desam Party government. The government has set up a high-level negotiation committee to “review, negotiate and bring down” the power tariffs agreed upon with various renewable energy power projects in both the wind and solar sectors. The government claims that state distribution companies, or discoms, are in such poor financial health that it cannot honour its agreements. This will affect both private- and public- sector power producers. For now, the Andhra Pradesh High Court has stayed the government’s action. But the state has continued to push, writing  to the Centre and even reducing the amount of offtake from wind farms unilaterally. 

According to ratings agency CRISIL, this review would stress 5.2 gigawatt of renewable energy projects, which had taken a debt of Rs 21,000 crore to build this crucial infrastructure. At a time when non-performing assets (NPAs) in the power sector continue to be a problem, the Andhra Pradesh government’s decision will make them considerably worse — especially if other states follow suit. 

The government has blamed “abnormally priced wind and solar power purchase agreements in recent years” for this status. But a lot of the government’s argument does not hold up. For one, the health of utilities like the Andhra Pradesh South discom, while still poor, has improved of late. It is also true that many of the  power purchase agreements (PPAs) were signed at an earlier stage of the development in the sector, when the prices were higher across the board in the country. If they have fallen since then, that is a straightforward risk that the government had agreed to bear under the 25-year PPA scheme. What would be the implications of forcing a renegotiation of PPAs when prices have fallen? It would severely increase the uncertainty in the sector. Investors will no longer take the word of a state government seriously if they believe that after an election the successor will come in and force a renegotiation. This is particularly dangerous because in this case the YSR Congress, the ruling party, is clearly playing politics, seeking to imply that these agreements were signed with “malafide intentions”. The political risk in this sector would thus increase considerably, with a chilling effect on future investments. Today it the power sector, tomorrow it could be something else. 

The sanctity of contracts must be upheld because no one would invest if they can be breached unilaterally. If the Andhra Pradesh government is of the opinion that there is corruption in the signing of previous PPAs, then it must make a case to that effect and prove it in a court of law. Investors might then not take as harsh a lesson from the cancellation of PPAs as they would from this wholesale attempt to rewrite the past. As it stands, the AP government is playing with fire. This decision has the power to completely undermine the Centre’s commitment to a renewable energy build-up. Earlier, a number of power distribution utilities in other states had also sought to renege on their PPAs, on the grounds that the tariffs of new renewable power had come down subsequent to signing the PPA. That move was thwarted; the move by Andhra Pradesh should also meet a similar fate.