How can the Sanctity of Power Purchase Agreements be Maintained?

State governments, discoms and power sellers have chosen to interfere with the PPAs when suitable to their interests

In November last year, the Punjab Renewable Energy Security, Reform, Termination and Redetermination of Power Tariff Bill was tabled before the state legislative assembly, renewing the still fresh memories of the Andhra Pradesh government unilaterally reducing power tariffs. Power Purchase Agreements (PPAs) need to be respected to attract more investments in the renewable energy sector and help India accelerate it's energy transition.

Why are PPAs important?

A power purchase agreement (PPA) is a legally enforceable contract signed between a buyer and seller of electricity. Contract terms are changeable in three ways: through contractual terms; through negotiations by the parties; or as per law. Recent actions by both the Union and state governments have departed from contract law principles and set precedents for such interferences in the future. These precedents can have a ripple effect on the renewable energy sector and could potentially dampen investor confidence. Investors prefer supporting bankable project contracts (i.e., lenders will be willing to finance the project basis the primary project contract), and the PPA is the central project contract in the electricity sector. 

A third party cannot enforce or modify a PPA

In June 2019, as a response to distribution companies (discoms) not maintaining letters of credit (LC) (typically required in PPAs for payment security), the Ministry of Power (MoP) directed load dispatch centres (LDCs or the grid operators) to schedule and dispatch power only if the discoms had opened the LCs. Later, in February 2021, the MoP notified the Electricity (Late Payment Surcharge) Rules, which effectively modified the late payment surcharge clauses in existing PPAs. It further proposed amendments to these rules, allowing sellers to sell power to a third party in case of continued default by the buyer, ‘notwithstanding’ the relevant provision to this effect in the PPA.

Both these rules, despite their laudable intentions (addressing investor concerns) undermine contract sanctity since they effectively give a third-party (the LDCs in this case) the responsibility to enforce the contract.

Can a third party to a PPA escape it?

The Andhra Pradesh (AP) government passed an order on July 1, 2019, reducing tariffs unilaterally for expensive renewable energy (RE) PPAs. The AP High Court struck down this order as illegal, fixed an interim tariff, and directed the parties to go to the Andhra Pradesh Electricity Regulatory Commission (APERC) to sort out tariff issues. 

Similarly, in November 2021, the Punjab government approved and tabled a bill before its legislative assembly that “terminates” tariff related clauses in certain thermal and RE PPAs. It also tasks the Punjab State Electricity Regulatory Commission (PSERC) to redetermine the tariff of concluded PPAs. 
The Punjab government wants to follow the AP government in this regard – getting the tariffs lowered until the pendency of cases, and indicating in no uncertain terms, the economic distress of the discoms.

It is established by law that parties cannot seek to get away from contracts just because they become expensive to perform. While a public interest argument can be sought to be made in lowering tariffs, there is a more significant public interest in respecting the sanctity of the contracts. 

How do we enforce PPAs?

The above cases demonstrate that the state governments, the Union government, discoms, or the power sellers have chosen to interfere with the PPAs when suitable to their interests. Negotiated solutions and consistent application of rules will create predictability and certainty essential for increased investments towards clean energy transition. So here are four solutions:

• Discoms signing expensive PPAs helped create the RE success story in India. They must be compensated fairly for their risks through budgetary allocations, individual project renegotiations, or innovative tariff designs.
• In future, standard bidding guidelines must be carefully designed so that they can stand the test of time. It will especially be important for newer technologies like storage.
• The Ministry of Power must provide detailed guidance on the procedures for exit by discoms from PPAs. This should include commercial aspects, resource adequacy, and system concerns.
• The technology and the energy mix will evolve rapidly. Discoms must have flexible power procurement portfolios. 25-year contracts must be reconsidered so that they are not in the same position a few years down the road. Discoms must sign PPAs based on robust resource adequacy plans so that they are not saddled with unnecessary capacity.
• In the long term, judicial mechanisms for contract enforcement must be strengthened so that aggrieved parties do not seek extra-judicial remedies. This includes building capacity in ERCs and reducing the time taken to dispose of cases.

Harsha V Rao is a Research Analyst at The Council on Energy, Environment and Water (CEEW). Send your comments to [email protected]

Harsha V RaoAuthor