The government of the state of Andhra Pradesh in India threatens to deliver a massive jolt to the country’s solar and wind energy market with a potential decision to renegotiate or even cancel existing power purchase agreements.
Several media agencies have reported over the last few days that the newly elected government of Andhra Pradesh is looking at the power purchase agreements signed with several solar and wind energy developers in the state. The government believes that the tariffs for these PPAs are too high and may point to corruption on the part of the previous government.
According to business daily Economic Times, state government officials informed project developers that all PPAs above the tariff rate of Rs 2.50/kWh (3.66US¢/kWh) would likely be reviewed. A committee has been set to investigate the matter.
According to Financial Express, the government is expected to move the state’s regulator to revise the tariff of wind energy projects from Rs 4.84/kWh (7.08US¢/kWh) to Rs 2.25/kWh (3.29US¢/kWh). The premise behind the sharp reduction is that the recent tariff bids in wind energy auctions have been considerably low. The lowest wind energy tariff in India is Rs 2.43/kWh (3.55US¢/kWh). The average lowest tariff bid in last five wind energy auctions has been around Rs 2.80/kWh (4.09US¢/kWh).
The last major solar power auctions in Andhra Pradesh were held last year. The tariff bids in those auctions were around Rs 2.70/kWh (3.95US¢/kWh), whereas the lowest solar power tariff bid in India is Rs 2.44/kWh (3.57US¢/kWh). However, market conditions have changed following the imposition of safeguard duties on imported solar modules from key suppliers like China.
In comparison, the weighted average power purchase cost for Andhra Pradesh in the year 2018-19 was Rs 3.83/kWh (5.60US¢/kWh).
Another business daily, Mint, reports that the government officials have attributed the high tariffs of solar and wind energy projects as the reason behind the huge losses the power distribution utilities are suffering from. While tariffs of some projects may be higher as they were commissioned under the feed-in tariff regime, which is no longer in effect, the government is bound to honor those tariffs.
Similar efforts have been made by other states as well. The state of Gujarat had unsuccessfully appealed to reduce the tariffs of power plants that pre-date the National Solar Mission. Tariff of these power plants were as high as Rs 12/kWh (17.54US¢/kWh) as the cost of installation was significantly high when they were commissioned in 2010. The Rs 12/kWh (17.54US¢/kWh) tariff was set for the first 12 years followed by a tariff of Rs 5/kWh (7.31US¢/kWh) for the next 13 years.
Gujarat has cancelled solar power auctions twice as it found tariff bids to be too high. The state of Uttar Pradesh asked project developers to voluntarily reduce their tariff bids for large-scale solar power projects in 2017. The state of Jharkhand also managed to get the project developers to reduce their tariff bids significantly in what was one of the largest solar power auctions at that time.
Any attempt to scrap the existing PPAs or to renegotiate the tariffs agreed under the previous government shall have a cascading effect across the renewable energy and banking sectors in the country. Investors in not only the energy but other sectors would hesitate to invest in the state. Non-payment of dues to the project developers would force them to default on their loans, leading to proportional consequences on the lending sector.
Andhra Pradesh is among the top five renewable energy generating states in India and recorded a share of over 22% energy consumption from renewable energy sources in 2018-19. In June of this year, the share of solar and wind energy generation touched 27% in the state’s total energy consumption with a high of 42.2% on 27 June.