(Updates with post-publication response from ex-chief minister)

*

Indian state's cabinet overruled advice that Adani deal

was not

good value

*

State's finance officials said solar costs likely to keep

dropping and state had bargaining power

*

Regulatory approval for Adani procurement deal came very

fast -

experts

*

Additional costs, taxes to make deal pricier than contract

indicates, officials say

By Sarita Chaganti Singh, Sudarshan Varadhan

NEW DELHI/SINGAPORE, Dec 17 (Reuters) - The approach

from the Solar Energy Corporation of India (SECI) on Sept. 15,

2021 came out of the blue. The federal agency, tasked with

developing the solar sector, wanted to know if the southeastern

state of Andhra Pradesh would like to sign India's largest

renewables contract.

Two years earlier, Andhra Pradesh's energy regulator had

said in a 10-year forecast the state had no short-term need for

solar power, and should focus on other renewables that could

provide 24-hour energy.

But just a day after SECI approached the state government,

the 26-member state cabinet led by Chief Minister YS Jagan Mohan

Reddy gave the deal its preliminary approval, according to

cabinet records seen by Reuters.

While SECI's Sept. 15 letter did not name the energy

supplier, it was publicly known at the time that the federal

agency had only contracted with two suppliers, the larger of

which was controlled by billionaire Gautam Adani, according to

past statements from the two companies.

By Nov. 11, the state government had secured the nod from

the energy regulator. On Dec. 1, state authorities signed a

procurement agreement with SECI for the deal, which could

eventually be worth over $490 million annually.

As much as 97% of that will go to Adani Green, the

renewables unit of the billionaire's Adani Group conglomerate,

according to documents related to the agreement, reviewed by

Reuters.

The news agency spoke to a former state power regulator and

an energy legal expert who said the 57 days between SECI's

approach to the state government and regulatory approval from

the Andhra Pradesh Electricity Regulatory Commission (APERC) for

the 7,000 megawatt deal was unusually fast, although timeframes

for such deals can vary.

The solar deal is now under scrutiny by U.S. prosecutors,

who indicted Adani and seven other executives in November for

alleged involvement in a bribery and securities fraud scheme

involving several Indian states and one territory.

U.S. prosecutors allege that $228 million was offered to an

unnamed Andhra Pradesh official by the defendants to direct the

state's electricity distribution companies to purchase the solar

power supplied to SECI by Adani Green.

Reuters reviewed 19 state government documents, many of them

previously unreported, and interviewed more than two dozen state

and federal officials about the deal, as well as independent

energy and legal professionals. Most of the people spoke on

condition of anonymity due to the sensitivity of the matter.

Together they provide a picture of how political leaders

overruled advice from finance and energy officials in order to

approve the massive Adani deal. Some officials have publicly

described the contract as likely to strain the state's coffers,

potentially leaving taxpayers on the hook for thousands of

megawatts of energy that Andhra Pradesh does not need.

Adani Green did not respond to Reuters' questions about the

alleged corruption nor the speed of the approval process. Adani

Group has previously called the allegations "baseless."

SECI told Reuters in a statement it was up to states and

their regulators to decide how much power to purchase. It

declined to answer other questions.

The office of Reddy, who was not named in the U.S.

indictment and lost power in an election this year, referred

Reuters to a Nov. 28 statement in which he denied being bribed

and justified the deal on grounds it provided free power to

farmers. Reddy's office declined to answer other questions.

A spokesperson for Reddy's party said after this story was

published that

APERC, which regulates the state's power sector and was

responsible for due diligence on the deal, did not respond to

repeated requests for comment on its processes and the U.S.

allegations.

The current state government also did not respond to

requests for comment.

DUE DILIGENCE

For most of Sept. 15, 2021 then-energy minister Balineni

Srinivasa Reddy was unaware of any potential solar deal, he told

Reuters.

But late that night, he received a call from a person in his

office, whom he did not identify, about a proposal that required

his signature for discussion in cabinet the next day, said

Srinivasa Reddy, who joined a rival party this year.

"Never before" had he been so rushed to approve files, he

said, and he was not given "details or time to study the

matter."

Srinivasa Reddy said he signed off after being assured by a

senior official at his department, whom he also did not

identify, that the contracting party was SECI. He said he had

"no idea the supplier was Adani."

Srikant Nagulapalli, who declined to comment, was then the

top civil servant in Srinivasa Reddy's department. Reuters could

not establish if Reddy consulted him or if he provided

assurances about the deal.

The next day, cabinet approved the deal "in principle,"

according to minutes from the cabinet meeting, allowing the

regulatory process to be fast-tracked.

On Oct. 21, the Andhra Pradesh Power Coordination Committee

(APPCC) - which had been tasked with studying the deal after the

preliminary approval - filed a report recommending the deal.

The committee was established by the state government to

coordinate between state-owned distribution companies; its

members include the state's top energy official and company

executives.

Seven days later, the Andhra Pradesh cabinet officially

committed to procuring 7,000 megawatts from SECI.

In doing so, it overrode advice from officials at the

finance and energy departments that the contract did not

represent good value.

On Oct. 28 - the same day as the cabinet meeting that

approved the deal but before the greenlight was given - the

finance department made a submission to the cabinet stating

there was an industry trend of falling solar prices and that

future agreements would likely be cheaper, according to cabinet

minutes.

It said Andhra Pradesh had leverage because the government

was the buyer, offering the supplier security that a default

would be unlikely.

The treasury also questioned the duration of the 25-year

contract, especially since supply was scheduled to start only in

2024, according to the minutes. The treasury said it believed

costs could continue to fall in the period between agreeing the

contract and power being supplied.

The energy department endorsed the treasury's advice.

The records of the cabinet deliberations do not document any

discussion about the finance and energy departments' concerns

beyond a statement in the minutes that the cabinet was "duly

overruling the finance remark."

Andhra Pradesh will pay 2.49 rupees per kilowatt-hour when

the solar power comes online, according to the agreement.

An Adani Green spokesperson told Reuters that supply would

be delayed beyond 2024, citing delays in "grid availability."

However, an analysis released by the office of Chief

Minister N. Chandrababu Naidu - who ousted Reddy's government in

elections this year - found the state would likely have to pay

more, because the contract did not account for certain taxes and

duties that are typically included in such calculations.

A state official familiar with the matter said Andhra

Pradesh is likely to pay as much as 23% over the price it agreed

in the Adani contract once the taxes and duties are included.

Andhra Pradesh is now seeking to suspend the deal due to the

indictment of Gautam Adani. A decision could come by year-end,

an official told Reuters.

If the Adani deal goes ahead, the state treasury will be

directly on the hook for solar bills running hundreds of

millions of dollars annually, according to Reuters' review of

contract documents. Annual payments to Adani once the power

supply is fully operational will be roughly equal to state

spending on social security and nutrition programs for the

previous fiscal year.

($1 = 84.8380 Indian rupees)