AP Government’s Move Puts Rs 21000 Crore RE Sector Debt at Risk

The Andhra Pradesh government's order to review the cost of solar and wind energy PPAs can have an adverse effect on the renewable energy sector and discom’s financial health, cautions CRISIL.

Pointing to a potential crisis in the renewable energy sector, the Andhra Pradesh (AP) government’s decision to review and bring down the purchase cost of wind and solar energy may cause financial trouble for 5.2 GW of renewable projects with estimated debt exposure of over Rs 21,000 crore. Of this, Rs 10,600 crore worth of projects may be at a higher risk of default, cautions CRISIL.

The AP order, issued on July 1, 2019, directs 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 submit its report to the state in 45 days.

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The rating agency said nearly half of this capacity is at a higher risk of default since they lack liquidity support beyond project level.

The central government’s push for renewables with a target of 175 GW renewable capacity by fiscal 2022, has brought investments in the country’s renewable energy sector which have doubled over the last five years to around $20 billion in 2018.

To reach the target, it will require further investments of around $80 billion till 2022. By May 2019, utility solar installations were over 27 GW and wind 36 GW of wind energy.

The move can aggravate the problem of delayed payments from distribution companies (discoms) and bring under stress about 5.2 gigawatt (GW) of renewable projects with debt of over Rs 21,000 crore.

“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,” said Manish Gupta, senior director, CRISIL Ratings.

If Andhra Pradesh goes ahead, generators may take the legal route to stall implementation which will prolong a resolution and result in further delays in payments to renewable projects.

According to the ratings agency, AP discoms are already facing a significant resource crunch with revenue gap (revenue generated less the operating expenses) widening in fiscal 2019. Consequently, discoms have been delaying payments to generators by 6-12 months.

Ankit Hakhu, associate director, CRISIL said any prolonged delay would put half of the capacity (2.6 GW with Rs 10,600 crore of debt) at immediate risk of default in debt servicing.

“Any prolonged delay would put ~50% of capacity (~2.6 GW with ~Rs 10,600 crore of debt) at immediate risk of default in debt servicing as these projects would have no other liquidity support apart from project-level liquidity reserves typically ~6 months of debt servicing,” he said.

Rest may get a temporary lifeline being part of renewable groups or being part of corporates with strong financial flexibility.

Such groups are prudently earmarking liquidity from recently raised capital at the holding company level and may sustain debt servicing of such projects by another 6-12 months.

Earlier, the Andhra Pradesh Electricity Commission (APERC) had disallowed attempts by discoms to renegotiate power purchase agreements.

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