ABSTRACT
The ever-changing nature of India’s Power Sector, in terms of regulatory, policy, and market dynamism, has led to the development of various models, especially pertaining to renewable energy. Among such models, Power Purchase Agreements have found the limelight, but the regulatory and policy changes in the Indian market have led to the decline of such agreements. This post seeks to critically analyse the decline of Corporate Renewable Power Purchase Agreements by examining the impact of the imposition of Safeguard duty; the lack of coordination between different levels of Government; the conundrum of debt-ridden State distribution companies (DISCOM) and discriminatory tariffs; the deficiencies in the T&D network; amendments to the Electricity Act of 2003; and the core benefits of the Green-Term Ahead Market (GTAM) model.
Introduction
Renewable energy has always remained at the top of India’s agenda. [1] Procurement of renewable power has assisted commercial and industrial consumers manage electricity expenditure and increase the predictability of costs while fulfilling renewable purchase obligations and carbon reduction targets. Corporate renewable power purchase agreement (PPA) [2] is one way in which businesses purchase renewable energy. It is a contract between the Corporate Buyer and the Power Producer to purchase electricity at the “purchase price” [3] for a predetermined period. The power producer can be a developer, independent power producer, or an investor. It contains typical commercial terms usually found in an electricity sale – length, delivery point/date, volume, and price – wherein current renewable energy assets or new renewable energy projects are used to supply electricity. [4]
PPAs in India are governed by an intricate web of laws and policies, predominantly the Electricity Act, 2003. [5] In the said Act, Section 49 deals explicitly with agreements for the purchase and supply of electricity, [6] and Section 86 encapsulates the regulation of PPAs by the State Commission. [7] Moreover, the National Electricity Policy, [8] the Tariff Policy, [9] the National Electricity Plan, [10] the Electricity Rules [11] and various State regulations and policies guide the PPA market in India.
Statutory Reforms: The Electricity (Amendment) Bill, 2020
The revamping of the statutory mechanism for the regulation of the energy sector was indeed long overdue. The Ministry of Power recently introduced the Electricity (Amendment) Bill, 2020, [12] to bring the Electricity Act of 2003 in tune with recent developments.[13] Considering the array of issues plaguing the PPA market, [14] the Bill called for the setting up of the Electricity Contract Enforcement Authority (ECEA), which will have the powers of a civil court to settle disputes related to PPAs between distribution companies (DISCOMs) and generation companies (GENCOs).
Part XA [15] will be inserted in the principal Act to improve the enforceability of PPAs and contracts relating to transmission and ensure time-bound adjudication of disputes under PPAs and transmission-related contracts. A timeline of 120 days to dispose of an application has been proposed. Moreover, any party aggrieved by the decision of the ECEA may file an appeal to the Appellate Tribunal within 60 days.
If the Bill stays true to its promise, this move will transform the PPA market and mitigate delays associated with payment [16] and renegotiation. [17] However, there seems to be a lack of clarity as to whether the ECEA can adjudicate on matters regarding franchise agreements, open access contracts, and net-metering agreements. Moreover, since the ECEA does not have any jurisdiction over matters related to regulation or determination of tariff or any dispute involving tariff, it is unclear how cases can be distinguished when such aspects are interrelated and interdependent in contractual disputes pertaining to PPAs.
Another important provision concerning PPAs is the timely adoption of tariffs, which is essential to safeguard consumer and public interests as stated in the case of All India Power Engineers Federation and Ors. v. Sasan Power Ltd. and Ors. [18] According to the Bill, under Section 63 of the Act, a sub-section will be inserted whereby the Appropriate Commission will promptly adopt the tariff within 60 days from the date of application. [19] If it is not decided by the Commission on expiry of this period, the tariff shall be deemed to have been adopted. This would avoid cost escalations and improve the sustainability of projects. Further, the provision would vitiate the Commission’s role in the adoption of tariff, provided there is transparency and compliance with the Government’s bidding guidelines. [20] Therefore, competitive bidding for PPAs would end up in the hands of the generator and the licensee.
The Draft Bill envisages increased penalties under Sections 142 and 146 of the Act to ensure strict compliance of the provisions under the Act and orders by Commissions especially to ensure compliance with Renewable Purchase Obligations (RPO). [21] In the financial year 2019-20, only four States have managed to meet and exceed their Renewable Purchase Obligations (RPO). [22] RPOs require DISCOMs, energy producers and certain consumers to obtain a share of their electricity from renewable sources. Prior to 2018, determination of RPO trajectories and monitoring of compliance was carried out by the State Commissions. However, to harmonize the national-level commitments for environment protection, the Bill proposed to empower the State Commissions to specify RPO targets as per the RPO trajectory prescribed by the Central Government. [23]
- Regulatory, policy and market changes in the power sector: Critical Analysis
The 2nd largest market for PPAs was India, preceded by the U.S.A. in 2018. Despite being second, corporate renewable PPAs additions are predicted to be 30% to 35% lower in 2019-20 [24] whereas India’s renewable capacity additions have to grow on average at 20-25 GW to be in consonance with the goal of 175GW by December 2022. [25] This can be due to multiple factors – both regulatory and policy changes – as laid down below.
- How the imposition of Safeguard Duty negatively impacted the Domestic Market:
On July 16, 2018, the Directorate General of Trade Remedies vide findings F. No. 22/1/2018 recommended the imposition of a 25% safeguard duty on the import of solar cells, [26] and the same was imposed vide Ministry of Finance Notification dated July 30, 2016, bearing No. 01/2018-Customs (SG). [27] This was done to protect the domestic market from the Chinese and Malaysian power sector competitors. However, over the last two years, such duty was found to be counter-productive to PPAs. Following are key observations:
- The import of solar cells was 538,038 in 2017-18, which had increased during April-September 2019 due to reduction in rate of the duty from July 30, 2019. The duty neither reduced the imports, nor did it increase the competitiveness of the Indian manufacturers of solar cells. Without addressing the issues domestic manufacturers are facing, the Government has proposed to impose safeguard duty for one more year till July 2021. [28] A duty of 14.9% will be levied from July 30, 2020, to January 29, 2021, and 14.5% from January 30, 2021, to July 29, 2021. [29]
- The imposition of safeguard duty obstructs the reduction in solar tariffs. As the tariff rate increased, India’s dependency on imported solar cells was neglected as the Government failed to consider that India’s need and demand for solar installation is 8 to 10 GW. [30] However, the current solar installation rate comes up to approximately 4 GW only. [31]
Therefore, the imposition of such safeguard duty, for “Make in India”, does more harm than good due to India’s constant rising need for power supply. [32]
- Poor coordination between the Central and State Governments:
The National Policy Framework exists to assist the development of the Power Sector. The underwriting of contracts by the Central Government agencies (Solar Energy Corporation of India (SECI) and NTPC Limited has helped Power Developers develop power projects and deliver the benefits of such underwriting to the consumers. [33] However, such efforts go in vain as the benefits reaped out of the aforementioned efforts are ineffectual (for PPAs) because of the poor governance displayed at the State level that does not roll out power projects as often as they are required to do so. The same inefficiency in the performance by the State Government is visible wherein out of 14.5 GW, only 1.25 GW has come from the State level. [34]
In 2019, it was observed that there were wind power developers who won contracts through SECI and NTPC’s auction to develop Power projects in Gujarat. [35] They expressed their interests specifically in Gujarat as it is a lucrative destination for wind power developers. However, the wind power developers complained that the land was reserved by the State Government for its own power projects. Further, it was reported that there was confusion as to who will provide the transmission lines and grid connectivity. [36] Thus, due to the aforementioned shortcomings, there was a delay in the commencement of the wind power projects by the wind power developers. This delay was counterproductive because it led to 10-15% rise in tariffs and a reduction in developers’ confidence in subsequent wind power projects. [37] The reason behind such a rise in tariffs and reduction in the developers’ confidence was because of the unjust removal of the wind power developers from the lucrative areas of Gujarat. Hence, the wind power developers were forced to look in other areas that unfortunately had exorbitant private land prices. Such instances of poor coordination have deeply affected the Renewable PPA market, contributing to its slow decline.
- Debt-ridden State DISCOMs Conundrum and Discriminatory Tariffs:
The debt owed by DISCOMs is increasing on a daily basis. [38] This rising debt can be due to multiple factors such as cross-subsidies not being funded which in turn leads to the industrial and commercial consumers being charged exorbitant rates while the agricultural consumers are being charged extremely low or no tariffs. [39] While lower tariff rates of Rs. 2.36 per kWh in 2020 [40] may look lucrative as they help to win power development projects, they become counter-productive as such low tariffs lead to the costs being cut through the production of lower-quality products. This leads to a reduction in the efficiency and shelf life of the power development project. On the other hand, soaring costs have become detrimental as their chances of winning a bid for power development projects reduce.
Another factor for rising debt can be the rapidly increasing Aggregate Technical & Commercial (AT&C) losses [41] and costs for thermal PPAs wherein recovery of revenue can be low. Due to such rising debt, DISCOMs are likely to become one of the significant contributors [42] to Non-Performing Assets (NPAs). [43] This will substantially affect the rise and decline of PPAs. Thus, a need for establishing a reasonable equilibrium in the tariffs arises. The State-owned debt, developers’ needs, and investors’ interests must be looked through a wider lens.
Even though the tariffs can be reduced, investors can still find them less viable because of the increase in the financial risk and blurriness due to the poor interplay of Central and State Governments alongside other factors, as mentioned above. As per the latest data displayed on the Ministry of Power portal – PRAAPTI – the total overdue amount from DISCOMs is Rs. 120,037 crores as of August 2020. [44] This can be due to the irregular delays in the payment from bodies (that are local), the State Government departments, and consumers situated in the rural areas which in turn hampers the Power producers’ cash flows and leads to the escalation of the financial distress. Further, such State Governments seem to be lending on an average of 6.2% (as of 2020) of their budget to the energy sector [45] while their outstanding liabilities for the energy sector, proportionally of the Gross State Domestic Product (GSDP), seem to be sky-scraping as their fiscal deficit, proportionally to the GSDP, exceed the limit wherein the fiscal deficits are not kept within the limit of 5% for the FY 2020-21. [46] This establishes the need to efficiently manage the fiscal deficits wherein a “borrowing limit” can be set for the DISCOMS based on an overall share of GSDP after all the other types of State Government aid to the energy sector is taken into consideration. [47] Further, effective monitoring and reporting of data by the State Governments is the need of the hour to ensure their debt-ridden condition ameliorates.
- Deficiencies in India’s T&D Network:
India’s Transmission and Distribution Network (T&D) is riddled with inefficiencies that need to be weeded out. In the Distribution sector, [48] the conundrum of network management of vast areas exists wherein consumers’ different expectations have to be met with different paying capacity. This is further aggravated by the fact that intentional and unintentional human errors exist wherein theft and network losses are innumerable. [49] [50] Though the electricity grid was designed to operate as a vertical structure, it continues to face new challenges such as difficulty in the penetration of renewable energy, ever-changing technological infrastructure, and the entry and exit of a plethora of market players and end-users. Thus, due to the aforementioned challenges, the T&D network has not been able to keep up in its growth and development path. They can be resolved, to a certain extent, [51] via enhancement of system flexibility, incentivising the domestic solar equipment manufacturing market, enabling hybrid tenders [52] for 24×7 reliable power supply in India, utilization of unused government land and non-arable land for the purpose of development of power projects, cheap storage solutions and creation of demand by encouraging the DISCOMS to purchase solar power.
- The road ahead: The Green-Term Ahead Market model
Indeed, India’s energy landscape is constantly mutating to accommodate market-based mechanisms to develop a sustainable energy-based economy. This meteoric transformation owes its genesis to the lack of alternatives to trade power. Long-term PPAs having contractual lock-in periods and structural distortions that have made the energy ecosystem rigid. Although India has tapped avenues such as green tariffs and virtual PPAs (VPPA), [53] setting up of renewable power exchanges was essential to boost the consumption of renewable energy.
The Green-Term Ahead Market model is an initiative planned by the Government that would allow spot trading of renewable energy through power exchanges. [54] This trading window would allow corporate consumers to buy renewable power without a PPA. Green markets will encourage the Renewable Energy (RE) generators and distribution utilities to choose exchange platforms such as the Indian Energy Exchange (IEX) or Power Exchange India Limited (PXIL) for renewable energy trading instead of entering long-term contracts for project capacity. [55] Hence, GENCOs can keep a portion of the capacity free from PPAs and trade extra power generated. [56] Renewable energy-rich states like Tamil Nadu and Karnataka [57] that avoid wind projects during peak seasons can trade on this platform.
The transactions through this mechanism will be bilateral with clear identification of buyers and sellers, thereby mitigating any difficulty in accounting for Renewable Purchase Obligations (RPO). There will be two segments under the GTAM: Solar RPO & Non-Solar RPO. [58] The four types of contracts under this model include Green Intraday, Day Ahead Contingency, Daily, and Weekly Contracts.
A separate market for green contracts is imperative against the backdrop of renewable energy commitments and ensures that our energy ecosystem gradually transforms into a renewable energy-based one. To fulfil the renewable purchase obligations imposed on DISCOMs, open access consumers, captive power producers, and industries, the Government has the responsibility to provide avenues to pursue such commitments.
Conclusion
Renewable energy catapults the engine of socio-economic development in contemporary times. To realize the ambitious targets set by India along with its commitments under the Paris Agreement and the Sustainable Development Goals, governments, private companies, banks and developmental institutions have joined forces to fulfill the shared goal of a renewable energy-based future. However, more often than not, these entities find it difficult to find solutions whereby all of the stakeholders benefit alike.
The cathartic nature of power projects is indeed permeated by numerous risks. With the plethora of policy and regulatory changes such as the safeguard duty and the proposed Electricity Act amendments, the corporate renewable PPA market remains unforeseeable. While such durable agreements concretize the predictability required for long-term business ventures, it sometimes locks state utilities and off-takers in largely unprofitable contracts. Although alternative instruments such as the GTAM, VPPAs and hedge agreements are present, PPAs are the most sought-after way to purchase power and there are certain ways in which the same can be given a boost.
Firstly, governmental support must ensure the availability of untied generation capacities, planning based on resource adequacy as well as enabling sharing of reserves across states. Moreover, price signals should reach investors and consumers through an optimal mix of the available contractual instruments and market mechanisms. Secondly, before establishing enforcement authorities like the ECEA, the financial viability of PPAs must be secured through long term visibility on energy banking, adjustment of power as well as charges, duties and subsidies. [59] Thirdly, the Safeguard duty imposed must be reevaluated as it has proved to be futile and counterproductive. In addition, long-term support to domestic manufacturers must translate into investments at scale. Fourthly, rather than competing for lower tariff rates with other countries, India’s focus must be on a temporary and marginal rise in the tariff rates to cover for the exorbitant debt owed by the DISCOMs. The temporary rise may last till the debt is under control and after that, the tariff rates may be lowered as deemed necessary by the appropriate Government. Fifthly, alongside controlling the debt-crisis, India is still heavily reliant on coal and the scenario is likely to remain the same [60] if no aggressive alternative efforts are made for capitalizing on the latent renewable energy available. [61] Therefore, policies and reforms must take into account the challenges ahead and provide an insight into the practicality of overcoming them when negotiating these intricate agreements.
About the Authors
Hamna Viriyam is a 3rd Year Law Student at the National University of Advanced Legal Studies (NUALS), Kochi and is an Associate Editor at IJPIEL
Pushpit Singh is a 1st Year Law Student at the Symbiosis Law School (SLS), Hyderabad and is a Junior Editor at IJPIEL
Editorial Team
Managing Editor: Naman Anand
Editor in Chief: Akanksha Goel & Samarth Luthra
Senior Editor: Varun Pandey
Associate Editor: Hamna Viriyam
Junior Editor: Pushpit Singh
Preferred Method of Citation
Hamna Viriyam and Pushpit Singh, “The Decline of Corporate Renewable PPAs in India: A Critique”
<https://ijpiel.com/index.php/2020/11/02/The-Decline-of-Corporate-Renewable-PPAs-in-India-A-Critique>
Endnotes
[1] https://niti.gov.in/sites/default/files/2020-01/IEA-India%202020-In-depth-EnergyPolicy.pdf
[2] https://www.ge.com/renewableenergy/wind-energy/commercial-partnering-development/ppa
[3] https://www.lexology.com/library/detail.aspx?g=d34553cd-fdb7-421e-ac14-545b161e69c2
[4] https://www.nap.edu/read/22081/chapter/14#117
[5] http://www.cercind.gov.in/act-with-amendment.pdf
[6] Id
[7] Id
[8] https://powermin.nic.in/en/content/national-electricity-policy
[10] https://www.cea.nic.in/reports/committee/nep/nep_jan_2018.pdf
[11] https://www.dgms.net/IErules1956.pdf
[13] http://www.cercind.gov.in/act-with-amendment.pdf
[14] https://img.saurenergy.com/2020/03/17_energy_4.pdf
[18] All India Power Engineers Federation and Ors. v. Sasan Power Ltd. and Ors., (2017)1 SCC 487.
[26] http://www.dgtr.gov.in/sites/default/files/Solar-Final_Finding-English_0.pdf
[29] http://www.dgtr.gov.in/safe-guard-investigation-in-india
[31] Id
[32] https://www.makeinindia.com/home
[34] Id
[35] Id
[36] Id
[37] Id
[38] https://praapti.in/
[40] https://ieefa.org/ieefa-india-interpreting-solar-tariff-trends/
[42] https://ieefa.org/ieefa-india-the-economics-and-politics-of-rising-non-performing-assets/
[43] https://economictimes.indiatimes.com/definition/non-performing-assets
[44] https://praapti.in/
[47] Id
[48] https://www.electricalindia.in/solution-for-transmission-distribution-network/
[52] https://www.renewablesnow.com/news/seci-issues-rfs-for-12-gw-hybrid-wind-solar-tender-683867/
[54] https://blog.energybrainpool.com/en/tutorial-power-trading-6-the-spot-market-for-electricity/
[56] https://www.saurenergy.com/solar-energy-news/iex-launches-gtam
[58] https://pib.gov.in/PressReleasePage.aspx?PRID=1650388
[59] https://www.nrel.gov/docs/fy16osti/65660.pdf
[61] https://link.springer.com/article/10.1186/s13705-019-0232-1
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