India’s solar PPA troubles: negotiating with Discom ‘cowboys’

On the whole, tariff and PPA renegotiations are harmful, but they can come in handy when a project misses its completion deadlines. Credit: Tom Kenning

Going to Indian courts over renegotiations of solar power purchase agreements (PPAs) can be a costly and time-consuming process, but is this where the trouble ends?

While India’s distribution companies (Discoms) watched PV tariffs fall dramatically over 2017, some looked back at their own solar auctions from previous years and realised the tariffs quoted were not nearly as attractive as first imagined. As a result, the PV industry has been irritated by some state Discoms employing various tactics including price matching tariffs, delaying PPA signings or even cancelling them. Opinions vary from seeing this activity as a significant threat to the industry, as a small-scale nuisance, or even as a handy get out of jail free card for developers facing delays.

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The threat

To start with let’s look at the negatives. Back in August, the National Solar Energy Federation of India (NSEFI) wrote a strong letter to the Ministry of New and Renewable Energy (MNRE) outlining the damaged caused by these Discom tactics and called for an “immediate intervention”.

The Federation said altering PPAs could make projects unviable and would hit sector confidence, because “the essence of PPAs is to provide security of contracted quantum of supply and price on long-term basis”. Just as worrying, PPA uncertainty would impact project economics and bring the banking sector into bad debt.

Jasmeet Khurana, an independent consultant, told PV Tech that state regulators should have the power to stop this behaviour, but Discoms “can still twist the arms of developers” by hurting them in other ways such as by curtailing their power.

He added: “Re-negotiation of PPAs will continue to be a risk unless there is a strong policy directive against it or a judicial precedent is set. In any genuine case, if developers are forced to go to court, we believe that the ruling will be in favour of the developers. Such a ruling should give comfort to other developers.”

Counter movement

Such a policy directive may not be too far away. Only last Friday, the new power minister R.K. Singh announced publicly that the ministry is finalising laws that will include penalties for state governments and distribution companies (Discoms) that do not honour PPAs.

However, it remains to be seen whether the policy would be enough to stop more occurrences. Only this summer, price matching has been carried out by the likes of Tamil Nadu and Jharkhand, while Uttar Pradesh has even renegotiated after PPAs were signed.

In conversation with various developers, Khurana gathered that many believe the PPA issue is coming to an end, but going to court will still be time consuming. In defence of the Discoms, he noted that they are already under financial stress and demand for power is not growing as much as when they had planned capacity expansions, which all makes renegotiations very tempting at any stage before the final PPA signing.

PV Tech understands that the issue had even made it to the Prime Minister’s Office at one point prompting strong disapproval.

Ministry of New and Renewable Energy (MNRE) secretary Anand Kumar has stated publicly: “Several states in India are contemplating renegotiating their power purchase agreements, but we in the ministry [believe] that once a contract agreement has been made, the contractual obligations must be honoured.”

Who’s in charge?

However, Bharat Reddy, deputy general manager, Solar Energy Corporation of India (SECI), said: “The problem in India is that any central entity cannot command the states. In the electricity sector itself they have autonomy, so central government cannot command them. They can give some guidance only [and] anything decided by central government is not binding. States have their own regulatory commissions.”

On the flip side, Reddy also said the PPA problem was concentrated in just a few states and is likely to be settled soon. Several downstream PV players have also told PV Tech that they felt the PPA issues were all but over, citing the strength of the central government and the outcome of a previous Supreme Court case in favour of the developer.

To give two examples:

Referring to PPA negotiations, Anmol Singh Jaggi, co-founder, solar O&M and advisory firm Gensol Group, said: “I can be very very confident on it that any state attempting it…this is a misadventure and this will not happen. The central government is very strong.

“In 2012 we had one case; Gujarat had filed a petition and appellate tribunal shot it down, so there was a history of somebody going ahead and renegotiating a tariff and it was shut down.”

Discom cowboys

Rahul Munjal, chairman and managing director of Indian developer Hero Future Energies, also referenced the historical Supreme Court judgment, with this paraphrase: “PPA is a document, which is a long-term document and cannot be opened. Period.”

He added: “They will never win anything in the court of law. Will they give us some short-term pain or nuisance value? Yes.”

Munjal said this ‘nuisance’ would come in the form of having to pay lawyers and sitting in on legal meetings – adding: “This is, I would say, the immaturity of cowboys who don’t understand the system, trying to create a nuisance.”

Offering another perspective, Munjal said he was glad the issue had been raised so that now the whole industry will discuss it in order to “once and for all nip it in the bud”.

Investor confidence

Vinay Shetty, managing director, of vertically integrated Chinese manufacturer Canadian Solar Energy Private, said PPA renegotiations would simply reduce global investor confidence in the Indian PV projects and were “not a good sign”.

Similarly, Ivan Saha, CTO and BU head, solar manufacturing at Indian manufacturer Vikram Solar, referring to the unhealthy practice said: “It's not good and they should find a way to contain this and find a way to protect investor confidence otherwise you won't get good quality investors in India and people will stay away from the Indian market.”

The waiting game

While the Discoms have been berated by the industry, Kuljit Singh, partner, Transaction Advisory Services at EY, offers a more nuanced point of view. He described an “odd trend” in the market where at the same time as Discoms feel a bit cheated by procuring solar in the past at higher costs than it draws now, many developers are also delaying projects, taking the maximum possible time given them to take advantage of PV equipment cost reductions going forward.

Singh said: “There is a kind of counter pressure, which is there in the market.”

As a result, he believes that India has not heard the last of tariff negotiations, but they will be concentrated in the “peculiar zone” before all three stages of a PPA signing. This could be when a bidder has been awarded capacity, but is still at the Letter of Interest (LOI) stage, or perhaps when a PPA has been signed but the regulatory commission has yet to approve it.

The other scenario would be when a project gets delayed far beyond the original timeline. Singh said some developers would be able to find a force majeure incident or extraneous event in order to avoid a penalty. In such cases there could be a voluntary renegotiation where the developer would agree to a tariff reduction to reflect the market-wide price drops since the original PPA signing. Singh said these occurrences would be less worrisome as nobody would be losing out in the process.

Exactly who has the power over these negotiations remains a muddy topic, and, for the most part, the industry will be hoping to see the back of these negotiations as soon as possible. 

Although relating to wind projects rather than solar, a report in the Indian paper Economic Times in late October, will encourage the renewables industry. In this case, the Karnataka government shot down a regulatory order that had attempted to reduce tariffs for wind projects whose PPAs had already been signed.

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