Banks stare at fresh NPAs, debt exposure of Rs 21,000 crore at stake

The Indian Express
July 24, 2019


A decision by the Andhra Pradesh government to reopen contracts signed with wind and solar generators could impact at least 50 of India’s biggest RE (renewable energy) developers and puts at stake nearly 5.2 gigawatts (GW) of projects, with an estimated debt exposure of over Rs 21,000 crore.

Nearly half of this capacity, according to rating agency Crisil, is at higher risk of default as they lack liquidity support beyond the project level. The move to reopen contracts, alongside raising serious questions among investors about the sanctity of contracts, could potentially lead to a fresh wave of non-performing assets (NPAs) in the banking sector.

The move is a body blow for RE developers, who have been the only bright spark in the otherwise sluggish electricity generation sector, with FDI inflows of $3.22 billion over the last four years alongside significant domestic investment leveraged by bank funding. There are concerns that other states could take a cue from this and initiate similar reopening if wind and solar project PPAs on the same grounds cited by the Andhra government — that tariffs discovered in subsequent years have been cheaper.

The Jagan Reddy-led government in Andhra Pradesh, an ally of the NDA Government at the Centre, had decided to “review” and “bring down” tariffs of all competitively bid renewable power projects in the state. The AP order, issued on July 1, directed a high-level negotiation committee to use “current rates”, “rates prevalent at the time of commissioning of projects”, and “the current opportunity cost of other sources of power” to benchmark and renegotiate agreements, and also submit its report to the state government in 45 days.

Affected private developers have raised concerns that this move by the state utilities to reopen contracts comes amid a general reluctance by the states to renegotiate pacts signed with old and inefficient state-owned thermal plants, most of which are idling due to high tariffs but the distribution utilities are still forced to fork out fixed charges.

In response to pressure from the Centre seeking a review of the move, the Andhra Pradesh government has said it would go ahead in renegotiating power purchase agreements with private developers. In a missive to the Prime Minister’s Office, the AP government has struck a defiant note and said: “Though we are aware of the legal nature of contracts and their importance, the divided state of Andhra Pradesh and the discoms which are in a debt trap are helpless to honour these high-cost renewable power purchase agreements done with mala fide intent.”

As on end-May 2019, a total capacity of around 78.35 GW had been installed in the country of which 40 GW has been added during the last five years. The move by the AP government comes at a time when India’s progress towards its March 2022 target of 227 GW of renewable energy capacity is blunted somewhat due to the feeble progress in addressing the damage on account of the country’s massive fleet of aging and inefficient coal- and lignite-fueled thermal power plants. Experts say that an exit option would relieve discoms from onerous financial liability and the funds thus released can be used by them to buy cheaper and more power, and supplying it to consumers at better rates.

“Around 5.2 GW projects out of 7.5 GW in AP are supplying power to state discoms under long-term power purchase agreements (PPAs) at pre-determined tariffs. They now face renegotiation risk given that their tariffs are above the recent auction prices of below Rs 3 per unit for renewable projects and average power purchase cost of Rs 3.8 per unit in AP in fiscal 2019,” Manish Gupta, Senior Director, Crisil Ratings. Assuming a typical debt funding of Rs 4 per MW (1 GW is equal to 1000 MW), this would put around Rs 21,000 crore of debt at risk of default. In the event of any adverse recommendation by committee, generators could take the legal route to stall implementation, which will end up prolonging the resolution and result in further delays in payment to renewable projects.

Issues of tariff renegotiation have also surfaced in the past in AP when discoms requested renegotiation of contracted wind tariffs to lower levels, which was rejected by the Andhra Pradesh Electricity Commission by upholding the terms of the signed power purchase agreements.

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