Legal Perspective

Stringent guidelines and penalties required for PPAs

The Indian renewable energy sector is facing many challenges despite witnessing significant growth. The annual installed capacity has increased considerably owing to the competitive bidding regime that led to a tariff reduction in subsequent auctions. On the flip side, decreasing tariffs have made it difficult to execute power purchase agreements (PPAs) that were signed earlier at considerably higher tariffs. As a result, there has been a pronounced negative sentiment among developers regarding PPA renegotiations, with every fall in tariff discovered in subsequent auctions. Several discoms in various states including Gujarat, Karnataka, Tamil Nadu and Madhya Pradesh have tried to renegotiate the tariff terms. However, more often than not, both the discoms as well as the developers have failed to reach a consensus and the cases have ended up taking legal recourse.

New competitive bidding guidelines

The new guidelines for solar competitive bidding were released in August 2017 and those for wind energy in December 2017 to facilitate transparency in the process. Both the guidelines are broadly similar. They provide a standard form and standard bidding documents, and specify that the appropriate commission must approve the deviations. The lease agreement has to be cleared by the relevant authorities and the standard bidding document clearance is to be provided by the end procurer. As per the bid structure, a minimum of 50 MW should be bid with the possibility of viability gap funding-based bidding offered by the procurer to the solar power generator. Minimum technical criteria have been set along with financial criteria that the net worth of the developer should be at least 20 per cent of the Central Electricity Regulatory Commission’s benchmark capital costs with additional liquidity conditions such as annual turnover and bank references.

The PPA terms as per the guidelines are as follows:

  • Duration: The PPA duration has been increased from 13 years to 25 years.
  • CUF: If a plant performs below the minimum capacity utilisation factor (CUF), a minimum of 25 per cent of the cost of shortfall will be levied as penalty on the developer. Meanwhile, excess generation beyond the maximum CUF specified can be sold to third parties subject to the right of first refusal. If the procurer purchases excess generation, then it will be at 75 per cent of the PPA tariff.
  • Payment guarantee: The payment guarantee has been ensured via two routes. In the case of direct procurement, the security is provided by the procurer in the form of a revolving letter of credit for not less than a month’s average billing and a fund with at least three months of average billing. In the second case, an intermediary procurer will provide the revolving letter and payment fund to the generator as well as to the end procurer.

There are significant offtake constraints given the country’s transmission infrastructure is limited and still expanding. The generation loss is measured against 19 per cent CUF or committed CUF, whichever is lower. However, there is still ambiguity regarding the compensation from the grid developer to the end procurer.

Financial closure has to be done within seven months from the date of execution of the PPA or the performance bank guarantee of 4-5 per cent of the project cost will be lost. The project needs to be commissioned within 13 months of the date of execution of the PPA (15 months for projects above 250 MW) with the provision of extension of up to one year in case of delay over land issues. Transmission connectivity is to be provided by the generator in case a site has not been specified. However, if the site is not a solar park, the procurer may specify that the solar power generator will be responsible for building connectivity and arranging access. However, stringent commissioning schedules make it difficult for making it possible for capacity to be installed only in solar parks.

As per the wind power bidding guidelines, the developer should have 25 per cent of land ready at the bid initiation stage, 90 per cent within one month of the signing of the PPA and the remaining 10 per cent within two months thereafter. Moreover, the commissioning schedule has been set at 18 months.

Experience with older PPAs

The first instance of reneging on PPAs was when in 2013 Gujarat Urja Vikas Nigam Limited filed a petition before the Gujarat Electricity Regulatory Commission (GERC) asking for a revision in solar tariffs determined by the GERC in 2010. The case was then presented before the Appellate Tribunal for Electricity where it was dismissed and is currently pending with the Supreme Court.

In the case of Tamil Nadu, the state discom, Tamil Nadu Generation and Distribution Company Limited (TANGEDCO), released a tender for developing 1,500 MW of solar capacity. The request for proposal (RfP) stated that TANGEDCO reserved the right to call the bidders to match the price with that of the negotiated L1 price. During the negotiations, the bidders (L2 Rs 3.60 per unit to L18 Rs 3.97 per unit) were called to match the L1 price of Rs 3.47 per unit. Accordingly, the Tamil Nadu Electricity Regulatory Commission approved the procurement of solar power from 16 solar developers at the price of Rs 3.47 per unit for a period of 25 years.

The Andhra Pradesh Electricity Regulatory Commission has a number of pending cases. These include a case filed by state discoms regarding generation-based incentive requesting to amend the wind generators’ tariff orders. In another case, the discoms had requested to curtail the control period up to March 31, 2017. They also sought permission to procure power from wind producers starting 2018-19 through competitive bidding in line with the guidelines of the Ministry of New and Renewable Energy (MNRE), Government of India, and the National Tariff Policy, 2016.

Jharkhand Bijli Vitaran Nigam Limited issued letters of intent for the solar capacity bid in May 2016 but kept avoiding the actual signing of the PPAs with the winning developer. Therefore, Clean Solar Power (Jaipur) Private Limited had to file an application before the Jharkhand State Electricity Regulatory Commission, which was subsequently withdrawn with a resolution of the deadlock. The developers agreed to a reduced tariff of Rs 4.95 per kWh for projects of more than 25 MW capacity and Rs 5.16 per kWh for projects below 25 MW of capacity against the bid-out tariff range of Rs 5.08 to Rs 7.95 per kWh.

Challenges

The cash-crunched discoms are hindering the growth of renewable energy projects by delaying payments, affecting the debt servicing capability of these projects. There is also the issue of unilateral termination of or reneging on PPAs by discoms. Moreover, the penalty clauses in PPAs are not very stringent. The PPAs also lack a robust mechanism for energy loss.

It has been a huge challenge to understand the subtle differences between central- and state-level bids. Moreover, the lack of engagement with government and regulatory bodies leads to a regulatory chasm that often becomes a one-sided compromise situation. A case in point here is the Uttar Pradesh New and Renewable Energy Development Agency’s 215 MW  grid-connected solar park for which a petition for the adoption of revised tariffs was filed with the Uttar Pradesh Electricity Regulatory Commission (UPERC) after the signing of the PPA. UPERC held that the RfP had a provision for rejecting the bid without assigning any reason, which would have given the agency the right to negotiate tariffs in public interest. The matter of tariff adoption was referred to the Empowered Committee which recommended the matter to the Negotiations Committee for the adoption of the tariff of Rs 7.02 per unit (down from Rs 8.60 per unit) for all the nine bidders (out of 15) whose projects had been commissioned.

Given the country’s current growth trajectory of renewable energy, there are bigger issues that merit focus of the regulatory authorities. These include grid curtailment issues to provide stability, the position and flexibilisation of existing thermal power plants, evacuation arrangements and open access, as well as improvement of discom health and ratings. Moreover, the MNRE must impose stringent penalties on states and project developers, and restrict unilateral renegotiations or termination of PPAs. n

Based on presentations by Ran Chakrabarti, Partner, Indus Law; Pallavi Bedi, Partner, Luthra & Luthra; Naved Askari, Counsel, AZB & Partners

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