India Ratings Raises Risk Concern for PPAs Signed With SECI, NTPC

In its revenue risk analysis, the India Ratings and Research a part of Fitch Group found that the Power Purchase Agreements signed by NTPC and SECI are vulnerable to risks.

Contrary to the general belief that the PPAs signed between the Renewable energy companies and reliable counter parties like Solar Energy Corporation of India (SECI) and National Thermal Power Corporation (NTPC) are much less risky than that with the state Discoms, India Ratings says that this might not be a case after all.

The statement does add that these PPAs fare better, “SECI and NTPC PPAs fare better on tariff payment obligations compared to directly selling to discoms” but also explains that the most recent PPAs have seen a shift away. While PPAs do say that payment obligations are direct obligations, however the other risks and obligations are on a pass-through basis. The report says,” However, every obligation, other than tariff payment obligation, needs to be met by SECI and NTPC only to the extent the same obligations are met on a back-to-back basis by discoms.”

This simply means that SECI and NTPC will act as only the intermediaries and will be linking the PPAs which was signed by the project developers to the Power Sale Agreement (PSA) which is signed with the respective Distribution Company. The development is indicative of limiting the liabilities on SECI and NTPC.

This was observed in the latest tariffs agreement signed this year by NTPC and SECI which limits their exposure if there is a case of default by the Discoms. Both the PSUs have assumed the direct obligation for tariff payment in their recent PPAs. Tariff payment means the monthly bills and supplementary bill payment that also include the change in law payment.

The report on this says,”SECI has the highest tender pipeline (19GW) and the financing of future projects depends on the features of SECI PPA. While signing PPAs with SECI and NTPC is perceived to be better than having PPAs with discoms directly, the intricacies of obligations under SECI and NTPC PPAs indicate significant dependence on back-to-back performance by buying discoms. Also, the latest NTPC PPA has tariff adoption by the relevant State Electricity Regulatory Commission for the discom that has signed back-to-back power sale agreement (PSA) as condition precedent. In earlier PPAs, such a clause was absent. In case tariff adoption is not completed within two months of signing PPA, the PPA will stand cancelled, unless the timeline for adoption is mutually extended.”

The report also mentioned the critical provisions like Payment security mechanism and paying compensation for grid issues to which it adds that these ”are to be complied on a back-to-back basis if discoms meet those obligations”.

Currently, PPAs are signed by NTPC and SECI with Project companies are backed by PSAs with Discoms. This was also a change in agreement, India Rating pointed out which again emphasizes that PSUs remain intermediaries. This means that the investment made prior to tariff or agreement adoption stands at risk of PPA cancellation. NTPC’s latest PPA reportedly stands canceled and terminated with no liability unless the tariff is adopted (the sole condition precedent) by relevant discoms who have signed back-to-back PPAs with NTPC.

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