ICRA: AP High Court's order reinforcing the sanctity of PPAs, a positive for RE IPPs

17 Mar 2022 , 01:23 PM

The High Court (HC) of Andhra Pradesh (AP) vide its order on March 15, 2022 in the matter of PPA tariff renegotiation, initiated by Government of Andhra Pradesh (GoAP) for wind and solar power projects, has set aside its previous order issued in September 2019 by a single judge bench of the HC. The AP High Court in its order dated September 2019 had ordered the AP state distribution utilities (or “discoms”) to make the payments at interim tariff of Rs2.43/2.44 per unit, instead of PPA tariff and had set aside the order issued by GoAP earlier in July 2019, to form a high-powered committee to review the wind and solar power tariffs.

The HC in its latest order has thus reinforced the sanctity of power purchase agreements (PPAs) signed between the wind & solar (or “renewable energy / RE”) independent power producers (IPPs) and state discoms. As per the order, the HC has directed the state discoms to honor the terms of the signed PPAs and clear the pending payments, as per the agreed tariff under the PPA within six weeks from the date of the order.

Commenting further on this, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said, “The order issued by the AP High Court upholding the sanctity of the signed PPAs is a significant positive development for the renewable energy sector and thus, will provide a major liquidity relief for the affected IPPs in the state. Pending resolution of PPA tariff renegotiation matter has been a key concern for the RE sector and in turn affected the credit profile of wind and solar IPPs in AP, especially the entities belonging to relatively weaker sponsor group. However, timely implementation of the HC order by the discoms remains a critical monitorable, given the weak financial profile of the discoms in AP marked by continued losses and large debt dependence.”

Further, the HC order thus has a direct impact on the power purchase cost to be borne by the AP discoms. The tariff order issued by Andhra Pradesh Electricity Regulatory Commission (APERC) for FY2022 has an approved annual revenue requirement (ARR) for AP discoms which is based on average RE purchase cost of Rs. 2.55/unit, considering the interim PPA rate. Based on the direction by AP High Court, the incremental impact on power purchase cost is estimated at about Rs. 10,500 crore, due to build-up of dues arising out of the difference between the PPA rate and interim rate over the last 3-year period.

Commenting further on the demand from the industrial segment, Mr. Vikram V, Vice President & Sector Head — Corporate Ratings, said, “Assuming this additional power purchase cost is approved as regulatory asset to be amortised over a period of 5 years, the incremental impact on cost of power supply for AP discoms is estimated at 54 paise/unit, thus reflecting an upward pressure of 8.5% on average retail supply tariff for AP discoms.”

“As a result, timely & adequate tariff determination by the APERC for AP discoms also remain a critical monitorable. Notwithstanding the pressure on cost of power supply, the average retail tariffs have remained unchanged for AP discoms as per the tariff orders issued since FY2019,” Mr. Vikram.

The outlook for the RE sector remains stable, aided by the strong policy thrust, improved tariff competitiveness of both solar & wind energy as well as supportive regulatory framework. The credit profile of the majority of the rated entities in RE segment continues to remain supported by availability of long-term PPAs, adequate liquidity buffer, support availability from the respective sponsor groups as well as strengths arising from satisfactory operating track record and debt refinancing with favourable terms over the last one to two-year period.