The problem started when Andhra Chief Minister Jagan said that he would review and re-negotiate power purchase agreements made during Naidu’s time.
Published on : 17 Aug 2019, 10:06 amIn his first few months in office, Andhra Pradesh Chief Minister YS Jagan Mohan Reddy reviewed many decisions made by his predecessor, Chandrababu Naidu. One review, in particular, has piqued the interest of the Japanese, whose Ambassador to India, according to a report, even wrote to Jagan stating that its foreign investors were watching the state’s renewable energy sector.
And why? Because on July 1, Jagan said that he would review and re-negotiate power purchase agreements (PPAs) made during Naidu’s time. PPAs are agreements made between a company that generates electricity and a power purchaser. In effect, the government is seeking to withdraw 21 PPAs with renewable energy companies. One of the contracts under contention is that of SB Energy, a joint venture of Japan’s Softbank, Foxconn and Bharti Airtel.
Why Jagan wants to withdraw the PPAs
In a government order, the government said that power distribution companies (DISCOM) in the state were going through a financial crisis, and one of the main reasons for this was the higher tariffs in the wind and solar PPAs.
“In order to ensure that consumers are provided with affordable power and DISCOMS are pulled out of the financial distress there is a need to review and re-negotiate the exorbitantly priced wind and solar Power Purchase Agreements (PPA),” the GO read.
The GO also announced the formation of a High Level Negotiation Committee “to review, negotiate and bring down the high wind and solar energy purchase prices”.
A week before this, Jagan ordered legal action against Naidu in connection with the agreements, alleging that the agreements had caused a Rs 2,636 crore loss to the state exchequer, and asked officials to take steps to recover the amount. He also ordered legal action against the then Energy Minister and senior officials who were involved in signing the agreements.
Where the renewable energy sector stands now
The GO states that Andhra’s DISCOMS are going through a financial crisis — but this isn’t new. They have been reeling under the crisis for years, and the loss at the end of the financial year 2019 stood at Rs 1,563 crore, as per the Ujwal DISCOM Assurance Yojana.
The projects that the Jagan government wishes to renegotiate were commissioned during Naidu’s tenure as the first CM of residual Andhra Pradesh. These projects used the feed-in tariff mechanism, where a certain fixed price is paid to producers of renewable energy for each unit they produce. However, prices have since been reduced, as the system has shifted to open bidding.
Soon after releasing the GO on July 1, the Jagan government gave another order. “Cancel all the wind, hybrid and experimental power purchase agreements which are in pipeline -- either not signed or not cleared by the AP Electricity Regulatory Commission (APERC),” it said.
Andhra reneging on its contracts puts at risk of non-payment the nearly Rs 21,000 crore debt of renewable energy companies. “A quick resolution here is also necessary to prevent vitiating of investor confidence in the sector, which is crucial to achieving the central government’s goal of 175 GW renewables capacity by fiscal 2022,” analytics company CRISIL said in a report.
Where this leaves stakeholders
RK Singh, Minister of State for Power and New and Renewable Energy, wrote to the state government requesting it not to cancel the agreements and to honour them. However, Jagan remained defiant.
“We have inherited a bankrupt exchequer with a huge deficit of Rs 2.62 lakh crore, the DISCOMs’ unpaid generator dues of Rs 20,000 crore and accumulated losses of DISCOMs of Rs 15,000 crore,” Jagan responded.
The concerns raised by RK Singh is what the Japanese Ambassador referred to as well. Satoshi Takagi, second secretary in the embassy of Japan, told Economic Times: “Our concern as Japanese government is that if legally binding contracts are not honoured, it would cause significant impairment to the business environment of AP state.”
The disgruntlement of DISCOMS in Andhra Pradesh began even before Jagan took office earlier this year. In February, the Southern Power Distribution Company of Andhra Pradesh Limited and the Eastern Power Distribution Company of Andhra Pradesh Ltd filed a petition with the Andhra Pradesh Electricity Regulatory Commission (APERC) over PPAs signed before March 31, 2017. They wanted to amend the tariffs and be able to reduce it. The PPAs were signed for 25 years, which the DISCOMS wished to reduce to five years as well. In 2017, the DISCOMS had wanted to sign agreements at a lower tariff. The then Andhra government wrote to the DISCOMS, asking them to honour the contracts, and said that the situation “would create an atmosphere of uncertainty”.
As per the original PPAs by Naidu’s government that Jagan now wants to cancel, Andhra had agreed to pay the higher tariff for 25 years. While the Naidu government signed up for tariffs ranging from Rs 4 to Rs 6 per unit, the prices are currently less than Rs 3 per unit.
Jagan’s wish to redo the contracts is significant because the state is one of India’s major players in renewable energy and, according to consultancy firm Bridge to India, has commissioned a capacity of 3,279 MW of solar energy and wind energy of 3,978 MW, from different locations in the districts of Anantapur, Kurnool and Kadapa. As of February, the state had an installed capacity of 2,988.43 MW of solar energy and 4,088.39 MW of wind energy.
The current situation
A memo filed by the Andhra Pradesh Southern Power Distribution Company Limited on July 27 stated that due to the financial condition, AP DISCOMS decided to withdraw from the PPAs it entered into with the clients of Suzlon and Axis Energy and their clients. ". since the PPAs are not yet approved, the same is not enforceable and the APSPDCL is at liberty to withdraw the same and that hence, permission is requested to withdraw the 21 Nos. PPAs entered with various wind power projects clients of M/s Suzlon and M/s Axis Energy Ventures India Private Limited," the memo stated.
Nine renewable energy companies then approached the Andhra Pradesh High Court, which stayed the GO till August 22, after which the court will hear the matter again. However, despite this, the Andhra Pradesh government began curtailing wind power and was pulled up by the Andhra Pradesh HC.
After this, renewable energy companies approached the Appellate Tribunal for Electricity (APTEL), which on Tuesday stayed the decision of the Andhra Pradesh government to withdraw the 21 power purchase agreements (PPAs). While this may offer temporary relief to many producers, the Andhra government’s decision to renege on its contracts has left a lot of stakeholders worried. Many also worry that a government going back on its contract sets a dangerous precedent.
When it comes to the Japanese keeping an eye, however, Jagan has been defiant. He has reportedly said that he will not succumb to pressure, and told the committee to probe irregularities.
"This is a tough decision we had to take, the renegotiation of PPAs will go on to instil confidence among the investors, though in the short run there could be some concern from the international community," he said.