PPAs: Renegotiation vs Delayed payments vs NPA

This is in the context of the recent attempts of Andhra Pradesh state Government, in India to renegotiate the PPAs of existing Solar/Wind assets.

To give you a brief context, the previous Government encouraged renewable power installations in an attempt to encourage green power generation in the state inspite of the government's financial conditions in not such a great condition. The new Govt., came and alleges that the contracts with those renewable assets would be renegotiated as the Govt. cannot afford payments to those companies and also that the contracts were awarded only to a few companies that had alleged relationship with members of the previous regime.

AP govt has been insisting upon renegotiating the PPAs that have been signed as it is unable to honour the high cost contracts, inspite of the recommendation from govt of India to not do so.

Is there any merit in the approach by AP. Before we get into further analysis, if we take a peek into the ground reality:

  1. Govt of AP doesn’t have the funds to honour the high cost PPAs
  2. If they can’t honour the payments, the agreement are deemed to be void due to the payment delays.But no power developer would terminate the agreement in India as the legal proceedings would take forever making it unviable for them to sustain
  3. As is the case with most electricity boards, as long as the PPA remains, most power developers hope to get the revenue some day. In the interim, utilities continue to incur higher losses and will pass on the burden to next Govt. who will have no option but to depend on schemes like UDAI to survive through the losses.
  4. Without the payments and the eventual inability of the power companies to pay the dues, the lenders will have to face increased NPAs. And as the NCLAT proceedings continue to navigate in un-chartered territories each stakeholder is left in a state of limbo to make ends meet.

Hence, what is the best solution.

Isn’t it in the best interests of the two key players i.e. the buyer and supplier of power to renegotiate the contracts mutually by taking the other stakeholders into cognizance.

Instead of everyone going through losses and battling it in courts, they can mutually come to terms with the reality on the ground and make good of what can be acheived.

So, what is the big problem?

Once it is done, this will set a precedence and may hamper the confidence of the investors, as every contract may eventually be renegotiated and will question the sanctity of the contracts and hence the viability of the investments.

This is the only concern. Regulator has a tough situation at hand.

  1. Govt is unable to pay.
  2. Developers want the contract to remain but are not receiving their payments
  3. Lenders and investors are also concerned about the future payments whereas they are not receiving any payments now.

The bigger question is if there were kickbacks in awarding the contracts. Every person who has ever dealt with Government contracts realize that there would be some kind of exchange of benefits (tangible/intangible).

Truth be told, Govt should be held accountable and if not it should be termed as bankrupt and allow for a clean slate. It will effect every one.

Also, this is an important use case for govts. on how to manage investor confidence and yet manage to ensue their agenda.

In the interim, High court has awarded a stay order against Andhra Pradesh government to do any re-negotiations. Things have definitely taken wrong turn and investors have definitely become wary of the future of these contracts.

It'd be interesting to see how things unfold, as this might redefine the growth strategy of renewable energy in India.

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