New Delhi: The Centre is exploring a law to protect investments affected by state governments’ decisions to scrap contracts as it moves to reassure foreign investors who are riled up by Andhra Pradesh’s plan to annul some clean energy agreements.

In a controversial move, the Y.S. Jagan Mohan Reddy-led Andhra Pradesh government decided to reopen renewable energy contracts inked under the previous state government led by his rival N. Chandrababu Naidu, drawing criticism from the Union government, as well as governments of France, Canada and Japan.

“This has sent a very bad signal to international investors. The Act being explored is that in the event of investments reaching a certain stage, a state government can’t arbitrarily cancel the contracts," said a senior Union government official, requesting anonymity.

“In the event of any such step taken by a state government, it will attract penalties and will make it difficult for them to do so."

The Union government has repeatedly cautioned the Andhra Pradesh government against scrapping the power purchase agreements (PPAs) signed by the previous Telugu Desam Party-led government, as it would have serious implications on India’s ability to attract overseas investments and the perception about the sanctity of legal contracts.

“Once the Act is brought in by the finance ministry, it will be binding on all states. Such kind of moves by the state governments are highly irresponsible and the Union government has been sending feelers to global investors that such a law may come into existence to assuage their concerns," the government official said.

Investors claimed that Andhra Pradesh’s decision could put at risk 5.2 gigawatts (GW) of solar and wind energy projects, with an estimated debt exposure of more than 21,000 crore.

“The Andhra Pradesh government knows the consequences that these are contractual commitments and if you go by contractual commitments there will be consequences," a second Union government official said, requesting anonymity.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Global investors in Andhra Pradesh’s clean energy space include Goldman Sachs, Brookfield, SoftBank, Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec, JERA Co. Inc., GIC Holdings Pte Ltd, Global Infrastructure Partners, CDC Group Plc, EverSource Capital and World Bank’s International Finance Corp.

They have invested in Indian companies, including ReNew Power, Greenko, Adani Power, PTC India Ltd, SB Energy, Mytrah and Hero Future Energies.

India’s power and new and renewable energy minister Raj Kumar Singh discussed payment security at a two-day conference of state power ministers in October. Finance minister Nirmala Sitharaman also assured global investors about the sanctity of power purchase contracts in India last month.

The Andhra Pradesh government has, however, softened its stand and clarified that it will not open all PPAs, but only those where malfeasance is established. Andhra Pradesh has around 7,700 megawatts (MW) of solar and wind projects.

“This will adversely impact investment climate not just in Andhra Pradesh but in the whole country. It will specially impact investments in the renewable sector. It will make it so much more difficult to meet our targets of 175GW of renewable energy by 2022," said the second government official.

India is running the world’s most ambitious renewable energy programme, with a target of 175GW of renewable energy capacity by 2022. Currently, India generates 82,580MW of clean energy, or 23% of its total power production.

Queries emailed to spokespeople of the ministries of finance and new and renewable energy on Thursday evening remained unanswered.

With record low solar and wind power tariffs, banks are already wary of lending to renewable energy developers as they suspect the viability of such projects. There are other problems, such as delay in payment by state-run power distribution companies that range from two months to 15 months, non-allocation of land to wind power projects, as well as transmission- and connectivity-related challenges.

Andhra Pradesh is trying to rework PPAs for wind and solar power with average tariffs (FY14) of 4.70 per unit and 5.8 per unit, respectively.

The state has clarified that it will not open all PPAs, but only those where malfeasance has been established. Andhra Pradesh has quoted an initial figure of 2.43 per unit for wind and 2.44 per unit for solar power tariff.

Close