Power producers may take Andhra govt head-on

State's move to renegotiate power purchase agreements has lenders worried

Independent power producers (IPPs) in Andhra Pradesh may just take the state government head-on on the issue of renegotiation of power purchase agreements (PPAs).

Additionally, the decision of the state government to renegotiate the PPAs signed earlier has left lending institutions a highly worried lot.

Banking on the new Electricity Act which allows power producers the freedom to 'generate anywhere and sell anywhere' in the country, IPPs in the state could well decide to back out of the existing PPAs signed with the state government and sell power to states which are willing to pay more, an industry source told Business Standard.

Lending institutions to the power sector have also expressed worry over the state government's decision.

Four power projects in the state are under implementation and have achieved financial closure to the tune of Rs 4,000 crore based on the PPAs that the IPPs have signed with the state government.

Close to 70 per cent of the total investment is in the form of debt.

With the new Electricity Act allowing open access there is nothing stopping the power producers to sell power to a state like Karnataka which is ready to pay more, according to a senior state government official.

The Congress government's decision to negotiate the PPAs is ostensibly because the fixed costs involved are higher and should be reduced.

"Any reduction in the fixed cost component will only impact the lenders with returns slated to come down. Additionally, the lenders have accessed funds at high cost. Lending to the power sector may now again become an issue," a banking official said.

Lenders also point out that the fixed cost component in the PPAs is the lowest in Andhra Pradesh when compared to other states.

"In Andhra Pradesh, the fixed cost of power projects is between Rs 1.21 and Rs 1.45 per unit. In Tamil Nadu the fixed cost component is between Rs 1.30 and Rs 1.60 per unit, while in Karnataka which has only one private power project the fixed cost is Rs 1.60 per unit," the official said.