Economic Survey: Renegotiating Power Pacts Will Disrupt Renewable Energy Sector

The Economic Survey cautions that renegotiation of power purchase agreements by states to benefit from all-time low renewable energy tariffs will cause uncertainty and lead to legal battles.

Bid to scrap pacts to seek lower tariffs will create uncertainty for the renewable energy producers and banks, already saddled with high bad loans, may become apprehensive of lending to the sector, Chief Economic Adviser Arvind Subramanian wrote in the survey. “There are cases where developers have already made huge investments into renewable energy projects based on the expected stream of revenue.”

There have been attempts by Andhra Pradesh, Karnataka and Uttar Pradesh to renegotiate or cancel pacts with wind and solar power producers as tariffs fell to their lowest. This, Crisil said in a 2017 report, could put investments worth Rs 48,000 crore at risk.

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The discovery of very low tariffs through auctions possibly contributed to some demands for renegotiation of pacts, the survey said. It highlighted the need for revisiting subsidies and incentives to the sector to avoid such renegotiation.

“The concern is that even if one state attempts to renegotiate PPAs, it would irreparably affect all future projects pushing up the cost of capital and turning away investors,” said Kameswara Rao, partner (energy, utilities and mining) at PwC India. “This would be counterproductive considering India's per capital electricity consumption is barely one-third of world average, which means new investment in power generation at an affordable cost is still a need. This, in substance, is the point made in the Economic Survey.”

Rao said gains from renegotiation may be marginal as past costs were indeed higher. “In contrast, increased financing costs for future projects will be real, besides the higher risk premium that investors and lenders will factor in.”

The expectation from the government is to enforce power purchase agreements. That's especially crucial given India's ambitious target to increase renewable energy capacity by nearly threefold to 175 gigawatts by 2022.

Union Minister for Power RK Singh had said the government would include penalty provisions in the Electricity Act amendment bill for stricter enforcement of power purchase pacts. The bill is likely to be tabled in the budget session.