In the ideal scenario, the current legal costs must be factored in within the contracts themselves. However, things work differently for Power Purchase Agreements (PPA). Considering they are long-term contracts, it cannot be reasonably expected to factor in the multiple risks involved at the time of execution. One of the many risks involved in such contracts is any unexpected change in the regulatory or legal framework, which is the foundation of the agreement. It is possible for the Applicable Law to change after the PPA bid has already been submitted by the parties. However, it is not possible to foresee such a change during the bidding process, due to which the impact on the tariff could not be factored in.
Any change in law is capable of having a significant impact on the obligations of the parties involved in the PPA by affecting the expected income or even costs involved. It is further possible for some change in law to alter the very basis on which the PPA was entered into, leading to a project being commercially unfeasible. Therefore, it becomes important to properly address such risks for the smooth operating and functioning of a PPA.
This blog aims to analyse the Change in Law clause within the Power Purchase Agreements, along with the past and current trends involved in the process. Also, this blog discusses the landmark judgement Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors. [(2017) 14 SCC 80] and how the courts have dealt with the issues of sanctity of contract and economic viability of a business project. The blog finally ends by providing a few suggestions for the smooth functioning of the PPAs through such Change in Law clauses and securing the investments of the parties involved, irrespective of the changes that the legal framework experiences.
Power Purchase Agreements (PPA)
A PPA is commonly used to strengthen the power sector public-private partnership (PPP) through a primary contract between the parties. The contract usually exists between an ‘offtaker’ (i.e., the public sector purchaser, or the state-owned electricity utility, which usually exists in jurisdictions with large state-operated power sectors) and a privately-owned power producer. Hence, the ability of the private sector participation to raise finances, earn a return on equity, and recover the capital costs involved is crucial for the risk allocation regime and structure of the PPA. PPAs are mainly used for the followingtypes of power projects:
- Where there are uncertain projected project revenues, due to which some price paid guarantee or quantities purchased guarantee is required to make the project sustainable.
- In cases where the subsidised or cheaper international or domestic competition is tough, the PPA provides certainty in the effective handling of the competition.
- Where the bulk of the product is usually taken by any one or a few major customers; for example, it might be the case that a specific government utility is involved in the purchase of the power plant, due to which the government shall have the first say in the power generated from the power plant. Here, the PPA helps in providing certainty in the revenue to the project company.
Currently, the PPP model can be found majorly in thermal power plants setup. However, therecent trend showcases the emerging Renewable Energy (RE) sector, which is mainly a private sector dominated area.
The Change in Law Clause
In commercial contracts, the general rule is to keep the contract price fixed in accordance with the current legal rights and obligations of the parties involved. However, things are different for a long-term contract, considering that such contracts are more susceptible to risks of any unexpected legal or regulatory framework change, which is not foreseeable by the parties when they are executing the contract. Such changes are capable of having an effect on the capital expenditure of the operation costs of the project and are also capable of making the contract commercially unviable. Therefore, to be prepared for such unforeseeable contingencies, a Change in Law clause is usually present in a traditional commercial contract, which helps in safeguarding the contractor’s interests. This is done by restoring their interests to the same position, as it would have existed in the absence of any such change. Normally,Change in Law clauses deal with the effects of the enactment of the laws, inclusive of situations of the repeal of the law, re-enactment, modification, changes in application or interpretation of the law, etc., which take place through a final court record, or any rate changes made within the taxation law.
A change in law is risky as it originates from any unexpected Applicable Law changes which take place after the bid has been submitted or after the contract has been executed. Once the investment is made in a project, such changes lead to the investor’s detriment. After all, such changes in law can give rise to new rules, amendments, new mandatory standards, codes, protocols, new tax slabs, etc.
The assumptions included within a PPA are subject to change with an unexpected change in law. Being long-term contracts, PPA’s must clearly identify and address the liabilities that a party can incur due to such changes. Such specific provisions canreduce the legal uncertainty of events subsequent to the changes. Therefore, if a project has a high probability of being successful, there must be a pre-planned financial model with a well-drafted risk mitigation plan that allows the risks to be allocated to appropriate parties. This allows the project to be properly financed if it meets the expectations of the investors and lenders, depending on the quality of the financial model presented. However, if projects are to be kept bankable even in a change in law situation, a robust Change in Law clause is a perfect choice. This clause will help address the concerns of the lenders’, especially situations where a specific party shall be liable for the costs arising due to the changes and other problems related to project financing. A change in law is also capable of affecting the project’s revenue projections considering that the service debt obligations under the financing agreements continue to exist even if there is a change in the law. Hence, it is imperative to clearly allocate the concerns and risks involved for the investors and lenders by addressing situations of repayment and accountability under such clauses.
The Change in Law clause willhelp the parties involved gain some relief for their obligations by providing them extra time, addressing additional cost issues, etc. However, it is not possible to bind the relevant public authorities to not change the Applicable Laws altogether. They are free to make any change in the law; nevertheless, the issues arising out of such change becomerelevant for this clause.
Change in Law Provisions under PPA (2010–2018)
No standardisation of the Renewable Energy PPA (RE PPA)
Even though model contracts are prepared for the thermal power PPA’s, Indiadoes not have any standard format for RE PPAs. The sector is still an evolving market, and the continuous advancement in technology reduces prices. A standard format can help PPAs be more efficient and productive, ensure uniform quality, and emulate best practices. However, the Ministry of Power has developed a different mechanism to stabilise the speculative market.
The Ministry of Power, in 2017, had issued specific Guidelines for Tariff Based Competitive Bidding Process for the Procurement of Power from Grid Connected Solar PV Power Projects (Solar Competitive Bidding Guidelines, 2017) –Clause 5.2, along with specific Guidelines for Tariff Based Competitive Bidding Process for Procurement of Power from Grid Connected Wind Power Projects (Wind Competitive Bidding Guidelines, 2017) –Clause 3.2. However, these guidelines allow the entities, through the Electricity Regulatory Commission’s (ERC) approval, to deviate from the original bidding guidelines. As such deviation from the competitive bidding guidelines has been allowed by law, and because no standard PPA exists, there have been multiple versions of PPAs being issued by various central nodal agencies and states.
Even though the guidelines specifically make it binding on the procurers to have a Change in Law clause in all PPAs that they enter into, there have been instances where ERC has approved RE PPAs, whichexcluded the Change in Law provisions. Such instances end up defeating the entire purpose of such guidelines. Further, due to the absence of the Change in Law provisions in PPAs, the judicial and quasi-judicial bodies have been cautious and have not allowed any grant of relief of tariffs or any further extension of time to diminish the effects of such legal changes.
InGujarat Urja Vikas Nigam Limited v. Gujarat Electricity Regulatory Commission, the impact of increased excise duties and customs was rejected by the Appellate Tribunal for Electricity (APTEL) because there existed no clause in the PPA or in the Tariff Order that allowed for revisions to be made to the tariffs in a Change in Law situation. Further, inRegen Powertech Pvt Ltd v. TANGEDCO, the appeal for the revision of feed-in-tariff was rejected by TNERC since compensation had not been included in the underlying regulations or under the provisions of the PPA.
Improper treatment of Change in Law situations
A few of theearlier solar PPAs which various states have issued have included the Change in Law situation as a force majeure event where the only relief available to the parties is to seek an extension for the already scheduled commercial operation date. While such clauses allow for the Change in Law to be applicable during the construction period, unfortunately, it does not allow for Change in Law once the project has been commissioned. This affects the aggrieved party’s expenditure and income, along with having implications on the project’s timeline. Mostly, if any force majeure event takes place, the extension of the completion date is allowed; however, there is no provision to permit the contractor to recover their respective damages or losses due to such delays in the completion date. Therefore, the PPAs do not address the monetary implications arising due to such changes, and hence, it becomes a challenge for the aggrieved party to claim reliefs in such situations.
Scale of Change in Law inadequate and vague
There exist many infirmities in the general Change in Law clauses within the PPAs, as their respective scope is incomplete, ambiguous, and not clearly defined. There are cases where some include the amendments of the existing laws, but very conveniently exclude any enactment of new laws or the removal of the existing laws altogether. Many otheraspects, such as the relevance of new consent and permits, or new scale of tax impositions, etc., are also often ignored.
Further, the procedure that the parties should ideally follow to claim any relief in case of a change in law is not set out in the PPA. There are instances where some PPAs require thedirect interference of the Electricity Regulatory Commission without providing any interference or notification to the other party related to the impact of a change in law. Such clauses do not provide any scope of mutual discussion between the parties to try to come to a resolution in addition to not levying any obligation to diminish the party costs and investments.
The principle to be applied to the PPA while considering any relief due to a change in law is not expressly mentioned in the PPA. Even though the main objective of having a Change in Law clause in the PPA is to limit the adverse impact of unforeseen changes in law along with making a system to avoid putting the parties in an economically difficult position, this objective is not met due to the absence of such fundamental aspects which can determine such reliefs within the PPA. Further, the Change in Law clause ends up becominginefficacious if the PPA itself disallows tariff tax revisions, and the parties are only allowed to approach the ERC in such difficult situations.
The Change in Law provisions in the PPA, between the distribution companies (Discoms) and the renewable energy project developers (RPD), becomes important forbankability purposes in the bidding process. Under the Change in Law clauses, Discoms must reimburse the RPDs, in accordance with the losses incurred by the RPD with the Change in Law situation. When Goods and Services Tax (GST) was first introduced in 2017, the safeguard duties on solar cells were put under the Change in Law provision in 2018 so that it could be tested how GST and the safeguard duties are leading to an increase in the overall project costs. It was then decided that the increase shall becompensated to the RPD by the respective Discoms.
There are mainly three things that must be obtained from the concerned Electricity Regulatory Commission in a Change in Law provision. These include – (i) declaration of the Change in Law situation; (ii) date at which the Change in Law situation took place; and (iii) to approve the compensation payable or provide relief to the RPD in the PPA. However, the manner in which the Discoms shall compensate the RPD for the damages and losses – in lump sum payment, unit basis compensatory tariff payment, annuity payment, or any other mechanism – are not specified within the PPA. To date, even though several state ERCs have issued various orders for the Change in Law compensation to be present in petitions brought in by the aggrieved RPDs, such orders have only worsened the ambiguity in relation to the manner in which the Discoms shall provide the compensation to the RPD. This has further led to a delay in providing compensation in many cases. Ambiguity also arises because many ERCs, including the Central Electricity Regulatory Commission (CERC) has stated that the Discoms can compensate the RPDs either through a lump-sum payment or as per the mutual understanding with the RPD in accordance with the PPA. However, as no procedure has been laid down in the PPA, compensation becomes more complicated.
This entire process ends up with two major drawbacks– (a) vague and ineffective contractual provisions in the PPA, especially in the Change in Law provision, which makes it difficult for Discoms and RPD to enter into a bankable agreement; and (b) the deficiency of a robust regulator for these difficulties. These drawbacks have a major impact, especially when looked at from the foreign investor perspective. This is because foreign investors would usually evaluate provisions like termination compensation and constraints put on compensation, with these drawbacks as benchmarks. Therefore, the Government should try to develop a sample PPA, which leaves all uncertainty or vagueness out and helps the parties in a smooth transaction. In addition, the regulator must also consider the ground realities attached with the process and keep in mind that it is the consumer who eventuallysuffers due to such delays, and accordingly, help protect their interests.
Recently, when the Gujarat Urja Vikas Nigam Ltd. (GUVNL) filed a petition along with MGVCL (Madhya Gujarat Vij Company), UGVCL (Uttar Gujarat Vij Company), GDVCL (Dakshin Gujarat Vij Company), PGVCL (Paschim Gujarat Vij Company), and GETCO (Gujarat Energy Transmission Corporation), it was seen that the Gujarat Electricity Regulatory Commission (GERC) had accepted the ‘Change in Law’incorporation in the proposed PPAs of the Gujarat Urja Vikas Nigam. The Discoms shall beexecuting these PPAs with the RPD under the ‘Government of Gujarat’s Policy for Development of Small Scale Distributed Solar Projects 2019’, which was a policy notified by the Gujarat Government for purchasing 0.5 MW to 4 MW capacity power projects.
The initiative to set up such projects by the Government had been exclusively done to help Discom-like obligated entities to efficiently fulfil their renewable purchase obligations (RPOs). Further, this 2019 policy states that the obligated parties, to meet their respective RPO, is bound to buy solar power under this Policy. Consequently, this resulted in the Gujarat Government notifying the guidelines and executing a draft PPA with small-scale solar project developers, which had been publicly released. Thedraft PPA released further provided the Change in Law provision and allowed the aggrieved parties to approach the regulatory commission to seek reliefs for the occurrence of such situations, including the provisions of modification in tax rates, cess on the sale, generation of electricity, etc.
This Change in Law provision in the PPA is intended to help the small-scale projects to be considered at the same foot as the projects under the competitive bidding, which shall furtherhelp in seeking reliefs after the PPA has been signed.
Thermal Power Plants
India, as a country, has largely beendependent on coal for its power. However, when the availability of coal decreased, several PPAs, which intended to conduct significant energy projects in different Indian states, witnessed serious litigation processes. One such landmark judgement isEnergy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors. [(2017) 14 SCC 80] wherein PT Adani Global Group had entered into a Coal Supply Agreement (CSA) with an Indonesian mining company, PT Dua Samudera Perkasa. The Agreement was executed between them on 14th December 2009. However, importantly, on 12th January 2009, the Indonesian Government had made a notable change in their laws. The Indonesian Government had passed the Mining Law called theLaw on Mineral and Coal Mining No.4 of 2009, which made it mandatory for the Indonesian coal suppliers and miners to increase their coal prices in accordance with the international market standards. Even though it took about a year for the law to be properly implemented, it was clear from January 2009 itself that the Indonesian coal market shall be witnessing an increase in price levels. Eventually, on 23rd September 2010, through official promulgation of theRegulation of Ministry of Energy and Mineral Resources No 17 of 2010, under Article 2, the Indonesian minister of energy and mineral resources asked all coal miners and suppliers to update their existing CSAs and escalate the coal prices.
Eventually, the Adani Power Group was forced to file a petition before the CERC to seek relief. They contended that relief could be provided to them, either under the ‘Change in Law’ clause or under the ‘force majeure’ clause of the PPA, wherein a legal action should be taken against the company and the government, and costs must be imposed for such unforeseen event to have taken place. Therefore, they prayed for adequate compensation for the hardships incurred by them.
The CERC then chose to provide relief to the parties through their overreaching regulatory powers provided under Section 79 of the CERC termed “compensatory tariffs”. The Commission ended up imposing the entire fuel price variation burden on the consumers, and therebyprovided compensatory tariff to Adani Power of Rs. 3600 crores, till March 2016.
However, the Commission’s order was thenchallenged before the APTEL. The tribunal ended up rejecting the compensatory tariff relief provided to the Adani Group and treated the Indonesian regulation as a force majeure event, instead of a Change in Law event, under the PPA. Thereby, the tribunal redirected the matter to the CERC to help determine the relief amount which shall be provided to the group. The CERC thenfurther reduced the amount of relief that was to be provided to the Adani Group.
Eventually, thematter came before the Supreme Court of India through appeals made by many NGOs and companies against the order provided by the APTEL. The Supreme Court, while upholding the sanctity of the contracts, refused to apply either the Change in Law clause or the force majeure clause to the case. Regarding the ‘Change in Law’ clause, the court highlighted that the term ‘law’ is not inclusive of all Indian and foreign laws, and instead that, “The meaning will have to remain the same whether coal is sourced wholly in India, partly in India and partly from outside, or wholly from outside. This being the case, the meaning of the expression “any law” in clause 13 cannot possibly be interpreted in the manner suggested by the respondents”. Therefore, they highlighted that tariffs could not be allowed due to any change in the Indonesian regulations.
The Supreme Court held that the amendment made to theNew Coal Distribution Policy (NCDP) in July 2013, must be considered as a Change in Law event. This amendment highlighted that “taking into account the overall domestic availability and the likely actual requirements of these TPPs (thermal power plants), it has been decided that FSAs will be signed for the domestic coal quantity of 65 percent, 65 percent, 67 percent and 75 percent of ACQ (Annual Contracted Quantity) for the remaining four years of the 12th Plan for the power plants having normal coal linkages”. Hence, the court provided limited relief for the period beyond July 2013 anddirected the CERC to calculate the quantum of relief on a case-by-case basis.
While upholding the sanctity of the contracts, this landmark Supreme Court judgment furtherdiscouraged aggressive bidding as done by the holding bidders. While enforcing the rule of law, it has strengthened the risk accountability of the lenders and the bidders. However, this judgement has also made the future of India’s coal-based thermal power generation sector ambiguous. While holding that no foreign law is included within the ‘Change in Law’ scope of the PPA, the court has held that any Indian law that has undergone a change in their government policy can be included within the ‘Change in Law’ provision. This pattern could be seen in many cases after the Energy Watchdog case, namely cases likeAdani Power Maharashtra Ltd. v. MSEDCL andAdani Power (Mundra) Ltd. v. Uttar Haryana Bijli Vitran Nigam Limited and Ors.
Conclusion and Suggestions
To conclude, PPAs have long-term prospects and possibilities and are equally prone to vagueness and uncertainty especially due to the Change in Law provision. The unpredictability in the expected regulatory and legal changes is eventually capable of completely eroding the intent with which the bid had been submitted. Further, the manner in which the Change in Law provisions is dealt with in India greatly differs depending on the state, wherein some do not even acknowledge the intended risks and some end up addressing it only partially. Therefore, effective allocation of risks can improve the bankability and efficiency of the PPA, along with ensuring their smooth functioning. Therefore, to make their PPAs effective, the parties must include thefollowing:
- There must exist a provision for the effective allocation of risk, in the Change in Law circumstances, with a comprehensive and clear definition of ‘Change in Law’. This definition must set out the scope of the current Applicable Law and must include the Change in Law scope, the relevant authorities that must be referred to, along with the date at which the event related to ‘Change in Law’ must occur, through the mutual understanding of the parties.
- Power companies have long term agreements of 25-30 years. Such long-term contracts are not feasible and are very risky unless it contains safeguards for both parties in the contract. The significant advancement in technology makes long-term commercial contracts economically unviable in future. Hence, the duration of contracts needs to be reviewed.
- As there is no clause for post-contractual negotiation under PPA, it makes it difficult for companies to sustain in case of unforeseen changes in the market. Hence, it is important to allowpost-contractual negotiation to the parties, and under the agreement, there must be a clause for it.
- There must be a timeline procedure that the parties must follow, with a deadline involved, to discuss the Change in Law-related issues. Further, if the parties are unable to come up with a preliminary understanding, then details of the effective mechanism, such as the mechanism under the Electricity Regulatory Commission, must be included to ensure expeditious proceedings and to avoid any discrepancies in the start of the resolution procedure.
- There must be a provision that deal with pending litigation proceedings to address questions of liabilities. Details such as the party which shall be liable and how the compensation amount must be paid must be included within the provision.
- There must exist a compensation mechanism capable of restoring the parties to the same position, as they were before they entered into the agreement, within the Change in Law provision itself. Further, to encourage parties to factor in minimum risks and avoid any minor disputes between the parties in the future, details must be provided for any extension in the commercial operation date, especially during the construction period.
About the Authors
Ms. Diksha Sharma is a Legal Practitioner at High Court of Madhya Pradesh.
Ms. Muskaan Aggarwal is a 3rd Year Law Student from Jindal Global University (JGU), Sonipat, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Hamna Viriyam
Associate Editor: Muskaan Aggarwal
Junior Editor: Swetha Somu
Preferred Method of Citation
Diksha Sharma and Muskaan Aggarwal, “Change in Law Clause in Power Purchase Agreements: Issues and Challenges” (IJPIEL, 7 January 2022)