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.
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.
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.
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.
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: