On Tuesday, 30th July 2013, the central government in India gave its initial go-ahead on splitting the state of Andhra Pradesh (AP) into two states, i.e., Telangana and Andhra Pradesh. The formalization of the split is expected to take at least another six months. Such a split is bound to have an impact on infrastructure projects in the state. Solar power projects are also expected to be affected as Power Purchase Agreements (PPAs) under the Andhra Pradesh solar policy were expected to be signed soon.
- Bankability issues may arise with the restructuring of the state DISCOMS
- The possibility of the state’s division may have been considered by the state authorities since the release of the policy
- Short-term implications include delays in the signing of PPAs and possible opting out of developers
Splitting of the state will require re-structuring of the state owned enterprises such as the power distribution companies (DISCOMs), which would be the PPA signing authority for solar projects. The jurisdictions of the DISCOMs could be rearranged or they could be divided to form new entities; such a restructuring is going to have an impact on their new customer base as well as their balance sheets.
As per the insights provided by a developer who plans to set up projects in the state, the possibility of the state’s division has been considered by the state authorities since the very release of the state solar policy. The matter was even discussed in the pre-bid meetings. In fact, most projects that fall in the Telangana region would enter into a contract only with the Andhra Pradesh Central Power Distribution Company Limited (APCPDCL), which is the DISCOM operating within that area. This will help avoid any issues related to the jurisdiction and operations of the off-taker. However, some areas in the newly-formed Telangana region will not fall under the jurisdiction of APCPDCL and some re-structuring of the DISCOMs will be required.
Due to the restructuring of the DISCOMS, banks are expected to have some concerns with the bankability of off-taker. Currently, there is very limited clarity on how the re-structuring will happen as the process is yet to begin. Without any clarity as to what can be expected, some developers may lose confidence and pull out before signing the PPA.
There is a very real possibility that the formation of new states can create problems in the short run. For instance, there can be delays in the signing of PPAs as the APTRANSCO may want to introduce revisions in the contracts to accommodate the implications of the split. However, once the ambiguity related to issues of bankability and operation are cleared, the developments would pick up pace. Finally, in the long run there may not be a significant impact on the overall functioning of the projects. Such state divisions have happened before in the country, like in the case of Bihar and UP, and eventually the operation of infrastructure projects has been worked out.
