At the same time, solar power tariffs have come down by 80 per cent in six years. With prices falling at such a fast pace, financially beleaguered state-owned power distribution companies are reneging on contracts which they signed at higher tariffs. In Tamil Nadu and Andhra Pradesh, discoms have cancelled PPAs signed just a year ago. Jharkhand is negotiating tariffs two years after awarding projects at ultra-high rates of Rs 6-9 per unit. Uttar Pradesh, on the other hand, has cancelled 10,000 Mw of coal-based projects citing high prices agreed to by the previous government.
“Shelving of contracts by states not only violates the sanctity of contracts, it is also against the principle of legitimate expectation and promissory estoppels. Discoms should honour their contractual obligations as protecting investors and enforcing contracts are few sub-indices of the index of ease of doing business,” said Aditya K Singh, a transactional and regulatory lawyer based in Delhi.
Legal experts expect an increase in litigation in the sector if these incidents set precedents. “This unsettling trend of cancelling PPAs on extraneous grounds is on the rise and crosses geographies from Gujarat to Tamil Nadu to Jharkhand. While generally speaking it would be correct to assume that such instances would result in a spurt in litigation, the actual scenario would also depend on a host of factors such as the stage at which the project is in, the financing arrangements and the project's bankability and its appetite to adjust to the new internal rate of return,” said Shailendra Singh, principal, infrastructure & projects, at Advaita Legal.
Rating agency ICRA in one of its latest reports has expressed concern over the rising trend of PPA cancellation and renegotiation which could impact the credit profile of power developers. “The recent attempts by state-owned distribution utilities (discoms) to renegotiate or cancel signed PPAs with wind and solar power developers are likely to have an adverse impact on the renewable energy sector. If implemented, this would also impact the credit profile of independent power producers (IPPs) and investment interest in this sector,” said the report.
Shailendra Singh adds that unilateral termination of PPAs runs afoul of some settled principles of law such as the doctrine of promissory estoppel and legitimate expectations since most of these PPAs would be an outcome of a state-wide policy to promote renewables.
Discoms across the country are battling weak financials and are undergoing restructuring through the reforms programme, UDAY. Most of these states are also the ones which are defaulting on payments to generators and are not meeting targets for renewable energy purchase.
“These incidents are also happening due to weak enforcement of Renewable Purchase Obligations. State commissions are adopting a liberal approach in the implementation of RPOs and have been waiving RPOs of obligated entities in a routine manner even after a clear direction for implementation by the Supreme Court and the APTEL. Since discoms are confident that they will secure the waiver every year, they have made a mockery of the competitive bidding process,” said Aditya Singh.