The Long-Term PPA Conundrum in India: A Commercial Way Forward

A. Introduction

Currently, India’s power[1] sector is poised towards undertaking key decisions that will ultimately determine whether its power generation objectives are achieved effectively.

Though India successfully transformed from a power deficit country to a net power exporter in 2017[2], this success has come via certain structural choices. One major choice has been a heavy reliance on long-term Power Purchase Agreements (“PPA”) to attract investments in power generation. However, fault lines have started emerging between various stakeholders regarding these PPAs.

Part I of this article seeks to analyse India’s (i) long-term power generation targets, (ii) conflicts surrounding existing long-term PPAs, and (iii) various commercial options for effectively achieving India’s power generation objectives while protecting interests of all stakeholders.

B. Power Generation – India’s 2030 Plan

As on May 2020, India has an installed power capacity of 370.5 GW[3]. The share of renewable energy sources[4] (“RE”) is a healthy, but relatively modest, 87.3 GW (23.5 % of total installed capacity)[5].

By 2022, India has set itself an ambitious target of attaining 227 GW of RE capacity. Further, the Central Electricity Authority has recently estimated the likely installed capacity of India by 2029-2030 to be 817 GW and has provided the following ‘optimal’ generation mix[6]: -

• Solar – 280 GW
• Wind – 140 GW
• Coal and Lignite – 267 GW

It is interesting to note that RE share of Solar and Wind Energy alone constitutes more than 50 % of the total capacity of 817 GW. Therefore, it is apparent that tremendous power capacity addition, especially of RE sources, is envisioned to take place in the next 10 years. However, the long-term PPA challenge, as described below, needs to be resolved for attracting and mobilising the huge capital investments required for this ambitious goal.

C. The Long-Term PPA Conundrum

PPAs are contractual arrangements that lock a specific offtake/purchase of generated power for a fixed price and duration from a power plant. Though long-term PPAs generally include PPAs with a term above 10 years, they are often entered for durations of up to 20 - 25 years. Due to assurance of return and minimal cash flow risk, such PPAs are preferred by banks for financing new power projects.

PPAs have formed a crucial part of India’s success in attracting private sector investments and increasing power capacity in the past 2 decades. This is attested by the fact that at least 78.5% (291 GW) of India’s current installed capacity is locked into long-term PPAs[7].

However, such long-term PPAs create a conflict of interests between power generation companies (“Genco(s)”) who favour them and power distribution companies (“Discom(s)”) who want to exit/renegotiate them in markets with rapidly falling power tariffs. This conflict is especially acute in India where close to 90% of the power procurement portfolio of Discoms constitutes of long-term PPA’s[8]. This issue has assumed gravity in recent times, and has even been acknowledged by the Standing Committee on Energy in its recent report[9].

It is observed that an over-reliance on long-term PPAs without developing other mechanisms has exacerbated the above problem and constrained India’s options for an immediate and satisfactory resolution of this conflict. Further, many long-term PPAs in India have either none or very rigid exit clauses and/or lack flexibility to reasonably revisit prices[10].

To the Central Government’s credit, contractual sanctity is sought to be protected through the proposal of creating an “Electricity Contract Enforcement Authority” to preserve the sanctity of existing power contracts via the Draft Electricity (Amendment) Bill, 2020[11]. However, a long-term solution that structurally benefits everyone is still required to achieve India’s power objectives in a cost-effective and sustainable manner. The same is outlined in the next section.

D. Moving away from Long-Term PPA’s – The Options

There exists certain options which can be considered to strengthen and explore alternative/supplementing mechanisms to long-term PPAs. These options can be broadly divided into PPA and Non-PPA related options. P

PA Related Options                 

• With mainstreaming of RE projects, investors and banks are getting more comfortable with RE power projects as an asset class. Further, the Indian RE market is rapidly maturing and demonstrating various indices that make it an attractive investment option for domestic and foreign investors[12]. Considering the above factors, it is possible for Indian power projects to: -

1. obtain bank financing for power projects with relatively shorter-term PPAs, especially when the relevant Genco intelligently plans its repayment strategy and utilisation of non-PPA related mechanism (as detailed below) during its merchant-tail,
2. explore contractual structures (for e.g., higher guarantees) that lower risk perception, interest payments and possible reduction of PPA duration, and
3. continue to attract rapid investments by global funds for power projects in India. Equity backed power projects, by their very nature, allow flexibility in terms of market strategy.

• PPA contracts can be made more flexible by adding sophisticated exit, review, price variation and price reset clauses (as detailed below) that allow parties to have contractual flexibility while protecting their respective commercial interests.
• PPA structures are currently simplistic and lock in parties to fixed prices for very long durations. Though helpful in initiating investments, a balancing act can be achieved by drafting dynamic PPA contracts[13] that: -

1. at the very outset, provide for variable pricing based on an analysis of relevant factors, such as a deep and accurate forecasting of power demand (demand side) and installation of new generation capacity (supply side),
2. flexible pricing that can fluctuate around a specified band of price based on various factors (such as then existing market prices),
3. a reasonable time period to revisit PPA prices, and/or
4. providing contractual flexibility for parties to exploit market opportunities. For example, when wholesale market prices are at a low, allowing buyers to procure power at a lower price than the PPA price, both parties can seek an alternative buyer for the contracted power, and if successful, the buyer’s savings can be shared between parties.

• Conventional energy sources tied to long-term PPA’s will play an important role in maintaining grid stability, especially with significant capacity addition of RE planned in the future (as detailed above). RE is a relatively variable and uncertain source of power. Therefore, relevant Gencos, Discoms and banks can discuss this structural opportunity and how to benefit from the same.
• Gencos can enter into PPA’s with a consortium of buyers. In such structures, the preferred contractual duration of both parties, (longer term for Gencos versus shorter term for buyers) can be achieved by buyers alternatively buying power for the PPA duration. Simultaneously, buyers can jointly guarantee minimum offtake throughout the PPA term to minimize risk of power non-offtake.

As such, the above PPA related options may be explored in order to provide alternatives or supplement existing mechanisms to long-term PPAs. Part II of this article will explore the various non-PPA related options that can be explored in India as an alternative/supplement to long-term PPAs, along with the likely trends in the Indian power market in the medium-to-long term future.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] This article uses the term “power” synonymously with “electricity” for the sake of brevity, unless the context requires otherwise.

[2] Press Information Bureau, Ministry of Power, Government of India, India becomes Net Exporter of Electricity for the first Time, 29th March 2017, available at, https://pib.gov.in/newsite/printrelease.aspx?relid=160105#:~:text=India%20becomes%20Net%20Exporter%20of%20Electricity%20for%20the%20first%20Time&text=As%20per%20Central%20Electricity%20Authority,to%20Net%20Exporter%20of%20electricity.

[3] Central Electricity Authority, All India Installed Capacity (in MW) of Power Stations (as on 31.05.2020) (Utilities), available at, http://cea.nic.in/reports/monthly/installedcapacity/2020/installed_capacity-05.pdf.

[4] Refers to Small Hydro Power, Biomass Power, Urban and Industrial Waste Power, Solar Power and Wind Power.

[5] Supra, at 3; This RE capacity mainly comprises of Solar Power (34.9 GW), Wind Power (37.7 GW), Biomass Power (9.8 GW) and Small Hydro Power (4.6 GW).

[6] Central Electricity Authority, “Report On Optimal Generation Capacity Mix For 2029-30”, available at http://cea.nic.in/reports/others/planning/irp/Optimal_mix_report_2029-30_FINAL.pdf

[7]World Energy Council India, Study on PPA related issues, available at, https://wecindia.in/wecindia_downloads/WEC_India_Studies/WEC%20India%20study%20on%20PPA%20Related%20Issues.pdf.

[8] Central Electricity Authority, “Discussion Paper on Re-designing Real Time Electricity Markets in India”, No RA-14026(11)/2/2018-CERC, July 2018, available at, http://www.cercind.gov.in/2018/draft_reg/RTM.pdf.

[9] Standing Committee on Energy (2019-20), Seventeenth Lok Sabha, Ministry of Power, Demands for Grants, 2020-2021, Fourth Report, Lok Sabha Secretariat, March 2020, available at, http://164.100.47.193/lsscommittee/Energy/17_Energy_4.pdf. Full excerpt is as follows “The Committee observe that the issue of long term Power Purchase Agreement (PPA) has become a conundrum. Since the advent of Solar Power, its tariff is on a constant decline. In the recent years, Solar Power tariff has aggressively been quoted making the Discoms reluctant to enter any long term PPA. This situation is causing disruption as long term PPA is a pre-requisite for financing of any new power project. In absence of long term PPAs it may be difficult to attract investment in Power Sector. On one hand, there are Power Generators who insist on honoring of long term PPAs at any cost as they have made huge investment in their projects. On the other hand, there are Discoms who do not want to purchase power at higher rate through long term PPAs as it is available at much cheaper rate in short term market…”

[10] Ibid, at 5.

[11] Section 109A, The Electricity (Amendment) Bill, 2020, No. 42/6/2011-R&R (Vol-VIII), Ministry of Power, Government of India, 17th April 2020, available at, https://powermin.nic.in/sites/default/files/webform/notices/Draft_Electricity_Amendment_Bill_2020_for_comments.pdf.

[12] Sumant Sinha, Why India is the new hotspot for renewable energy investors, 14th January 2020, available at, https://www.weforum.org/agenda/2020/01/india-new-hotspot-renewable-energy-investors/.

[13] Martin Duvoort, Is it time for PPA 2.0? Why we need to future-proof energy funding, 10th April 2019, available at, https://blogs.dnvgl.com/energy/is-it-time-for-ppa-2-0-why-we-need-to-future-proof-energy-funding