Editorial | September 2017
Honour contracts, for investment sake!
The good news is that solar power tariff has fallen 80 per cent over the last seven years. Then by all rational expectations, it should have been a celebration time for the government, solar power producers, power sector ecosystem and the consumers. But the bad news is that some states have arbitrarily decided to cancel PPAs signed over the last few years or revise their tariffs downwards, in line with the latest tariffs arrived at through competitive bidding process. That is, these states - Andhra Pradesh, Gujarat, Tamil Nadu, Uttar Pradesh, Karnataka and Jharkhand - are reneging on the contracts signed by them with renewable power producers in the past, and that is threatening to become a precedent.
<p>From Rs.12.76/kWh of solar tariff in December 2010, the tariff has fallen steadily to 2.44/kWh for 500-MW Rajasthan project. This is mostly driven by falling solar PV prices globally. For wind power, the tariff has fallen toRs.3.46/kWh in a recent auction. The trend is expected to continue in future. </p>
<p>Already, state power distribution companies (discoms) are refusing to sign new long-term PPAs with generators across the board, citing availability of plenty of power at much lower prices on power exchanges. The price of power in the spot market is currently hovering around Rs.2.5 per kWh, which is much lower than the average tariff of Rs.4 per kWh offered by several new power plants. Discoms are trying to take advantage of the arbitrage between spot power and long-term PPAs, for short-term benefit, ignoring its long term hazards. The stranded capacity has crossed 40,000-MW mark, by now.</p>
<p>The banking sector, which is already staring at rising unpaid loans of over Rs.10 lakh crore, is worried about the prospect of Rs.1.5 lakh crore of renewable loans adding to their existing burden. Before extending the loans to renewable projects, banks assess their viability on the strength of the fixed price contract in their PPA for 25 years, besides evaluating the cost and efficiency of the technology they adopt at that time. And if the tariffs are lowered, the projects would become unviable, affecting the project's loan servicing capacity. Besides, the states' decision will make future renewable projects ineligible for bank loans, at a time when 70 per cent of the project cost is funded through bank loans. </p>
<p>At stake will be the government's ambitious target of achieving 175 GW of renewable capacity by 2022, envisaged in line with India's commitment at the Paris Summit on emissions. India wanted to ensure that about 40 per cent of its electricity comes from non-fossil fuels by 2030, to achieve this target. </p>
<p>Besides, this will discourage domestic and foreign investors as well as lenders from participating in various development projects, let alone development of the power sector, and would render these useful assets unproductive. </p>
<p>Ultimately, the key to 'Ease of Doing Business' lies in enforceability of contracts. This statement is not limited to the power sector. The states have to recognise that as more and more renewable PPAs are signed, the impact of the previous high tariff PPAs will get averaged gradually, bringing out the benefits of lower tariffs in relief. Given that this has become a multistate issue now, the Centre has to intervene and uphold the sanctity of contracts for the benefit of the country.</p>
<p> Follow me on twitter @PratapPadode</p>