India’s dodgy system puts investors off
Poor enforcement of contracts turns away prospective investors in renewable energy
Falling renewable energy tariffs in India have prompted some state governments to tell generators that they can’t buy the energy at prices agreed upon, exposing the businesses to risks due to poor enforcement of contracts in Asia’s third-largest economy.
Investors panicked earlier this year when the southern states of Andhra Pradesh and Karnataka, which account for a quarter of the country’s wind installations, backtracked on many purchase agreements to lower prices. Reason: cost per unit of power had fallen to a record low of Rs3.46 (Dh0.20) in the country’s first wind auctions held in February.
The issue goes to the heart of any commercial economy, said Rajiv Ranjan Mishra, managing director at the Indian arm of Hong Kong-based power developer CLP Holdings Ltd.
“You can extend it to every single contract and this can cause mayhem,” he said. “Particularly in a sector where you have commitments for over 2025 years, if you can’t depend then it will be terrible news.”
The country has consistently ranked among the worst places to do business in part because of its weak record in enforcing contracts — India ranked 172 out of 190 countries in that category, behind Egypt and Zimbabwe, according to the 2016 World Bank Doing Business report.
In wind alone, 3 gigawatts of capacity worth Rs480 billion ($7.5 billion) in four states is facing uncertainty because of renegotiation, credit assessor Crisil Ltd said Monday. That shows how the sanctity of contracts
Lower costs
The move is an attempt to lower costs at bankrupt distributors that accumulated Rs4.3 trillion ($67 billion) of debt as of September 2015 and lose money on every unit of electricity sold.
The wind-contracts issue also contradicts Prime Minister Narendra Modi’s goal of building 175 gigawatts of renewable capacity by 2022. The target may require over $200 billion in investment, much of it from overseas.
“India needs foreign capital to grow its renewable energy sector and that money will quickly turn away if there is such blatant flouting of the rule of law,” said Ranjit Gupta, chief executive officer at windproject developer Ostro Energy, which is backed by private-equity investor Actis LLP.
While opening wind power pacts is the most recent example of violating contracts, it has happened elsewhere. In June, the power distributor for the northern state of Uttar Pradesh cancelled purchase agreements with Bajaj Energy Ltd’s five coal-fired plants, saying the agreed prices were too high and hindered the state’s ability to provide electricity to all its citizens.