India Mulls Penalty For Refusal To Sign Solar PPAs

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The Ministry of New and Renewable Energy in India has put a notification to impose heavy penalties if states or project developers unilaterally modify or move to renegotiate solar power purchase agreements.

The Ministry had to issue this notification following several attempts, some successful, by state power utilities to back out from power purchase agreements as well as renegotiate tariffs. As per the notification, if either party unilaterally backs out of it, a penalty of at least 50% of the tariff will be levied on that party.

At least in one instance, a state power utility refused to sign the PPA with a project developer. Solairedirect had secured a 250 megawatt solar project at one of the solar parks being developed by NTPC Limited in the state of Andhra Pradesh. The project was the cheapest one when it was awarded in a competitive auction at a tariff of ₹3.15/kWh (4.9¢/kWh). The two power utilities of Andhra Pradesh have now refused to signed PPA with this project claiming that it has contracted enough solar power to meet its requirement. NTPC has been asked to look for other buyers for the power.

States like Jharkhand and Uttar Pradesh have been able to secure lower tariffs from project developers by renegotiating the terms of PPAs. Jharkhand had refused to sign PPAs for 1.2 gigawatts capacity for almost two years because the tariffs discovered in competitive auction were higher compared to those in other states. Uttar Pradesh told more than a dozen project developers to reduce tariffs by as much as 18% just before they were ready to commission the projects.

Tamil Nadu is believed to be renegotiating the tariff for India’s largest solar power project. The project owned by Adani Green Energy has a tariff of ₹7.01/kWh, nearly three times the lowest solar tariff in India.

Impact of the notification

The new notification will be welcomed by project developers as well as financial institutions that have invested in the solar projects. With the rapid pace of solar power tenders and project implementation there is always a risk of offtake, especially when the power demand is subdued for a variety of reasons.

The Solar Energy Corporation of India had announced a payment security fund to ensure the developers receive payments on consistent basis even if power utilities default on their payments. This helped distribution of risk related to the projects providing a cushion to the lenders as well. This notification would likely have a similar impact.

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