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Andhra Pradesh HC Order Upholding Sanctity of PPAs Positive for Renewable Energy Producers: ICRA

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The High Court of Andhra Pradesh upholding the sanctity of PPAs (power purchase agreements) is a positive development for the renewable energy sector, said ICRA.

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The High Court of Andhra Pradesh vide its order on March 15, 2022 in the matter of PPA tariff renegotiation for wind and solar power projects, 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.

“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,” Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said in the statement.

According to Kadam, pending resolution of PPA tariff renegotiation matters 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 groups.

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However, he stated that timely implementation of the HC order by the discoms is a key factor, given the weak financial profile of the discoms in AP marked by continued losses and large debt dependence.

The AP High Court has set aside its previous order issued in September 2019, by a single judge bench of the HC, ICRA said in a statement.

The AP High Court in its order dated September 2019, had ordered the AP state distribution utilities (or discoms) to make the payments at an interim tariff of Rs 2.43/2.44 per unit, instead of PPA tariff and had set aside the order issued by the AP government in July 2019, to form a high-powered committee to review the wind and solar power tariffs, it stated.

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.

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“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 per cent on average retail supply tariff for AP discoms,” Vikram V, Vice President & Sector Head – Corporate Ratings, said.

The tariff order issued by Andhra Pradesh Electricity Regulatory Commission (APERC) for FY2022 has an approved annual revenue requirement for AP discoms which is based on average RE purchase cost of Rs 2.55/unit, considering the interim PPA rate.

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, he added.

According to ICRA, the outlook for the RE sector remains stable, aided by the strong policy thrust, improved tariff competitiveness of both solar and wind energy as well as supportive regulatory framework.

Vishrov Mukerjee, Partner, J Sagar Associates who has represented Green Infra Wind Solutions in a batch of Writ Appeals before the AP High Court said the judgment underscored the importance of certainty in contracts by rejecting the plea that PPAs can be reopened on the ground of financial hardship.

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Quashing the proceedings pending before the regulatory commission can finally (hopefully!) give quietus to this issue. This coupled with directions for payment in a time bound manner and rejection of curtailment of RE projects which have must-run status will provide much needed relief to the sector, Mukerjee said.

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