One of the most critical challenges, ironically, has emerged from one of the greatest successes-falling tariff prices. Solar tariffs have fallen by 50% in the last few years. An industry-stunning Rs 2.00 per unit bid held the lowest tariff record for less than a month, to be replaced by a Re 1.99 per unit bid. But this Icarus seems to have flown too close to the sun.

The trouble is that once solar tariffs are determined through a competitive bidding process, they are encapsulated in long term power purchase agreements (PPAs) and are not subject to further changes for the entire term of the PPA. But (usually) state owned distribution companies (DISCOMs), who are the ultimate purchasers of power see the tariffs fall every week or so, and therefore are disincentivized to tie themselves up to long term contracts at what they consider to be higher prices (It was a similar myopic pursuit of the lower tariff possible that led Andhra Pradesh to embark on the renegotiation misadventure with respect to executed contracts).

What this means is that there are now a significant number of projects which have successfully participated in bids, but for which long term PPAs have either not been executed, or not become effective.

To understand this problem in more detail, we need to briefly understand the mechanism of renewable power purchase in India:

• All utility scale power purchase in India is through a competitive bidding process, where the tariff is discovered through an auction process under Section 63 of the Indian Electricity Act, 2003 (Electricity Act).

• A large portion of the procurement is managed by two central intermediaries (or trading companies), the Solar Energy Corporation of India (SECI) and the National Thermal Power Corporation (NTPC). NTPC and SECI manage the bid processes and is the primary counterparty to the PPA with the solar developer. However, NTPC and SECI then enter into back to back Power Sale Agreements (PSAs) with the DISCOMs, who are the ultimate purchaser of power. Under the PSAs, NTPC and SECI charge a trading margin to the DISCOMs.

• Since the tariff is bid discovered, there is no regulatory supervision of the tariff. However, regulatory approval is required for the following (i) approval of the bid process (the procurement approval); (ii) approval to the DISCOM to acquire a certain quantity of power (the capacity approval); and (iii) approval of the trading margin between and SECI or NTPC and the DISCOM. To add additional complexity, because of the nature of the projects, different regulators have jurisdiction over the various approvals. Usually the Central Electricity Regulatory Commission (CERC) has jurisdiction over the procurement approval and the trading margin approval whereas the state electricity regulator (SERC) has jurisdiction over the capacity approval.

• The present practice for SECI, in particular, has been to run the auction process, sign the PPA and then identify the DISCOMs who shall become the ultimate purchaser of the power. However, different DISCOMs also follow different processes. Some DISCOMS first get the approval from the regulatory commission and then sign the PSA whereas others sign the PSA and then go for approval.

The net result has been that for several hundreds of MW of projects for which Letters of Award (LOAs) have been awarded post completion of tenders and PPAs executed, either the PSA is not executed, or, even if the PSA has been executed, the capacity approval has been indefinitely delayed. It is estimated that this issue affects 6.5- 12 GW of projects. (The Central Electricity Authority in its August 2020 Report on the renewable sector notes that 39.4 GW of “pipeline” renewable projects are delayed, a significant number of which is for delays in execution or approval of PSAs).

Even the trading margin which SECI/ NTPC has been charging, has been the source of endless dispute, with DISCOMs often backtracking on accepting trading margins they had already consented to in the past, and then having the issue drag through the labyrinth of the CERC determination process.

The problem is that from a tendering law perspective, a LOA is not legally binding and therefore SECI has the ability to withdraw or terminate a tender process any time prior to the actual signing of the PPA. Further, the PPA also usually contains a clause that allows either SECI or the developer to terminate the PPA in case the relevant regulatory approval is not in place. Therefore, the developer has limited legal options in such a case. However even in such circumstances, there are instances of developers becoming exasperated with the delays and walking away from PPAs. For example, three developers, ACME Solar, Shapoorji Pallonji, and Azure Power projects terminated PPAs for around 1.4 GW of capacity citing regulatory delays.

Unfortunately DISCOMs typically lack the understanding of the complexity of risks that drive bid behaviour, nor have they bought into the idea of the requirement to develop the sector at multiple levels. For example, SECI has been active in seeking manufacturing linked solar auctions, where the discovered tariff would obviously be higher that standalone generation auctions. SECI’s solution has been to pool the different types of tariff together and provided a weighted average tariff to the DISCOMs. SECI has even proposed pooling power acquired through auctions over 6 months and bundling them but approval of this solution is pending with the CERC.

The only solution seems to be for SECI to approach the auction after receiving the necessary confirmation from DISCOM(s) with respect to acquisition of power. This however, has major disadvantages. The larger DISCOMs (such as Gujarat and Rajasthan) would benefit from low tariffs, whereas many of the other states (considered risky by developers) will struggle to find bidders or face disproportionately high tariffs.

Delays in execution or approval of the PSAs creates business uncertainty for the developer, who are suspended in limbo for months. As tariffs fall, the uncertainty becomes exacerbated. Lenders usually would not disburse funds till such time as all approvals are obtained. Developers face the dilemma of whether to make investments without PSAs and risk the entire investment or on the other hand, delaying investments till the PSA is signed or approved and risk being unable to complete the project in time, resulting in liquidated damages and under penalties under the PPA (fortunately regulatory commissions seem to be taking the view that project timelines will be extended in case of delays in procurement approvals, which is a welcome relief for developers).

Most importantly these delays undermines confidence in the robustness of the India’s tendering system for acquiring future renewable capacity, the vitality of which is the single largest factor that will attract long term institutional capital into Indian renewables, so that it can continue its blistering growth trajectory.

This article was originally published in Economic Times on 12 February 2021 Written by: Deepto Roy, Partner. Click here for original article

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