Political Risk Spikes In Andhra As Jagan Government Questions PPA’s

The central government has been forced to move and publicly ‘advise’ the newly elected government in Andhra Pradesh, where the new Chief Minister, YS Jagan Mohan Reddy has voiced doubts on the PPA’s signed by his predecessor government of Chandrababu Naidu.

The central missive follows the state government’s first moves, which included an order to cancel all the infrastructure contracts awarded before April 1, 2019. A move that could impact almost Rs 50,000 cores worth of projects. These will potentially include renewable energy projects too. Such moves could send a very negative signal to potential investors as well as developers, at a time when the industry is not exactly in the pink of health, and definitely does not have the margins to manage such ‘disruptions’.  It is also clear that the new state government might have been more influenced by headline power tariff numbers, rather than the reality of state discom finances and the multiple surcharges and taxes the state levies to arrive at the final power cost.

AP State chief secretary LV Subramanyam is the recipient of the letter from the MNRE secretary Anand Kumar, where the latter has raised concerns about hasty and ill-informed action.

The letter reminds the state secretary that renewable energy project PPAs with the state government are signed under section 62 or 63 of the Electricity Act. The State Electricity Regulatory Commission (SERC) fixes the tariffs in line with the Central Electricity Regulatory Commission’s guidelines in the first case. In the latter case, the tariff is arrived at through a transparent open competitive bidding basis. “In both cases, SERCs conduct public hearings before adopting the tariffs and signing the PPAs,” says Kumar’s letter.

The letter urges the state chief secretary to apprise the new CM of these facts and to desist from taking any action that might impact investor sentiment.

Andhra Pradesh has a chequered history as it is when it comes to state interference causing massive disruptions. The state gave birth to a rash of infrastructure firms 15 years back, all growing on the back of massive state irrigation contracts. A change on government turned most into zombies, with neither firms nor projects in any state to service bank loans taken.

Jagan Mohan Reddy’s vow to review all the PPA, especially wind and, solar, besides other large projects would have caused some serious distress, therefore.

For the record, Andhra Pradesh has been an active player in the solar and wind ‘boom’ over the past 5 years, with the erstwhile state government ensuring an increase in renewable energy capacity to 7,463MW in 2018-19 from 1,340MW in 2014-15. The state also set up the biggest solar park project of 1,000MW at a single location in Kurnool’s ultra-mega solar park. As recently as January this year, it did appear that the state would achieve its targeted capacity addition of 5,000MW of solar and 4,150MW of wind power by 2020 and achieve 18,000MW renewable energy capacity by 2021-22.

Investors with a longer memory will recall how the state brought another industry, the microfinance industry to its knees when it encouraged borrowers to default. alleging usurious rates of interest by MFI’s. It took the industry years to recover from that shock, besides moving away from the state altogether.

The renewable energy industry, with much riding on Andhra Pradesh, will hope it doesn’t come to that. For make no mistake, Andhra Pradesh actions could have a cascading effect nationally.