NEW DELHI :
The Andhra Pradesh government’s plan to cancel clean energy contracts signed under the previous government has rattled foreign investors, including sovereign wealth funds and pension funds, said investors, analysts, and chief executives.
The issue, which threatens to derail India’s clean energy run, is being discussed at the top levels of the National Democratic Alliance (NDA) government to ensure quick resolution. Andhra Pradesh has around 7,700 mega watt (MW) of solar and wind projects.
This comes against the backdrop of India’s green energy sector being one of the largest recipients of foreign direct investment (FDI) and the country requiring $30 billion of clean energy investments over the next decade to run the world’s largest green energy programme.
Some of the largest overseas investors in India’s green economy include Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Singapore’s GIC Holdings Pte Ltd, Abu Dhabi Investment Authority (ADIA), the UK government’s CDC Group, French energy firm Engie SA, and Japan’s JERA Co. Masdar-owned by Abu Dhabi government’s sovereign wealth fund Mubadala Investment Company is also scouting for opportunities here.
“This is disastrous. It will have an impact on the ongoing deals in the renewable energy space. Which investor would want to put money when there is no sanctity of contracts?" asked the chief executive of a New Delhi-based company that has set up projects in the state, requesting anonymity.
The Union government is pulling out all stops to impress upon the Y.S. Jagan Mohan Reddy-led government to not cancel the previous government’s decision to ink power purchase agreements (PPAs) for the projects in the so-called “in-pipeline", as it would have a wide-ranging impact on foreign investments.
“Reopening and renegotiation of contracts may impact the enthusiasm of investors about India," said Debasish Mishra, partner at Deloitte India.
“Renewable energy has been one segment that has been led by private sector, with significant equity coming from foreign private equity, sovereign and pension funds," said Mishra.
The Andhra Pradesh government has set up a cabinet sub-committee to “identify the person/persons/institutions responsible for prima facie mala fide decisions and actions, and recommend appropriate action."
One of the terms of reference of the panel that has spread uncertainty in the India clean energy space is to “review all investments in the power sector and infrastructure projects approved and PPAs executed during this period and recommend appropriate action in case of omissions, commissions, mala fide actions, loss of valuable public resources."
“If there is corruption, establish it. How can you en masse revisit PPAs? The decision can be challenged in a court of law," said a senior Union government official, requesting anonymity.
The Andhra Pradesh government went ahead with its plans despite the Union government’s earlier efforts, including a 6 June communication from new and renewable energy secretary Anand Kumar to state chief secretary L.V. Subramanyam to dissuade the state from doing so. “We will examine the contracts," said a state government official, requesting anonymity.
Queries emailed to CDPQ, GIC, ADIA, CDC Group, Engie SA, and JERA over the weekend remained unanswered. A CPPIB spokesperson did not comment.
Foreign investors have put around $1.02 billion equity investment in renewable energy projects in the current financial year till date, according to data compiled by consulting firm Bridge to India.
These investments have been growing and is spread across sectors such as solar power generation (roof-top and grid connected), wind power generation firms, and electric vehicles, with the electricity storage projects gaining traction now. International equity investment in India’s clean energy sector was $283 million in 2016, $532 million in 2017, and $1.02 billion in 2018. This excludes all offshore debt funding and investments made by foreign developers in their Indian subsidiaries.
“If the case ends up going through litigation, we fully expect a decision in favour of project owners. All projects have been sanctioned by state government agencies and approved by the state regulator under standard processes consistent across the country. There is no likelihood of success for the state government’s case unless it can prove some wrongdoing in project allocation and/or determination of tariffs," added Vinay Rustagi, managing director at Bridge to India.
Globally, India is ranked fourth and fifth respectively in installed capacities for wind and solar power. With competitive solar bids and India’s wind energy sector having transitioned from a feed-in tariff regime, which ensures a fixed price for wind power producers, to tariff-based competitive auctions, obtaining finance at the lowest cost has become key.
“The real risk for investors therefore, apart from having to fight an expensive legal process, is how to navigate the investment anxiety caused by this process in the short-term. International investors, in particular, would be nervous and funding discussions are likely to get stalled. Domestic investors and banks are also bound to go slow," said Rustagi. “The risk of delayed payments and curtailment, however, is real and growing, and would continue to test investors," he said.