Private sector participation in power generation has been at the core of power security in the last two decades, with independent power producers (IPP) currently owning 46% of the total installed generation capacity in India. Unfortunately, the sector that attracted FDI in excess of US$14 billion in the last two decades, faces upheavals, many of which are not of its own making. The recent action of the Andhra Pradesh government (APG) in threatening to terminate power purchase agreements of private developers unless tariffs are reduced is the latest problem to befall the sector. This has sent shock waves not only through IPP, but also those considering investment in the infrastructure sector in India in general.
The legality of the proposed action is doubtful. The contracts in question were awarded through competitive bidding, the bids reflected market realities at the time, and projects were funded on the basis of the power purchase agreements (PPA) executed after the bidding process. It is unrealistic to expect the bidders to reduce tariffs to the levels that may be more appealing at a later stage, and any coercion of the developers is unconscionable. Unilateral reduction in tariffs will be contrary to the contractual terms, and termination of the contracts if tariffs are not reduced will be in violation of the contracts.
Renegotiating contracts at this stage affects not only the developers, but also the investors, banks and financial institutions that funded projects on the basis of the executed PPA. In most cases developers may even need the consent of their investors and lenders to renegotiate the contracts. Reductions in tariffs will most certainly affect the financial viability of projects, which are grappling with delays in payments from distribution companies (discoms). This will put further pressure on projects, some of which may have to undergo debt restructuring or insolvency resolution processes unless the central government and the Reserve Bank of India intervene.
Abhishek Tripathi is the managing partner of Sarthak Advocates & Solicitors. Anura Gupta is a principal associate at the firm.