A contract is the foundation on which the arrangements of a power project are structured. In a long project life, contractual certainty and predictability of enforcement are key for the success of a project. Events such as Covid-19, which happen rarely, are not so rare when one considers the life of an infrastructure project. In these situations, contractual terms acquire a new perspective.
Power producers in India, particularly those supplying power to state-owned discoms, have been facing stress for a long time, particularly due to delays in contractual payments. The situation has been exacerbated by the political pressure to renegotiate or terminate older, more expensive power purchase agreements (PPAs) with independent power producers (IPPs). In this context, PPAs need closer scrutiny both by the discoms and the IPPs.
In the renewables space, a large number of PPAs have been executed by various government agencies, both at the central and the state level, under various schemes such as the Jawaharlal Nehru National Solar Mission. NTPC VidyutVitaran Nigam Limited (NVVNL) and the Solar Energy Corporation of India (SECI) emerged as the premier central agencies for renewable energy PPAs. NVVNL and SECI have, in turn, entered into power sale agreements with state-level agencies while state-level agencies have also entered into direct PPAs with developers in various cases. While NVVNL and SECI have developed templated PPAs for their projects there remains some divergence across the states.
Long-term PPAs in the renewables space typically have fixed tariffs for the entire contract term of 15-25 years. With a reduction in efficiency as the project ages, the tariff is likely to be higher than the prevailing market-based tariff. This problem has been particularly acute with solar power projects, where tariffs have fallen steeply over a decade. This has led to eagerness amongst discoms to seek renegotiation or cancellation of PPAs with high high tariffs. This has been sought to be justified on the basis of lower-priced bids received in recent years. Developers’ options range from seeking specific enforcement of the contract to termination of the contract against payments. In either case, the actual realisation of payments takes considerable time, leading to cash flow mismatches for the project in the interim.
Curtailment of power
Curtailment is another tactic used by discoms to reduce offtake from renewable energy projects. While older renewable energy projects with higher tariffs are more susceptible to curtailment, other projects also suffer from this from time to time as power demand reduces. This is because most non-renewable PPAs enforce payment of fixed charges even in case no power is being drawn, making it imperative for discoms to purchase from such projects. SECI’s latest draft of the PPAs does seek to address this issue by providing for compensation in the event of curtailment of power for no fault of the developer; however, earlier PPAs (which were also at significantly higher tariffs) may not contain express provisions for compensation in the event of curtailment. The Ministry of New and Renewable Energy (MNRE) has tried to address the issue in part by granting renewable power projects “must-run” status. However, many states have chosen to ignore such directions. Even during Covid-19, despite the issuance of an advisory by the MNRE and power projects being exempt from lockdown conditions, several state governments resorted to curtailment, claiming force majeure. Such claims are yet to be tested in the courts, although such a position appears questionable unless the discoms are able to establish that Covid-19 has directly resulted in their funds becoming insufficient, or that a demand due to Covid-19 is making it more onerous for the discoms to fulfil the contract.
Payment delays by discoms are the biggest challenge for IPPs. While many PPAs do not contain an adequate payment security mechanism, those that have such provisions are rarely implemented, with most discoms being reluctant to open the letter of credit (LC). Even the Ministry of Power’s circular mandating the opening of an LC as a condition for the despatch of power has not been implemented by the discoms fully. The Covid-19 outbreak and the consequent relaxations in the provision of LCs have further pushed back IPPs.
Contract enforcement is key to further investment in the power sector. While it requires some political will, it is equally important to free up the process of contract enforcement from politics, particularly where such contracts have been secured following a competitive bidding process.