With the Andhra Pradesh government mulling a review of the power purchase agreement between the state discom and the Solar Energy Corporation of India for supply of power by Adani Green, Banasree Purkayastha looks at the options available with it, and what would happen if the deal is cancelled
What are the issues with the agreement?
The N Chandrababu Naidu-led TDP government in Andhra Pradesh is examining whether the state can cancel the power purchase agreement (PPA) between the Solar Energy Corp of India (SECI) and the state discom. This follows allegations by the US Securities Exchange Commission (SEC) that the Adani Group paid around $265 million in bribes to officials in several states, including Andhra Pradesh, to secure solar power contracts. Per the Hindu BusinessLine, the state Cabinet is likely to discuss the status of the PPA at it meeting today (December 3) and review the options before the government. State finance minister Payyavula Keshav had earlier told Reuters that the government was “digging into all the internal files” from the previous YS Jagan Mohan Reddy-led YSRCP administration, under which the alleged misconduct took place. “We will also examine what can be done next, like is there a possibility to cancel the contract … state government is looking into this issue closely,” Keshav said. The US SEC has alleged that the bulk of the bribes was paid to Andhra Pradesh officials when it was governed by the previous government.
What were the terms of the PPA?
In December 2021, the Andhra Pradesh government had signed a PPA to procure 7,000 MW of solar power through SECI at Rs 2.49 per kWh for 25 years in a phased manner. Adani Green was contracted to supply an initial 3,000 MW renewable energy to the state discom starting September 2024, another 3,000 MW in FY25-26, and 1,000 MW in FY26-27. The Andhra Pradesh Electricity Regulatory Commission had approved the procurement plan in November 2021, during the tenure of former chief minister Jagan Reddy. The twist in the tale is that Adani Green has not yet commenced supply to Andhra due to alleged delays by the Central Transmission Utility of India in setting up transmission infrastructure but is selling power from the same project on power exchanges at Rs 3.5 per unit, per an Economic Times report.
Options before the state government
There are three options before the Andhra government but each comes with a catch. First, it can write to the SECI (a central government PSU) to cancel its agreement with Adani Green Energy and recommend a probe by a central investigative agency into the bribery allegations. That would push the ball into the Centre’s court. The second option is to put the PPA on hold while a state government committee investigates the allegations. The third option is to scrap the deal in its entirety but that would come with legal ramifications, as it involves not just the state government and SECI, but also the electricity regulatory commission which gave the approval for the PPA. The state government has to look into the pros and cons of each option, before taking a call.
Financial implications if the deal is scrapped
Andhra Pradesh would stand to lose significantly if the PPA was cancelled as buying power from the open market would be much costlier. As per the terms of the PPA, while Adani Green is contracted to sell power to the state discom at Rs 2.49 per unit, in the open market it could sell at Rs 3.50 a unit. That works out to a 40% increase in return for the same cost, Adani Group CFO Jugeshinder Singh has said. On the other hand, the Andhra consumers’ price would go up if the state had to purchase from the open market, he said. Typically, clauses in such PPAs allow states to terminate contracts and also bar the companies involved from future bidding should it be found that the bidder has committed a serious transgression. However, cancelling the power deal may lead to the state sliding into a power crisis or buying it from the open market at a much higher rate which could upset its finances further. If Andhra decides to cancel the project, it might end up paying as much as Rs 2,800 crore annually for 25 years, as per a HinduBusinessLine report.
Political equations are also at play
The state government’s final decision also hinges on the many political calculations that chief minister Naidu will have to consider. The allegations offer an opportunity for Naidu to gain politically if former CM YS Jagan Mohan Reddy is implicated in the case. It would also be payback time. Jagan Reddy, on assuming office in 2019, had cancelled the PPAs reached during the previous Naidu regime. However, Naidu would have to tread with caution, given the Opposition narrative that the Adani Group is close to the Modi-led NDA government at the Centre, and the TDP is an ally of the NDA. Cancelling the solar power deal may also send wrong signals to investors, which the state is desperately wooing. Given its energy needs, Andhra may not renege on the deal but look at alternatives such as setting up power production infrastructure in the state itself or reworking the pricing of the existing deal.