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The Punjab legislature recently passed the Punjab Renewable Energy Security Reform, Termination, and Redetermination of Power Tariff Bill, 2021. This is bad news for the power sector, to say the least.
The Bill proposes the renegotiation of signed power purchase agreements (PPAs) with renewable energy generators whose tariffs have been in the vicinity of Rs 7 per unit since they were signed, more than five years ago, probably between 2013 and 2016. In contrast, current solar tariffs may vary from Rs 2-2.5 per unit, depending upon the location and other factors.
About 1000 MW of capacity owned by a number of independent power producers (IPPs) is likely to be affected through the passage of this Bill and what’s more, it will surely have an adverse effect on the installation of new projects going forward.
Punjab, however, is not the first state to take this retroactive step. Andhra Pradesh, too, has been busy reopening PPAs since 2019, a move that is now being heard before various courts of law. Andhra Pradesh, however, did not resort to the legislative route like Punjab.
Gujarat, Rajasthan, Karnataka and Uttar Pradesh, too, have all tried to renegotiate or cancel PPAs in the past. Why are state governments resorting to such measures? Is it too difficult to realise that the drop in tariffs to near Rs 2 per unit is due to the steady decrease in the capital cost of the equipment?
Moreover, all such projects have gone through a process of financial closure and their capacity to service their loans gets seriously undermined if the price of power is altered from what was envisaged in the project proposal which had been approved by the financial institutions. Such projects are doomed to become non-performing assets (NPAs) and will add to the huge list of power projects already termed as such.
More often than not, such decisions have political overtones and usually, the government in power tries to nullify PPAs signed by the previous regime, usually citing corruption.
Decisions to alter PPAs are also often taken when elections which are around the corner. Punjab seems to have fallen in this category. Politics apart, such a move is sure to face legal impediments as well since tariff determination is under the domain of the electricity commissions and not state governments. With the passing of several electricity reform laws, the government has ceded its right to have a say in tariff determination.
Certain state governments’ decisions to renegotiate/cancel PPAs should also be seen in the light of India’s commitments made in the Paris agreement (2015) and also in the recently concluded COP26 at Glasgow. We have given ourselves a stiff target of having a renewable generation capacity of 500 GW by 2030 and we are certain to miss the bus if we continue to renegotiate PPAs because doing so kills investor sentiments.
We are falling short of our target of having a renewable capacity of 175 GW by 2022 as it is since there has been a dip in the installation of solar/wind plants, one of the reasons for which is that we have not been able to build a conducive atmosphere for developers.
The power sector is a difficult sector to govern because responsibilities are divided between the Union government and the states. While the Union government frames policies for the power sector through statutory documents like the National Electricity Policy and the Tariff Policy, the states are responsible for power distribution.
Policies are framed by the Union government keeping the national perspective in view but the states’ vision is limited to their own geographical boundaries and to the ground realities as they face. The fact is that the distribution sector is politically volatile and is intrinsically linked to vote banks. Given this political economy, the states will continue to take measures which may be harmful from the national point of view.
However, on the limited point of renegotiating PPAs, it is time for electricity regulatory commissions to draw the line. Developers will approach the regulatory commissions first in case of any infringement of the PPAs.
Unfortunately, as it seems today, state-owned distribution companies (discoms), the regulatory commissions and the state governments seem to be one cohesive team, pitted against the hapless developers. Regulatory commissions as well as courts of law should take a dim view of the attempts made by discoms to flout contracts. Till this is done, we can forget about realising our dream of 500 GW of renewable capacity by 2030.
Somit Dasgupta is a Senior Visiting Fellow at the Indian Council for Research on International Economic Relations (ICRIER) and former, Member (Economic & Commercial), Central Electricity Authority (CEA).