Power Purchase Agreements: Caught in a legal cesspool

States reneging on power contracts sours competitive bidding for renewable energy

In the past six months, there has been a surge in instances of states reneging on power purchase agreements or renegotiating tariffs with developers. This comes at a time when renewable power prices are witnessing a free fall and coal-based power has hardly any takers with no state signing long-term contracts.

This has not only brought into the limelight the need for separate regulations for awarding renewable energy projects but also the need to preserve the legal sanctity of a power purchase agreement (PPA).

“States shall endeavour to procure power from renewable energy sources through competitive bidding to keep the tariff low, except from waste-to-energy plants. Procurement of power by the distribution licensee from renewable energy sources from projects above the notified capacity shall be done through the competitive bidding process, from the date to be notified by the central government,” the new Tariff Policy announced last year said.

While solar power has bidding guidelines specified by the Centre which most of the states adhere to, there is a lack of guidelines when it comes to wind power. Introduced this year, competitive bidding in wind power projects helped the tariff spiral down drastically to Rs 2.44 per unit from Rs 5 per unit.

How the states crashed the party

• Uttar Pradesh: Cancelled 10.7 Gw of coal-based power projects
• Karnataka: To cancel PPA with all wind power project developers
• Andhra Pradesh: Approached regulator for change in tariff for wind projects signed two years ago
• Tamil Nadu: For  memorandums of understanding (MoUs) signed worth 1,400 Mw for renewable, the state has requested for change in tariff last year. The MoUs were signed at Rs  7.01/unit and the state wanted it to be reduced to Rs 5.10 per unit
• Jharkhand: Solar power tender cancelled two years after bidding & negotiation of tariff
• Madhya Pradesh: To take away must-run status of renewable energy

 

At the same time, solar power tariffs have come down by 80 per cent in six years. With prices falling at such a fast pace, financially beleaguered state-owned power distribution companies are reneging on contracts which they signed at higher tariffs. In Tamil Nadu and Andhra Pradesh, discoms have cancelled PPAs signed just a year ago. Jharkhand is negotiating tariffs two years after awarding projects at ultra-high rates of Rs 6-9 per unit. Uttar Pradesh, on the other hand, has cancelled 10,000 Mw of coal-based projects citing high prices agreed to by the previous government.

“Shelving of contracts by states not only violates the sanctity of contracts, it is also against the principle of legitimate expectation and promissory estoppels. Discoms should honour their contractual obligations as protecting investors and enforcing contracts are few sub-indices of the index of ease of doing business,” said Aditya K Singh, a transactional and regulatory lawyer based in Delhi.

Legal experts expect an increase in litigation in the sector if these incidents set precedents. “This unsettling trend of cancelling PPAs on extraneous grounds is on the rise and crosses geographies from Gujarat to Tamil Nadu to Jharkhand. While generally speaking it would be correct to assume that such instances would result in a spurt in litigation, the actual scenario would also depend on a host of factors such as the stage at which the project is in, the financing arrangements and the project's bankability and its appetite to adjust to the new internal rate of return,” said Shailendra Singh, principal, infrastructure & projects, at Advaita Legal.
 

Rating agency ICRA in one of its latest reports has expressed concern over the rising trend of PPA cancellation and renegotiation which could impact the credit profile of power developers. “The recent attempts by state-owned distribution utilities (discoms) to renegotiate or cancel signed PPAs with wind and solar power developers are likely to have an adverse impact on the renewable energy sector. If implemented, this would also impact the credit profile of independent power producers (IPPs) and investment interest in this sector,” said the report.

Shailendra Singh adds that unilateral termination of PPAs runs afoul of some settled principles of law such as the doctrine of promissory estoppel and legitimate expectations since most of these PPAs would be an outcome of a state-wide policy to promote renewables.

Discoms across the country are battling weak financials and are undergoing restructuring through the reforms programme, UDAY. Most of these states are also the ones which are defaulting on payments to generators and are not meeting targets for renewable energy purchase.

“These incidents are also happening due to weak enforcement of Renewable Purchase Obligations. State commissions are adopting a liberal approach in the implementation of RPOs and have been waiving RPOs of obligated entities in a routine manner even after a clear direction for implementation by the Supreme Court and the APTEL. Since discoms are confident that they will secure the waiver every year, they have made a mockery of the competitive bidding process,” said Aditya Singh.