Industry leaders say sanctity of the Indian contract under question, global investors get cold feet post AP government’s move to renegotiate contracts
There is Rs 48,000 crore at stake. The desperate battle being fought in multiple arenas – in politics, the judiciary, the bureaucracy – is testament to the do-or-die nature of the situation brewing in Andhra Pradesh.
New chief minister YS Jagan Mohan Reddy has set up a committee to probe alleged corrupt practices of the previous Chandrababu Naidu government.
But even before completion of the probe into the allegations, his government has begun cancelling tenders issued for a number of large projects like the Polavaram irrigation project.
He is also attempting to renegotiate and cancel contracts with renewable energy power producers who had signed 20 and 25 year deals with the Andhra Pradesh government in 2015-16.
Now industry has gone up in arms against the first time CM.
Jagan’s rhetoric is that he is cleaning up corruption and wasteful expenditure of public money which his predecessor had indulged in.
But industry, especially those that have already set up shop and begun operations, is hopping mad at what they call arbitrary moves to shut them down.
We focus on the issues faced by renewable power producers and why they are now staring at huge losses in the investments they have made in Andhra, a situation that is likely to have a domino effect on investments nationally.
A number of power purchase agreements (PPAs) were signed by the Telugu Desam Party (TDP) government led by former chief minister N Chandrababu Naidu in 2015-16, after the united Telugu state was divided into Andhra and Telangana the previous year.
These PPAs were for renewable power – solar and wind energy. The tariff fixed for solar producers per kWh (kilo Watt hour) varied from Rs 4.63 in most parts of Andhra to Rs 6.16 per unit in the NTPC Anantapur project. Tariff for wind energy producers per kWh was Rs 4.76 per unit.
Andhra currently has around 8000 MW of solar and wind projects and Chandrababu Naidu, with an eye on attracting more investments, promised hassle-free set-up for renewable energy producers, promising to take the production to 10,000 MW in the next five years.
Investors flocked, many of them entranced by Naidu’s earlier track record of governance in erstwhile united Andhra Pradesh and his Hyderabad glory.
Investments poured in from the renewable power sector to the tune of Rs 48,000 crore, of which Rs 37,000 crore came from banks in the form of loans to the power producers.
Then came the elections in 2019 and the YSR Congress led by YS Jagan Mohan Reddy swept the state in 2019, taking the chief minister’s seat for the first time.
All of the previous government’s large schemes immediately came under microscopic scrutiny.
In late June, Jagan announced that the Andhra Pradesh state power utility was paying at least Rs 2636 crore more than it should. This, he said, was due to the overpriced tariffs of wind and solar power under the contracts signed by the Naidu government.
At the time, Principal Advisor to the chief minister Ajeya Kallam told mediapersons – “Of the 221 PPAs in wind energy, more than 70% (worth Rs 40,000 crore) signed after 2014 benefitted mainly five players.”
The government further announced its decision to renegotiate the existing contracts for lower tariffs, throwing industry and the Centre into a tizzy.
In early July, the state then formed a High Level Negotiation Committee comprising ministers, senior bureaucrats and the advocate general of the state, to meet with and bring down the tariffs of the renewable energy producers.
The argument proffered by the government is that the state utility was already under huge debt burden of Rs 20,000 crore and it would become insolvent if forced to pay high tariffs as dictated by the PPAs.
So what is facing the axe? PPAs of 21 wind power projects, a 600 MW Siemens Gamesa wind-solar hybrid project, an Axis Energy hybrid project, energy storage projects and about 600 MW of schedulable power along with cancellation of land allotment to Greenko’s solar-wind hybrid project at Anantapur.
On July 15, the Union Minister for Renewable Energy RK Singh shot off a letter to Jagan, requesting that the sanctity of contracts be observed and that no contract could be cancelled unless there is “malafide intent” or malpractice proven.
He also cautioned that such a move would hurt investor sentiment.
In turn, two days later, the Andhra Pradesh Southern Power Distribution Company (APSPDCL), the state’s power utility, wrote to the Solar Energy Corporation of India, asking to reconsider tariffs of 400 MW of solar projects in the state which had already been connected to the grid.
A similar letter followed to the NTPC for 1250 MW of solar projects, asking the Central PSU to revise tariffs downward.
A 1000 MW solar park in Kurnool was signed off at a tariff of Rs 4.61 per unit. The state power utility wanted NTPC to renegotiate it down to Rs 2.44 per unit.
Power producers then took the case to the Appellate Tribunal for Electricity (APTEL) and obtained a stay on the government’s move to renegotiate prices down.
“Further, we direct the DISCOM to pay the tariff at the approved rate of Rs 3.74 per KWh till the next date of hearing,” stated the order. The next date of hearing is fixed for 26 August.
The state did not back down. Instead, the power utility APSPDCL wrote to the State Electricity Regulatory Commission, asking it to cancel 21 wind PPAs worth 776 MW. The reason cited was the “precarious financial position of the discoms.”
APTEL once again intervened, stalling the government’s move to withdraw the 21 wind power PPAs.
Power producers have also taken the matter to the Andhra Pradesh High Court and have obtained a stay on the same.
“Sentiments are affected,” Sunil Jain, Chief Executive Officer and Executive Director, Hero Future Energies told The Lede.
He is also the president of the Wind Independent Power Producers Association or WIPPA, an industry body of over 30 wind producers.
“Legally, the Supreme Court and the Gujarat High Court have given clear verdicts so I don’t think a state government can renegotiate PPAs in this manner. Such a change of stand by government does not reflect badly only on the state but also on the country. It affects investor sentiments,” he said.
His view is echoed by a leader of an industry body in Delhi who did not wish to be named.
“The sanctity of the contract needs to be observed,” said the representative. “When an investor puts in money and enters into a contract with the state utility, they are bound to it. If state governments are going to start reopening contracts, it doesn’t bode well. India’s ranking is already lowest on contractual sanctity.
This is the first thing any foreign investor looks at when they want to invest. They are questioning the legal system of the country when they do such things.”
Power producers point to the rates for solar and wind power purchases by states across the country at the same time the contracts were awarded by the Naidu government.
Wind power, especially, is variable, as it is dependent upon wind velocity. Tamil Nadu and Gujarat have the highest wind velocity and as a result, tariffs are lower in these two states.
The Central Electricity Regulatory Commission (CERC) itself has divided up regions into four wind zones, depending on velocity. As is evident from the chart below, Andhra Pradesh was in the middle of the stack of some of the largest states producing wind power – neither the cheapest, nor the most expensive.
Most of Andhra lies in Zone 3. Some areas do come under Zone 4.
The Central Electricity Regulatory Commission (CERC) provides recommended or approximate tariffs for each wind zone. For 2015-16, the CERC had stated that the tariff for wind zone 3 would be Rs 5.27 and tariff for wind zone 4 would be Rs 4.39.
State electricity regulators have the power to fix the rate above or below this figure, depending on the project.
The Andhra State’s Electricity Regulatory Commission approved the wind power tariffs following which the contracts were awarded at Rs 4.76 on average.
Below is a comparison of the tariffs in various states during the period in contention.
As for solar power tariffs, Andhra again, did not feature among the most expensive deals at the time.
Power producers say that the input cost for solar power at that time was much higher and firms had spent that money to set up the projects.
In successive years though, solar panels and other costs had plummeted, thanks to low cost Chinese equipment flooding the market and the technology became a lot cheaper.
Below is a comparison of tariffs for solar power in different states during 2015-16.
“It is like buying a Maruti car when it is first brought out into the market and then going back a few years later to the dealer and saying give me back my money because the same car is now cheaper,” said Sunil Jain.
“If capex (capital expenditure) has fallen, it is not my fault. It is good for the country that the capex is falling and the new projects will be cheaper, prices will be less. But you cannot renegotiate a PPA just because prices came down in the following years. Even the past government (TDP government) tried to renegotiate PPAs on some pretext or another but this government has gone overboard,” said Jain.
Investors, both foreign and domestic, have turned wary, say industry leaders. Thanks to what they call the Andhra government’s “stubborn refusal to listen to reason” foreign investors, especially the Japanese, who had pumped in money into the renewable energy sector, are now tightening purse strings.
“New investments which had to come will have a challenge. Foreign investors are upset. The Japanese have already said this will impact investments in India. Many others have said informally that they do not want to put in money in the country,” said Jain.
“This could not have come at a worse time because the economy is in a slowdown,” said the industry representative. “At such a time if you are going to send out signals which are scaring away investors – not just foreign, but also domestic investors, it is hardly helpful.
There are foreign investors in some of the Indian companies. They will start asking questions. These are projects which are operational, not under construction. They cannot even pull back and their money is stuck.”
The issue is likely to have a cascading effect on the already stressed banking system. Of the Rs 48,000 crore investments made, Rs 37,000 crore is from banks who have lent to the power producers, on the back of the promise of a 20 years’ contract to buy power.
“In the eyes of the lenders, they will stop disbursing loans,” said Jain. “They should have gone through a regulatory process. Do an enquiry and whatever the outcome is, we will accept it. But this kind of arbitrary renegotiation and cancellation is not acceptable.”
“I am scared now that companies will go bankrupt. They have taken debt from banks. If they are unable to service the loans, NPAs will go up and we will have a whole new problem on our hands,” added the industry representative.
What is worse is that despite the stay on the government’s attempts to cancel and renegotiate contracts, power producers claim that the state has not been obeying the court’s or APTEL’s orders.
“There are already issues with curtailing of power,” said Sunil Jain. Other renewable energy producers in Andhra say that the state is not evacuating the power they are producing, despite repeated requests.
A letter written by Sunil Jain to the Indian Banks’ Association as president of WIPPA, states that payments due to renewable power producers has been delayed by eight months.
The state’s representatives argue that they are armouring up to fight corruption.
“Just because one or two persons are worried about their investment or their property in the state, should we keep quiet when we realise the fact that there is rampant corruption and huge amounts have been paid to former CM Naidu to fix the rates for power purchase?” asked YSR Congress MP Vijayasai Reddy, a close aide of the chief minister.
“When there are people who are willing to supply at Rs 2.48 now, and it has been causing huge loss to exchequer, should the incumbent government keep quiet about it? These questions are my answer to your questions,” the MP told The Lede.
When asked about the violation of contracts and that this has led to a freeze amongst investors in the renewable energy sector, Vijayasai Reddy said – “So far as sanctity of the contract is concerned, when the law of the land is violated and huge money has changed hands from producers to the politicians, the contract that has been entered into is vitiated by them.
So contracts are liable to be repudiated and the contracts would be construed as void ab initio. The loss to the exchequer that has been caused by the then government and the then CM should be recovered in toto.
It is people’s money which has been amassed by the then CM and his family. It is people’s money that has been robbed in the form of corruption,” he said.
Another senior leader of the YSR Congress and MP Mithun Reddy told The Lede that technically no action has been initiated by the state government.
“All that the CM has done is he has put a committee to look into all the scams of the previous government. PPAs were given on a nomination basis, not on a tender basis.
When it involves thousands of crores, you cannot do it on a nomination basis. We cancelled tenders which are scams, which have been given on nomination basis,” he argued.
“There is a huge revenue deficit in the state. We want to reduce it. We are not worried about anything.
Orally they (power producers) have been told that there would be a renegotiation. Our discoms are in debt to the tune of Rs 20,000 crore. What will happen if discoms file for bankruptcy?
We are only bothered about cleaning up the system. We want to give cheaper power to public and to industry,” he said.
As for the Centre’s obvious disapproval over the Andhra government’s move to renegotiate contracts, the YSR Congress leaders laugh at the suggestion.
“So far as this issue is concerned, the Chief Minister had a discussion with the Honourable Prime Minister and Honourable Home Minister and we have a perfect relationship and understanding with the centre. There is no conflict of interest or difference of opinion,” said Vijayasai Reddy.
Mithun Reddy echoed his views. “Whatever we are doing we have discussed with the Central government. They have given our leader a go-ahead for cleaning up all the scams.
They are very happy that we are cleaning up the system. Those who are getting affected by this clean-up are the ones who are making all the noise. We can’t let people’s money be eaten up in scams,” he said.
The union government though is at pains to state that there is no reduction of investor confidence in the renewable energy sector in the wake of the Andhra shake-up.
“This has not really impacted investor sentiment,” Anand Kumar, Secretary, Ministry of New and Renewable Energy told The Lede.
“It could have dented the image of the Andhra government but not national sentiments. The central government is very clear that all contracts will be honoured. If any state government wants to do such things, then the image of that government will take a hit,” he said.
When queried about the letters written by the minister to the chief minister of Andhra and the obvious lack of action from Jagan, the senior bureaucrat said – “Everybody knows that our judicial system is very strong.
Central government has always said that agreements cannot be renegotiated unless there is cause to do so which is malafide. The court has given a stay. Nobody has cancelled the contracts yet. India is not a banana republic, people can take recourse to legal action.
Companies can go to NCLT (National Company Law Tribunal) against the non-payments of dues. There are avenues available for industry. We have built a system that is robust and credible,” he said.
But the renewable power sector is nervous.
“The Central government has been supportive,” said Sunil Jain of Hero Future Energies. “There is Rs 50,000 crore at stake. Lenders also stand to lose a lot of money. It will impact all the sectors.
The feeling now is that if one person in the country can do this, then anyone can do it. It is a very negative message that is going out. There is a world crisis of liquidity crunch and a recession looming large,” he said.
The industry representative agrees. “These are led by reasons of economics or political vendetta. International investors will not listen to this. They are only going to say - contract is violated. It is a very negative atmosphere.
Now industry is saying if this can happen to the renewable power sector, it can happen to any sector. It was not enough that the industry is not getting paid, now it is about opening up contracts. It is a very very bad situation. It has come at the worst time.”
The Lede attempted to reach Minister RK Singh, a foreign investor as well as some of the power producers but they preferred not to comment since the case is sub-judice.
But what guarantee is there that the state government will evacuate power and make payments to power producers even if the court verdict goes in favour of the producers?
“We are all bracing for that. We all know there are problems. I am cautious,” said Jain.