In July 2018, the Indian Government imposed Safeguard Duties on the import of solar cells in panels or modules. Such imposition of Safeguard Duties is a Change in Law event. These Safeguard Duties were constantly revised for the next three years until July 2021. Various Solar Power Projects that were bid or executed before the imposition of these Safeguard Duties were affected. This is because the imposition of the Safeguard Duties would lead to a change in the way the Power Purchase Agreements of these Solar Power Projects are interpreted and would also cause significant detriment to the Solar Power Project producers and distributors.
Thus, in this Blog Post, firstly, the authors scrutinize the Change in Law provision/clause under a Power Purchase Agreement and discuss the impact of the imposition of Safeguard Duties in India. Secondly, the authors explore the effect of Change in Law on distressed Distribution Companies and the consequential impact on Solar Power Generating Companies. Thirdly, the authors anatomize the impact of Change in Law on Pass-Through of Safeguard Duties. The authors discuss the parameters for the calculation of incremental tariffs, the concept of Carrying Cost, and the consequential impact on the commercial viability of the Solar Power Projects. Fourthly and lastly, the authors discuss the Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021 — issued by the Ministry of Power — as a plausible solution to Change in Law-related conundrums.
1. Introduction: Change in Law provision/clause under a Power Purchase Agreement and Imposition of Safeguard Duties in India
“Change in Law”are events that lead to a change in the applicable law. The sequence of this may be illustrated from the following example. Suppose there is a contractor. He submitted his bid for a project, or a contract was executed for providing a service on 1 January 2000. When submitting the bid or executing the contract, the existing regulatory and legal framework is considered to determine the project’s overall price and its tariff. In other words, the regulatory and legal framework existing up to 1 January 2000 would be considered to determine the overall price of the project and its tariff. However, the problem arises after 1 January 2000 because a “Change in Law” eventmay happen in the form of introduction of a new law, amendment of existing law, the introduction of new and mandatory standards, imposition of a new tax, revision of the current tax rate, and new interpretation of existing law by the Courts. In other words, these Change in Law eventsmay not be factored into the bid submitted or the contract executed because such events wereunforeseeable and out of the Parties’ control at that time. Further, these Change in Law events may either decrease or increase the Parties’ obligations in a Power Purchase Agreement (PPA) as it consequently affects the “expenses, expected income, and the costs” incurred. Itmay also fundamentally change the foundation of a PPA that may, in turn, significantly affect the commercial viability of a project. This is further exacerbated because, inPTC India Ltd. v. CERC, the Supreme Court held that the Parties must align their contracts if the laws change and comply with the same. In other words, the mandatory compliance for Change in Law increases the pressure of detrimental impacts on the commercial viability of various projects that were bid or executed before the Change in Law event(s) occurred.
Generally, Change in Law eventsare combatted by passing off the risk to the customers through an increase in price or contracts with “flexible payment mechanisms” that can factor in the Change in Law events during the contract’s tenure. However, this may happen in traditional commercial contractsbut not in PPAs because PPAs are long-term contracts (generally spanning between 20-25 years) with fixed long-term prices with little to no scope for adjustment. This means that it is highly challenging to include the prospective risks like Change in Law events in PPAs because of their long-term tenure and nature, thereby making PPAs highly susceptible to future changes. Change in Law eventshas as one of the most dangerous risks for which thorough due diligence is conducted and, thus, to prevent such dangerous risks, a Change in Law provision/clause. This Change in Law provision/clause (in the PPA), firstly, defines the scope of the Change in Law events. Secondly, it should generally define the Parties — such as the power project developer, financier, and other related Parties, if any — that are liable in case of Change in Law contingencies. In other words, the Change in Law provision/clause allows the Parties to share the risks equitably. Further, it will enable the Parties to assess the regulatory and legal framework from a prospective lens. Thirdly, it should state the date from which the Change in Law provision/clause would be applicable. Fourthly and lastly, it should generally discuss a standardized procedure that the Parties may adopt for receiving compensation in case of Change in Law events before directly approaching the Electricity Regulatory Commission (ERC). Thus, this means that an ideal Change in Law provision/clause provides the Parties (in a PPA) relief regarding risk-sharing obligations in the form of – additional time that may be granted in case of Change in Law events will now be privy to the other Parties such as financiers, thereby allowing them to relatively better assess the commercial viability of the project; or additional costs that may be incurred can now be shared between the Parties; or both forms of risk-sharing obligations would be granted through a Change in Law provision/clause. This benefit of Change in Law provision/clause is further explained through the “bankability” of a power project. If a project meets the following criteria, it is financed and is considered as “bankable”:
a. The power project has a high probability of success.
b. The power projects’ financial model consists of enough future cash flows.
c. The power project has a mitigation plan wherein risks are allocated to the suitable Parties.
d. The power project’s financial model’s projected results can meet the expectations of the lenders and the investors.
The bankability of a power project is exponentially increased with the existence of a Change in Law provision/clause in a PPA. This is because such a provision/clause encapsulates more uncertainties and risks that, in turn, affect the power project’s revenue projections. In other words, it makes such projections more practicable for lenders and investors. It also clarifies which Parties would be sharing additional costs and funding such additional costs incurred from a Change in Law event by allocating risks to the suitable Parties. Thus, a sturdy and ideal Change in Law provision/clause enables a relatively increased portrayal of the commercial viability of a power project.
A. Conundrums with a Change in Law Provision/Clause in a PPA
The previously mentioned is far from reality for Renewable Energy (RE) projects because of the following challenges Change in Law provision/clause faces in a PPA:
a. Lack of standardization for Renewable Energy PPAs: In India, thermal power PPAs are standardized in the form of Model Contracts. However, RE PPAs do not have such a form of standardization, due to which multiple conundrums arise. Firstly,there have been various versions of RE PPAs because the Wind Competitive Guidelines, 2017 and Solar Competitive Bidding Guidelines, 2017 (hereinafter “2017 Solar Guidelines”) allow for deviation from the prescribed guidelines with the prior approval of the ERC. This provision for deviation allows for substantial issuing of multiple versions of RE PPAs, especially in the lack of a standardized version. Secondly, as mentioned earlier, the deviation has led to Change in Law provision/clause being wholly excluded from the PPA with the prior approval of the ERC in various cases as seen in re: Thiru S. Akashaya Kumar and others for M.P. No.17 and18 of 2018 by the Tamil Nadu ERC (TNERC). This essentially defeats the purpose of the guidelines, i.e., to account for as many contingencies as possible. Thirdly, the deviation concerning the exclusion of Change in Law provision/clause as mentioned earlier also leads to varied opinions by the various quasi-judicial and judicial bodies. For example, inGujarat Urja Vikas Nigam Limited v. Gujarat Electricity Regulatory Commission, the Appellate Tribunal for Electricity (APTEL) did not allow for revision in tariff (resulting from increased customs and excise duties) because the PPA and the “underlying Tariff Order” did not incorporate a Change in Law provision/clause to account for such Change in Law events. Similarly, inRegen Powertech Pvt Ltd v. TANGEDCO, the TNERC did not allow the change in feed-in-tariff under the PPA as the regulations on which the PPA was formulated did not provide for a Change in Law provision/clause. Fourthly and lastly, it has also led to ambiguity in the scope for the “Change in Law” provision/clauses if included in the PPA. For example, the PPAs —competitively bid RE projects issued by the Solar Energy Corporation of India and National Thermal Power Corporationstipulate the imposition of a new tax under the scope of Change in Law. However, PPAs issued by Gujarat Urja Vikas Nigam Limited (GUVNL)only have those Change in Law events that impact the final sale of electricity or energy output. It does not include those Change in Law events that affect a project’s operating or capital expenditure. Thus, the benefits of uniformity in quality improved productivity and efficacy, and the scope for incorporating best practices is lost.
b. Mismatched treatment of Change in Law as Force Majeure: In the past, Solar PPAshave been approved that treat Change in Law events as Force Majeure events. This leads to multiple problems. Firstly, theonly remedy for Force Majeure is extending the scheduled commercial operation date. Secondly, such PPAsaccount only for those Change in Law events that occur during the project development phase and not after the project has been commissioned. Thirdly and lastly, Change in Law events affects the Partiesin a two-fold manner: the project’s timeline and the Parties’ finances. However, the PPAsdo not include a remedy for providing monetary compensation relief to the Parties. They cannot recover damages or losses caused by the Change in Law event. Thus, Change in Law events and Force Majeure events should be treated differently.
c. Scope of “Change in Law” provision/clause is incoherent and limited: Various PPAs have Change in Law provision/clause that included the existing laws but excluded the following – implementation of new laws, acquiring new permits or clearances, imposition of a new tax, and other relevant events. This exclusion has led to various problems as follows. Firstly, thesePPAs do not establish a procedure to follow if a Change in Law event occurs.Some PPAs mandate the Parties to approach the concerned ERC directly. However, these PPAsdo not suggest mediating the situation before approaching the ERC. Some of these PPAs do not make it mandatory for the aggrieved Party to notify — that they are approaching the ERC — to the other Parties. Further, these PPAsdo not mandate risk-sharing obligations between Parties. Secondly, these PPAs do not lay down principles that should be followed while granting relief to the aggrieved Party if a Change in Law event occurs. Itwas found that various PPAs, quite often, fail to mention thefollowing fundamental principle to be followed while determining relief for Change in Law: the aggrieved Party must be restored in the same economic position as if the Change in Law event would not have happened. Thirdly and lastly,some Wind PPAs do not allow the Parties to revise tariffs in case of tax changes even though the Parties might be allowed to approach the ERC. This, in turn, defeats the purpose of a Change in Law provision/clause.
Considering the preceding arguments, we have discussed how Change in Law events — like tax changes — impact RE projects. Moving on, it is also imperative for us to explicitly discuss the intersection between Safeguard Duty and Change in Law.
B. Change in Law and Safeguard Duties in India
Solar panels or modulesconstitute 45-50% of the capital expenditure for a solar power project. Further, Indiaimports approximately 90% of its solar equipments. The problem arose regarding the rise in prices of the solar power projects due to the imposition of Safeguard Duty. On 30 July 2018, the Indian Governmentimposed a 2-year Safeguard Duty (SGD) on the import of solar cells (in panels or modules). SGD’s ratewas 25% from 30 July 2018 to 29 July 2019, 20% from 30 July 2019 to 29 January 2020, and 15% from 30 January 2020 to 29 July 2020. SGD was further extended wherein its ratewas 14.9% from 30 July 2020 to 29 January 2021 and 14.5 from 30 January 2021 to 29 July 2021. The purpose behind the same was to protect the domestic solar manufacturing industries. However, the imposition of this SGD is particularly detrimental for those solar projects that won their bids before 30 July 2018 or those solar projects whose PPAs were executed before 30 July 2018 as it leads to an exponential rise in the solar projects’ cost because such introduction of tax was not foreseeable and controllable for the Parties, thereby rendering it a detrimental Change in Law event. This was further clarified through the Ministry of New and Renewable Energy’sApril 2018 office memorandum, which stated that Change in Law also includes changes in cess, duties, and taxes under the 2017 Solar Guidelines. However, this clarification is beneficial only for those PPAs that follow the 2017 Solar Guidelines or those PPAs that have the SGD incorporated as a Change in Law event. The following problems persist:
a. Regulatory approval would still be necessary to pass through the SGD’s impact. In other words, the solar power project would require the approval of the ERC to revise its tariffs to cover the additional costs that may be incurred. Thus, this regulatory approval is bound to be time-taking and cumbersome.
b. Distribution Companies (DISCOMs) are likely to delay the payment of compensation to the Generating Company (GENCOs) or the solar power project developer even after the regulatory approval is obtained because DISCOMs are already overburdened with debt and are loss-making.
c. There will likely be a delay by the ERCs while adjudicating and determining the payment of compensation, thereby detrimentally affecting the solar power project developers’ cash flows.
Thus, the imposition of SGD has left a plethora of things unanswered that shall be discussed in the following sections of this blog post.
2. Effect of Change in Law on distressed DISCOMs and the Consequential Impact on Solar Power GENCOs
When a Change in Law event occurs, the adjudicating authoritypasses through the impact of the SGD onto the DISCOMs. This means that the DISCOMs would be liable to pay the RE GENCOs compensation for the additional costs incurred (by the RE GENCOs) in developing the solar power project. This ability to pay additional money, i.e., compensation, to the RE GENCOs arises from the DISCOMs’ ability to revise the tariffs and charge additional money from the daily, average consumers of electricity. However, this is apt only in theory because the practical scenario is far from theory. The reason behind the same is that the DISCOMs are over-distressedwith an existing debt of over Rs. 20,000 crores to the RE GENCOs as of March 2022. Further, these DISCOMs are making losses due to which their ability to pay compensation to the RE GENCOs in light of Change in Law is further reduced.
The reasons attributable to DISCOMs’ current status are multiple. Firstly, the provision of cross-subsidies is highly detrimental to the DISCOMs because the industrial and commercial consumers had to face an increased cross-subsidy burdenof Rs. 75,027 crores in the fiscal year of 2019-20 as opposed to the cross-subsidy burdenof Rs. 67,785 in the fiscal year of 2016-17. Thisessentially leads industrial and commercial consumers to purchase power through “open access” routes and even build captive power generation plants for cheaper and affordable electricity. Further, there isa significant delay by the Government in the release of the additional amount received from industrial and commercial consumers to subsidize domestic and agricultural consumers. Secondly, there is a delay in filing tariff petitions by DISCOMs. They are supposed to do the same promptly under the Ujwal DISCOM Assurance Yojana (UDAY Scheme) to ensure that the State ERCs can issue tariff orders as soon as possible. However, failure to do the same is a deviation from the UDAY Scheme and detrimental to the unrecovered revenue gap for the DISCOMs as it adds on to the same in the absence of revised tariff rates. Further, there is an inadequate hike of tariff rates by the DISCOMs. This means that the DISCOMs are not adequately hiking their tariff rates to cover their unrecovered revenue gap. It was found that the median tariff hike by DISCOMs at a pan-India level reduced from 8% tariff hike (in 2015) to 4% tariff hike (in 2016 and 2017) to 3% tariff hike (in 2018) and lastly to 1% tariff hike (in 2019). This, in turn, significantly slows down the process to reduce the financial losses suffered by the DISCOMs. Thirdly and lastly, thereis a rapid and continuous rise in the Aggregate Technical and Commercial (AT&C) losses due to DISCOMs’operational and management inefficiencies and ineffectiveness. Thus, it is imperative to note that even if the cost of SGD is passed off onto the DISCOMs, who would, in turn, be mandated to pay compensation to the RE GENCOs, it would not be beneficial to the RE GENCOs because the DISCOMs are overburdened. This means that they do not possess the adequate financial capacity to pay the RE GENCOs, and due to this inability to pay the compensation amount to the RE GENCOs, it is likely to affect them in the following ways:
a. Itcan cause substantial strain on the RE GENCOs to maintain enough cash flows to “pay their vendors, service their debt, and meet Operation and Maintenance (O&M) costs.”
b. Itcan impact international investor confidence in RE GENCOs because of the delayed payments from DISCOMs. International investors may be reluctant to invest in developing RE equipment and technologies such as solar panels, modules, and other related materials. DISCOMs’ inappropriate behavior further exacerbates this wherein itwas reported that they had asked the RE GENCOs to waive the “late payment surcharge” and have also requested “discounts” in due amount payment.
d. RE GENCOs’ ability to pay worker salaries can be hindered, which would, in turn, affect RE Research and Development (R&D) as the skilled human resources may choose to leave the job at the RE GENCOs. Itwas found that the rooftop solar sector is likely to employ 3,00,000 workers for the next five years starting from 2019. However, delayed payments by DISCOMs are likely to affect such employment opportunities, which, in turn, is likely to impact innovation.
Thus, it is imperative to note that the DISCOMs’ ability to pay needs to be seriously considered while determining the compensation amount payable to the RE GENCOs. Failure to do the same is likely to impact the RE GENCOs detrimentally.
3. Effect of Change in Law on Pass-Through of Duties and Project Viability: Case Law Analysis
According to the Indian Contract Act, 1872 (hereinafter “1872 Act”), compensation to be granted for a contract is fixed. However, as earlier discussed, there may be a change in circumstances — such as regulatory and legal framework — that may impact the performance of the contract. Thus, to prevent a significant impact on the performance of the contract, a Change in Law provision/clause exists in the contract to modify its interpretation as per the Change in Law events that generally get triggered after the submission of a bid in a solar power project or after the execution of the PPA.
Change in taxes and duties can be considered a Change in Law event to trigger the Change in Law provision/clause. For example, inGMR Warora Energy Limited v. CERC, APTEL observed that if any tax is levied after the “cut-off date” by an Act of Parliament, and which results in incurring of added expenditure for the Parties, they would be protected as such levy of tax will be considered as a Change in Law event. Further, inACME Guledagudda Solar Energy Private Limited v. BESCOM, KERC held that imposition of SGDs and any increase or decrease in the rate tariffs, duties, taxes, or levy of various types of cess such as “Swaccha Bharat Cess, Krishi Kalyan Cess,” or imposition of Goods and Services Tax (GST) would qualify as a Change in Law event. As earlier discussed, such events are considered detrimental to the project’s commercial viability because they lead to additional recurring or non-recurring expenditure to the Parties, resulting in adverse financial gain or loss. Thus, to prevent such adverse scenarios, Change in Law provision/clause is triggered wherein the Parties would be entitled to suitable compensation.
However, this entitlement is subject to the Change in Law provision/clause incorporated in the PPA. InAdani Power Limited v. CERC, APTEL observed that compensation could not be granted to the aggrieved Party. The question of “Carrying Cost” also does not arise because the PPA did not capture any provision that enabled the restoration of the aggrieved Party to the same economic position before the Change in Law event occurred. Further, it is imperative to note that this reasoning emanates fromUnion of India v. Tulasiram Patel, wherein the Supreme Court held that when a statute contains express provisions, anything not expressly mentioned is said to be excluded. Thus, this means that there must be an implicit or explicit provision in the PPA that allows the Parties for compensation relief for the actual cost incurred and for the “Carrying Cost” incurred on the added Working Capital infused for the solar power project development. Further, the PPA must contain the technical and financial parameters to calculate the incremental tariff. Lastly, the PPA must lucidly mention the appropriate Authority the Parties must approach for resolution regarding compensation relief.
A. Parameters for Calculation of Incremental Tariff
InAdyah Solar Energy Private Limited v. GESCOM, KERC found a provision envisaged in the impugned PPA, which stated that the incremental tariff, resulting from any change in duties or taxes, must be calculated by the appropriate Commission. It is imperative to note that the PPA did not have any financial or technical parameters for calculating the incremental tariffs. In that regard, the KERC placed reliance on a “Generic Tariff Order dated 18.05.2018 for Determination of Tariff and other Norms in respect of New Solar Power Project (Ground Mounted and Solar Rooftop Photovoltaic Units)” and laid down the following parameters for calculation of incremental tariffs:
a. “Debt to Equity Ratio.”
b. “Interest on capital loan.”
c. “Tenure for repayment of the loan.”
d. “Return on Equity.”
f. “Interest on working capital at two months receivables.”
g. “Discount Rate to factor in time value of money to arrive at levelized tariff for the life of the plant.”
Thus, when no specific financial or technical parameters are envisaged in a PPA, the parameters mentioned above can be considered to calculate the incremental tariffs.
B. Delay in Adjudication regarding Claim for Compensation by appropriate Authority: The Concept of “Carrying Cost”
If a Party claims for compensation due to Change in Law, and there is a delay in adjudication by the appropriate Authority, the question that arises is: what happens then? The answer lies inAdani Power Limited v. CERC, wherein the APTEL observed that the aggrieved Party would be eligible for compensation for “Carrying Cost” from the effective date at which the Change in Law event occurred till the date at which the appropriate Authority passes the final decision regarding the grant of compensation. This was challenged before the Supreme Court inUttar Haryana Bijli Vitran Nigam Limited v. Adani Power Limited. The Supreme Court upheld APTEL’s observation as follows: “A reading of Article 13 as a whole, therefore, leads to the position that subject to restitutionary principles contained in Article 13.2, the adjustment in monthly tariff payment, in the facts of the present case, has to be from the date of the withdrawal of exemption which was done by administrative orders dated 06.04.2015 and 16.02.2016. The present case, therefore, falls within Article 13.4.1(i). This being the case, it is clear that the adjustment in monthly tariff payment has to be effected from the date on which the exemptions given were withdrawn. This being the case, monthly invoices to be raised by the seller after such change in tariff are to appropriately reflect the changed tariff. On the facts of the present case, it is clear that the respondents were entitled to adjustment in their monthly tariff payment from the date on which the exemption notifications became effective. This being the case, the restitutionary principle contained in Article 13.2 would kick in for the simple reason that it is only after the order dated 04.05.2017 that the CERC held that the respondents were entitled to claim added costs on account of change in law w.e.f. 01.04.2015. This being the case, it would be fallacious to say that the respondents would be claiming this restitutionary amount on some general principle of equity outside the PPA. Since it is clear that this amount of carrying cost is only relatable to Article 13 of the PPA, we find no reason to interfere with the judgment of the Appellate Tribunal.”
Similarly, this principle was applied inClean Solar Power Private Limited v. Solar Energy Corporation of India Limited. The impugned project was commissioned, its equipments were installed, and energy was flown into the grid. The liability of the Respondent, for payment of the power purchased from the Petitioners, started from the Commercial Operation Date (SCOD), which was defined as per the PPA and relied upon by APTEL as follows: “…the date on which the commissioning certificate is issued upon successful commissioning of the full capacity of the Project or the last part capacity of the Project, as the case may be.” Thus, APTEL held that the Respondent was liable for payment to the Petitioners — arising from the impact of GST on procuring Solar PV Panels and associated equipments — until COD only for the “the contracted capacity and energy.” Therefore, this means that the aggrieved Party, under the Change in Law concept, must be granted compensation for the following costs –
a. The “actual cost” incurred due to the Change in Law.
b. The “Carrying Cost” incurred due to the Change in Law because the aggrieved Party must arrange for the finances of both the costs as mentioned above until the same is approved by the appropriate Authority.
Further, inNisagra Renewable Energy Private Limited v. MERC, APTEL relied on the MERC’s Order and held it to be correct wherein it was stated that Carrying Cost is allowed because it is based on the principle of restitution for Change in Law, due to which Carrying Cost must reflect the “time value of money.” It cannot and must not be used as a “tool” to earn extra compensation. Further, APTEL observed that, in the time gap between the spending date and realizing the said amount, the Working Capital loan is taken, and interest can be claimed on such loan due to the tariff principle. Similarly, when additional expenses, i.e., Carrying Costs, are incurred due to a Change in Law which are to be reimbursed later in the form of compensation, such additional expenses are funded through the Working Capital loan or any other alternative. If the PPA does not stipulate the interest rate for the Carrying Cost, the interest rate for the Working Capital specified in the “MERC (Terms and Conditions for Determination of Renewable Energy Tariff) Regulations, 2015” (hereinafter “RE Tariff Regulations”) will be used as the “…rate for carrying cost to work out the financing cost.” Additionally, it was also held that Carrying Cost “…is the value for money denied at the appropriate time and is different from LPS (Late Payment Surcharge) which is payable on non-payment or default in payment of invoices by the Due Date.” In other words, Carrying Costs must be calculated on actuals because “…Change in Law impact ought to be computed on actuals.” Thus, it was finally held that: “Payment of carrying cost is a part of the Change in Law clause which is an in-built restitution clause (of the PPA).”
C. Issue of Change in Law Occurring Outside India
The discussion on the issue of Change in Law would be incomplete unless the author discusses the Supreme Court judgment of “Energy Watchdog v. CERC.” In this case, establishing the “Mundra Ultra Mega Power Project” in Rajasthan, Gujarat, and Haryana was in question. The tariff for the sale of power was to be determined through a competitive bidding process. Both Adani and Tata were able to quote their tariffs because they had long-term Fuel Supply Agreements (FSAs) with the coal mines in Indonesia. However, in 2-3 years, after the tariffs were determined, the Indonesian power producers were affected by the passing of new regulations by the Indonesian Government. Adani approached the CERC to seek discharge from the performance of the PPA on the grounds of frustration of the contract. Alternatively, they sought the development of a mechanism that would restore Adani in the same economic position before the new Indonesian regulations were passed. This was not accepted by the CERC, which, in turn, formed a committee to investigate the challenges faced by the power producers. They recommended the grant of a compensatory tariff to Adani, which the CERC subsequently approved. However, unsatisfied with the same, Adani approached APTEL, which observed that the inability to perform the PPA was due to Force Majeure as provided under the 1872 Act. Further, any change in the Indonesian law would not be under the umbrella of Change in Law events. In this regard, the case was brought before the Supreme Court that held the following: firstly, as per the PPA, Force Majeure was defined as a “hindrance.” In other words, an event that would wholly or partially prevent the performance of the PPA. The Supreme Court observed that, in the present case, the rise in prices did not amount to “hindrance.” Further, the increase in fuel costs was explicitly excluded from the PPA’s Force Majeure clause. Due to this, the Supreme Court held that the present case was not a Force Majeure event. Secondly, the Supreme Court observed that a Change in Law event exists if there is a change in the Indian Law. During that period, in 2013, the Ministry of Power issued a notification that was reiterated in the Revised Tariff Policy, 2016. In that context, the Supreme Court observed that if these changes affected the procurement of coal in India, the Change in Law clause would be triggered. However, a change in the Indonesian law that affects the coal prices or supply does not amount to Change in Law events for the PPA. Due to this, the Supreme Court set aside the CERC’s and APTEL’s decisions. It referred the matter back to the CERC to decide whether a Change in Law event occurred regarding Indian law that affected the power producers.
D. Issue of Commercial Viability of a Solar Power Project at the state-level
We comprehend that changes in duties and taxes can significantly affect the project’s commercial viability from the preceding. Adding on to the previous arguments, it is imperative to note that only CERC has been instructed by the Ministry of Power vide “Direction No. 23/43/2018 dated 27.09.2018” to process pass-through claims for PPAs expeditiously. However, no state ERC has been directed to do the same by their respective state Governments. This is inherently detrimental to the aggrieved Party in a PPA because it leads to delay in obtaining compensation from the respective state-level ERC. This delay would be corroborated by adversely impacting investor confidence, as earlier discussed, because investors would be hesitant to invest in RE technology and equipments in India, particularly solar PV generation. Thus, these delays at the state level and adverse impact on the investor confidence, coupled with incurring additional recurring or non-recurring costs and expenses and the time to complete the solar power project, significantly impact the commercial viability of a solar power project. In finality, it is also imperative to mention that although the Indian Government has provided financial support to Public-Private Partnerships (PPPs) through various grants and schemes such as the “Viability Gap Funding” (VGF) scheme and “Jawaharlal Nehru Nation Urban Renewal Mission,” it is of quintessential importance for the PPP projects to become financially independent and reduce their heavy reliance on such grants and schemes.
4. Conclusion: Are the Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021 Beneficial?
On 1 October 2020, the Ministry of Power published the “Draft Electricity (Change in Law, Must-run status and Other matters) Rules, 2020” (hereinafter “2020 Rules”) in an attempt to clarify and bring uniformity pan-India regarding the issue of comprehending and calculating Change in Law-related costs. However, the 2020 Rules were not brought into force as they were replaced by the “Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021” (hereinafter “2021 Rules”). According to Rule 3(5) of the 2021 Rules, the amount of the incremental tariff shall be calculated as per the formula laid down in the PPA (if any). However, if the PPA does not lay down any such formula, the incremental tariff amount shall be calculated as per the formula laid down in the 2021 Rules. According to Rule 3(3) of the 2021 Rules, the incremental tariff amount shall be calculated by the affected Party who shall submit the relevant documents and calculations to the appropriate Commission, which, in turn, as per Rule 3(8) of the 2021 Rules, would verify and adjust the incremental tariff amount accordingly within 60 days from receipt of such documents and calculations. Further, according to Rule 3(2) and 3(3), the pass-through shall “happen” in an expeditious manner within 30 days of submission of the relevant documents and calculations to the other Party by the affected Party or on the expiry of a 3-weeks’ notice to the other Party, whichever is later.
From the 2021 Rules, it is evident that the term “Change in Law” includes a change in taxes and duties. Further, the 2021 Rules establish a firm procedure to claim compensation due to Change in Law events. However, it is imperative to note that no provision describes the need for expeditious “granting” of compensation. When we scrutinize the 2021 Rules, there are provisions to expeditiously “commence” the process of granting compensation, but there are no provisions to expeditiously “conclude and grant” the compensation. In other words, there is no explicit provision to fast-track the process of granting compensation. Due to such absence, it only adds to the delay in adjudication that the Parties are bound to face and affect the commercial viability of the solar power project, as earlier analyzed. Therefore, although the 2021 Rules are a way forward, it would be intriguing to witness how they are implemented on a case-to-case basis.
The views and opinions expressed by the authors are personal.
About the Authors
Ms. Astha Ojha is a Managing Associate at L&L Partners, New Delhi.
Pushpit Singh is a 3rd-year student at Symbiosis Law School, Hyderabad, and is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Hamna Viriyam
Associate Editor: Pushpit Singh
Junior Editor: Parishti Kaushik
Preferred Method of Citation
Astha Ojha and Pushpit Singh, “Analysis of Change in Law and Safeguard Duty on Solar Power Projects in India” (IJPIEL, 14 March 2022)