Solar in Andhra Pradesh

The Indian renewable energy developer community has been in the ICU for the last six months as a change in the government in the southern state of Andhra Pradesh led to a massive cash flow issue. The new government came in and said that it would not honor the power purchase contracts of the solar and wind power plants as it felt that the previous dispensation had overpaid for wind and energy power for dubious purposes.

The state government wanted to renegotiate the prices to a much lower level and is strong-arming the developers through various means such as curtailing the power generation from the plants using flimsy reasons. As cash flows from over 5000 MW of RE plants stopped, these developers started to face working capital issues and the prospects of a default on debt became very real. The central government tried to persuade the state government not to go to these extreme steps however AP refused to listen. With RE developers now threatening to go for international arbitration, some sort of truce seems to have been negotiated between the state government and the central government.

While there are no details, it seems that the central government will give some carrots for the AP government not to finish off the renewable energy sector in India. The carrots seem to

1)      Loans from the central power sector lenders such as REC and PFC to the AP distribution utilities to temporarily tide over their financial issues

2)      Power to be sold from Andhra Pradesh to other states which will be facilitated by the central government

3)      The state government will not pay for any interstate transmission charges.

In return for the above carrots, the AP state government will continue to honor the contracts that it already has signed. This will also ensure the renewable energy developers earn enough money to pay their debt and keep up the trust of the foreign funds which have funded most of these RE developers.

India has a target fo 450 GW of RE capacity by 2030 up from around 80 GW now. This will mean that more than half a trillion dollars in investment requirements over the next decade. The country remains capital and cash-starved and will need foreign investors to continue pouring money into the RE sector which is heavily capital intensive. Recent quarters had seen most tenders and auctions go unbid by the major RE developers who were too busy surviving to worry about growth. Hopefully, this truce between the state government and the central government can revive the sector.