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APDoomed? Why AP could lose out in top state race from here on

It has been over 50 days since YSR Congress government came to power in Andhra Pradesh. At the oath-taking ceremony, Y.S. Jaganmohan Reddy swore to ensure that he will be appreciated for his work within the first 100 days of his government. Looks like his promises were forgotten soon after he got off the dais. Not only has his entire focus been on the previous Chandrababu-led government, he has also gone further by initially cancelling PPAs and then, halting them in the name of reviews. 
 
Despite the Central Government and Andhra Pradesh High Court giving a rap to the Chief Minister, the state government has been nonchalant to the directives. Following this, several renewable energy firms which have invested heavily in Andhra Pradesh are facing massive trouble as it puts the entire renewables sector at risk. 
 
According to Ratings Agency Crisil, Andhra Pradesh (AP) government’s move to review and bring down the purchase cost of wind and solar energy could aggravate the problem of delayed payments from distribution companies (discoms) and stress 5.2 GW of renewables projects with estimated debt exposure of over Rs. 21,000 crore.
 
Nearly half of this capacity is at higher risk of default since they lack liquidity support beyond project level. The AP order, issued on July 1, 2019, directs a high-level negotiation committee to use current rates, rates prevalent at the time of commissioning of projects, and the current opportunity cost of other sources of power to benchmark and renegotiate agreements, and also submit its report to the state in 45 days.
 
“Around 5.2 GW projects out of 7.5 GW in AP are supplying power to state discoms under long-term power purchase agreements (PPAs) at pre-determined tariffs. They now face renegotiation risk given that their tariffs are above the recent auction prices of below Rs 3 per unit for renewable projects and average power purchase cost of Rs 3.8 per unit in AP in fiscal 2019,” says Manish Gupta, senior director, CRISIL.
 
This excludes inter-state transmission system projects of ~2 GW, where the exposure is to central counterparties (of NTPC Ltd. and Solar Energy Corporation of India) and are relatively safe as the payments to the developers are from the counterparties’ pooled cash flows. 
 
Assuming a typical debt funding per MW of Rs. 4 crore, this would put Rs.. 21,000 crore of debt at risk of default. That is because, in the event of any adverse recommendation by the committee, generators may take the legal route to stall implementation, which will prolong resolution and result in further delays in payment to renewable projects. 
 
AP discoms are already facing a significant resource crunch with revenue gap (revenue generated less the operating expenses) widening in fiscal 2019. Consequently, discoms have been delaying payments to generators by 6-12 months.
 
The rest 50% of capacity (with Rs. 10,400 crore of debt) may get a temporary lifeline being part of renewable groups or being part of corporates with strong financial flexibility. Such groups are prudently earmarking liquidity from recently raised capital at the holding company level, and may sustain debt servicing of such projects by another 6-12 months.
 
This move has not only violated investor confidence in Andhra Pradesh, but it has also driven several key and foreign investors out of the state. If such a situation continues and the current government doesn’t respond, then Andhra Pradesh’s position from being the top state in every sector could slip to being the state that is not business-friendly. Eventually, it could hit the financial situation of the state and push it further into debt, apart from the already existing financial deficit. 

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