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PPA renegotiation, cancellation by state discoms may impact RE sector growth: ICRA
Aug-22-2017

The domestic rating agency, ICRA in its latest report has said that the growth of renewable energy (RE) sector is likely to be hit adversely if power distribution companies (discoms) in states like Andhra Pradesh, Karnataka and Uttar Pradesh implement renegotiation or cancellation of signed power purchase agreements (PPAs) with the wind and solar power developers. If attempts by these state-owned discoms are implemented, ICRA noted that this would also impact the credit profile of the independent power producers (IPPs) and investment interest from the private sector in this sector.

As per the report, given the circumstances, significant uncertainty exists for wind-based IPPs, which have recently signed PPAs based on feed-in tariffs. It also said that the resolution of the PPA renegotiation or cancellation issue remains crucial to retain investors’ interest in the sector. However, ICRA explained that such cancellation or renegotiation by discoms may be legally challenged by the affected power producers and its resolution could be a protracted affair. It also noted that the wind capacity in the states like Andhra Pradesh and Karnataka is around 830 MW and 490 MW, respectively.

The rating agency understands that the central government is trying to dissuade state discoms from such unilateral action on PPAs. Apart from this, it noted that several PPAs tied-up by wind and solar power developers with state-owned discoms do not have any termination penalty clause related to any discom event of default. The report further indicated that that these PPAs usually do not have any deemed generation clause and are based on single part tariff – which is linked to actual generation.  As a result, it pointed out that the wind and solar energy projects with PPAs at a relatively higher tariff in comparison with average power purchase cost of the off-taker discom remains exposed to a risk of forced back-down or grid curtailment, a situation which has occasionally been seen in a few states in the past.  

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