Power Purchase Agreement – A Low Risk Proposition for Solar Power Generation Companies

Kamuthi Solar Park
Image: Financial Express [CC BY-SA 4.0], via Wikimedia Commons

This paper is not related to core aspects of international relations but a regional specific issue in the state of Andhra Pradesh, India. The issue could have domestic and in turn international implications on the international energy value chain.

Recently, the government of Andhra Pradesh in India decided to review the Power Purchase Agreements (PPAs) with Wind and Solar Power generation companies. PPAs are between the purchaser “offtaker” (often a state-owned electricity utility) and a privately owned power producer to secure the payment stream (The World Bank, As on September 2019). The companies argued that the state government had no say in the contracts which were signed between the distribution companies and the developers while the Andhra Pradesh government argued that the high cost PPAs were difficult to be honoured and the tariffs had to be revised downwards (Economic Times, 24 September 2019).

In the year 2015-16, the author had the scope to interact with the entrepreneurs and experts in solar power industry (Banerjee, 2017). PPAs, which are generally  for the time period of 25 years in case of solar power, was expressed as the most encouraging arrangement by the entrepreneurs as the arrangement provides low risk proposition to the investors for a guaranteed period of 25 years.   PPAs are presently the primary arrangement for sale of solar power as states are the lone buyers for majority of the solar power plants. 

Reverse bidding is practiced in case of Grid Interactive Solar Power. States decide the benchmark tariff to give a base and then initiate the bidding process while the policy decides the bidding steps. Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) revise the levelized/benchmark tariff almost every (or couple of) year/s to adjust with the market trends. During the bidding process, the tariff quoted can vary with the benchmark tariff. The solar power tariff went to all time low during May 2018 with a private developer quoting INR 2.44 per unit and marginally rose to INR 2.55 per unit during a bidding process in June 2019 (wherein the tariff ceiling was INR 2.65 per unit)(The Economic Times, 13 June 2019). This price of solar power is much lower than INR 17.91, the price of solar power (Feed in Tariff) in 2010 (Center for Science and Environment, as on February 2016). As per the experts, the solar tariff reduced substantially due to the bidding practice and reduced cost of Photo Voltaic (PV) panels & other equipment. The consulting firm, Bridge to India, suggests that many times Indian developers are not pricing risks fully (Livemint, 20 March 2017). To survive the low tariff, the quality of plant might be compromised. In case if low quality equipment is used to match the low tariff, the plant may not be able to function in its full capacities for a period of 25 years. However, bidding is a good initiative wherein the developers have the freedom to decide the tariff and the buyer (who is generally the state distribution company in case of solar power) to choose the lowest tariff. 

Grid Interactive Solar Power gained momentum only in the year 2012 with a push from the National Solar Mission initiated in the year 2010. Solar power is still at nascent stage compared to wind and biomass. The year 2015 saw a major thrust towards the Grid Interactive Solar Power with the  government announcement to raise the country’s solar power generation capacity by ten times to 100 GW by 2022, which comprises of 60 GW from Grid Interactive Solar Power, while the remaining 40 GW is targeted to come from grid-connected roof-top installations. Total solar potential of the country is estimated as 750 GW and the total Installed Grid Interactive Solar Power Capacity is 24.3 GW (Ministry of Statistics and Programme Implementation, 2019). India still has long gap to achieve the solar target of 60 GW. After achieving universal electrification, the commitment of the government is towards providing reliable power to the households. Untapped solar potential provides for a lucrative path to enhance generation capacities through clean means. Private investments in solar power generation play an important role in achieving the electrification goals and solar targets.   

The central and state policies have reached to a level where it can attract private investors and the policies are conducive as well. Policies and regulations need change from time to time but uncertainty in policy is a major barrier, as suggested by the experts (Banerjee, 2017). Again, in case of Solar, the business models emerge from policies and delays/uncertainties affect the revenue patterns.

As per The World Bank, PPA mitigates the risks of uncertainty from the projected price and sale quantity for the power generation company (The World Bank, As on September 2019). The PPAs also mitigate the risk volatility for the buyers. Khana and Barroso mention that the last minute policy revisions during the biddings under National Solar Mission in few states are the examples of erratic behaviour (Khana & Barroso, 2014/15). The authors further conclude that the investors need to feel secure before they establish a manufacturing base in solar power.

Grid connected solar plants can also decide to have a long term contract with large industries, and pay for wheeling the power from the solar plant to the industry. It is likely that this price may be more attractive since the industry maybe in a position to pay a marginally higher cost for solar power when compared to the industrial tariffs even after adding the wheeling charges. But industries may not be in a position to sign a contract for 25 years which the utilities are willing to do as at present. Industries may sign a contract for possibly 5 or at best 10 years.

All contracts with industries or utilities have clauses that specific payment terms if solar power is not available due to weather conditions or if there is a drop in demand due to rains and winter conditions. Both parties attempt to safeguard their interests through various clauses in the power purchase agreements. Payment for power supplied is another critical issue for solar power producers. Utilities do take more time than industry for making payments and there are always disputes because of which full payment also is not made. Resolving this and recovering back payments is a very time consuming process as well.  

There is need for deciding levelized / benchmark tariff from time to time to adjust with the changing capital cost and market trends. It is also important to attract private investors to enhance the installed capacities in grid interactive solar power. Solar Feed in Tariff (FiT) is decided by the existing state/central policies, regulations, existing fixed & variable cost of the solar plant, and developers during the bidding negotiations. PPAs are the instruments which provide low risk proposition to the investors in solar power generation and thus is considered as the most preferred option by the investors. To retain the interest of the investors it is important to safeguard their most preferred instrument, PPAs. Tariff adjustments within the PPA timeframe may demotivate the investors. The new investors may consider such examples as speculated risks. Investments in renewable power have associated risks due to its variable nature.  The uncertainties in the existing PPAs add to the associated risks with solar power particularly when the market is still at a nascent stage.  

 

References:

Banerjee, M. (2017). Role of State Policies and Private Sector Participation in Grid Interactive Renewable Power. Indian Institute of Foreign Trade. New Delhi: PhD Thesis.

Center for Science and Environment. (as on February 2016). http://cseindia.org/docs/photogallery/ifs/Renewable%20Energy%20in%20India%20Growth%20and%20Targets.pdf.

Economic Times. (24 September 2019). https://energy.economictimes.indiatimes.com/news/renewable/andhra-pradesh-high-court-asks-renewable-cos-to-move-aperc-against-renegotiation/71273226?utm_source=Mailer&utm_medium=ET_batch&utm_campaign=etenergy_news_2019-09-25&dt=2019-09-25&em=bWFuanVzaHJlZ.

Khana, A., & Barroso, L. (2014/15). Promoting Renewable Energy through Auctions:The Case of India. World Bank Group.

Livemint. (20 March 2017). https://www.livemint.com/Industry/0Cj7S0TtuhZqA2OmCsEQyL/Solar-power-bids-unsustainable-Bridge-to-India.html.

Ministry of Statistics and Programme Implementation. (2019). Energy Statistics 2019. Government of India, New Delhi.

The Economic Times. (13 June 2019). https://economictimes.indiatimes.com/industry/energy/power/solar-tariffs-increase-marginally-in-seci-auction/articleshow/69765460.cms?from=mdr.

The World Bank. (As on September 2019). https://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-agreements/power-purchase-agreements.

 


About the authors

Dr. Manjushree Banerjee is an Independent Consultant and Freelance Contributor on Energy Access. She was associated with the Social Transformation Division of The Energy and Resources Institute (TERI) for ten years. In total, she possesses about fifteen years of work experience on Energy Access and has led many National and International projects. Presently she is working as an independent consultant and also a freelance contributor with Observer Research Foundation.

Dr. Bhaskar Natarajan is Director (Energy Efficiency & Clean Energy), Sustainable Communities India (SCI). Dr. Bhaskar has over twenty-five years of experience working on various facets of the social dynamics of energy, as well as the environment. Dr. Bhaskar has worked with the private sector and also with international agencies on clean energy. Dr. Bhaskar is presently with Sustainable Communities India.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of The Geopolitics or any other organisation.