As the Imbroglio over Andhra Pradesh's effort to renege on its signed PPA's continues to simmer, the state government is implementing the classic payments squeeze to force firms to come to the negotiating table. Successful or not, this has already damaged India's credibility with potential and existing investors
This week has all about India’s refusal to finally sign up for the RCEP or the Regional Comprehensive Economic Partnership. While the government has put its decision down to the lack of flexibility from other members to accomodate Indian concerns, the general consensus is also clear that it is also an acknowledgement of India’s lack of preparedness for such a treaty. While the lack of competitiveness of our industry, and reasons therein can always be debated, there is absolutely no doubt about the extra costs and risks for industries operating in a sector with a huge government overhang.
The plight of the renewables sector in Andhra Pradesh is the most stark example of it. At a time when the central government has realised the key issue of payments, curtailments etc, and taken steps to tackle it, the Andhra government’s intransigence on renegotiating PPA’s signed by the previous state regime is frankly, breathtaking. So much so, that we heard the term ‘Andhra discount’ for the first time during discussions with a renewables financing professional working with a global fund. Taken another way, there is a premium firms raising money for large renewables projects might end up facing, after the Andhra experience of its most storied players.
After placing a 4 week stay on the government order, the state high court placed the onus of taking a call on the issue with the APERC( Andhra Pradesh Electricity Regulatory Commission) along with a six month time frame to do it, the state government has been unrelenting in its squeeze. Its (admittedly loss making) discoms have failed to make payments to the developers caught in the crossfire, even at the lower rate of Rs 2.80 per unit, (instead of an average Rs 4.80 per unit), the state discoms continue to treat power produced by these projects poorly, if we consider inputs from the state. The three firms that have been pinpointed by the State Chief Minister, Jagan Mohan Reddy, include ReNew Power, Greenko and Mytrah , all established firms with projects all over the country. Coincidentally, all three have been powered by investor funding, which will create its own pressure on the investing climate for the whole ecosystem. Besides their own valuations and further fund raises, possibly. Worse,firms that had escaped the CM’s eagle eyes, also seem to be suffering from payment delays.
For the Andhra chief minister, whose main grouse, besides allegations of impropriety in the deals themselves, is that there was no need to commit to such long term deals when ‘everyone’ knew that prices would come down with higher efficiency, the issue has become a prestige issue. Which is never a good idea with politicians. Even a positive response from the ERC now to the developers issues, may not see the state enforce such an order, without a face saving measure for the CM. So far, bringing down the price to Rs 2.80 is off the table, especially for the full 25 year period. We might yet see either a reduction of the contract period, or a lower rate for a significant portion of the contract period, to settle matters here. For the developers, stuck as they are with their investments and assets in the state, something along those lines may be the least of the poor choices in front of them.
Of course, what it does to their plans to invest any further in the state, or even the plans of their peers, is something to be seen.
Andhra Pradesh matters in the context of the large national targets too, already under great stress, despite official protestations of being on track. The state would have easily contributed a further 5-6GW of power in solar and wind together. With time passing by all too fast as the country moves towards the 2022 deadline,that number may be missed by a huge factor, unless the state government makes a huge U turn.