Flouting contracts a ruinous strategy

Flouting contracts a ruinous strategy

A number of state-owned power distribution utilities now seek to renege on their power purchase agreements (PPAs) with renewable energy producers, on the ground that the tariffs of new renewable power, particularly from solar photo voltaic installations, have come down subsequent to signing the PPA. Andhra Pradesh and Uttar Pradesh are prime offenders, other states want to follow suit. This is a worrying trend that will have serious negative consequences. If a contract solemnly entered into with a quasi-sovereign entity has no sanctity and can wilfully and unilaterally be breached, no one would want to invest in the country. The loans taken by the renewable energy producers to set up the capacity that turns infructuous after cancellation of PPAs would turn bad, adding to the non-performing burden of the banks.
Electricity utilities do have problems of their own. Under the UDAY scheme, they have managed to palm off the bulk of their debt to the state governments, leading to slippages in state-level fiscal discipline. Yet, the combined losses of state power entities were still over Rs 40,000 crore in 2016-17, after declining by more than a fifth from the previous year’s level. It is understandable that they wish to latch on to the lowest cost power available and ditch higher-cost purchase commitments. But, in the process, they cannot be allowed to wreck the country’s efforts to improve its rank in the World Bank’s ease of doing business ranking and add to the banks’ woes. What state governments need to do is to stop patronising any kind of power theft and improve realisations. This, along with pooling low- and high cost power, would permit state utilities to honour their contractual obligations without ruining their finances or killing the renewable power industry.
The easy path of simply scrapping older contracts would put the entire cost of adjustment on one segment of the energy ecosystem and thwart future investment. Tariffs would, in all likelihood, fall further and if utilities keep scraping PPAs till tariffs hit rock bottom, they will be left with neither credibility nor power.