[et_pb_section fb_built=”1″ _builder_version=”4.5.1″ _module_preset=”default”][et_pb_row _builder_version=”4.5.1″ _module_preset=”default” min_height=”181px” custom_padding=”|0px||||”][et_pb_column type=”4_4″ _builder_version=”4.5.1″ _module_preset=”default”][et_pb_text _builder_version=”4.5.1″ _module_preset=”default” inline_fonts=”Cormorant Garamond,Molengo,Cormorant,Cormorant Infant”]<\/p>\n
Abstract<\/span><\/strong><\/span><\/p>\n 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.<\/span><\/p>\n 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 \u2014 issued by the Ministry of Power \u2014 as a plausible solution to Change in Law-related conundrums.<\/span><\/p>\n <\/strong><\/span><\/p>\n 1. Introduction: Change in Law provision\/clause under a Power Purchase Agreement and Imposition of Safeguard Duties in India<\/strong><\/span><\/p>\n \u201cChange in Law\u201d<\/em><\/span>are events<\/a> 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\u2019s 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 \u201cChange in Law\u201d<\/em> event<\/span>may happen in the form<\/a> 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 events<\/span>may not be factored<\/a> into the bid submitted or the contract executed because such events were<\/span>unforeseeable and out of the Parties\u2019 control<\/a> at that time. Further, these Change in Law events may<\/a> either decrease or increase the Parties\u2019 obligations in a Power Purchase Agreement (PPA) as it consequently affects the \u201cexpenses, expected income, and the costs\u201d<\/em> incurred. It<\/span>may also<\/a> fundamentally change the foundation of a PPA that may, in turn, significantly affect the commercial viability of a project. This is further exacerbated because, in<\/span>PTC India Ltd. v. CERC<\/em><\/strong><\/a>, 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.\u00a0<\/span><\/span><\/p>\n Generally, Change in Law events<\/span>are combatted by<\/a> passing off the risk to the customers through an increase in price or contracts with \u201cflexible payment mechanisms<\/em>\u201d that can factor in the Change in Law events during the contract\u2019s tenure. However, this may happen in traditional commercial contracts<\/span>but not in PPAs<\/a> 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 events<\/span>has<\/a> 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<\/em>, defines the scope of the Change in Law events. Secondly<\/em>, it should generally define the Parties \u2014 such as the power project developer, financier, and other related Parties, if any \u2014 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<\/em>, it should state the date from which the Change in Law provision\/clause would be applicable. Fourthly<\/em> 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 \u2013 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 \u201cbankability<\/em>\u201d of a power project. If a project meets the following criteria, it is financed and is considered as \u201cbankable<\/em>\u201d:<\/span><\/span><\/p>\n a. The power project has a high probability of success.<\/span><\/p>\n b. The power projects\u2019 financial model consists of enough future cash flows.<\/span><\/p>\n c. The power project has a mitigation plan wherein risks are allocated to the suitable Parties.<\/span><\/p>\n d. The power project\u2019s financial model\u2019s projected results can meet the expectations of the lenders and the investors.\u00a0<\/span><\/p>\n 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\u2019s 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.<\/span><\/p>\n A. Conundrums with a Change in Law Provision\/Clause in a PPA<\/em><\/strong>\u00a0<\/span><\/span><\/p>\n 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:\u00a0<\/span><\/p>\n a. Lack of standardization for Renewable Energy PPAs<\/em><\/strong>: 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<\/em>,<\/span>there have been various versions<\/a> of RE PPAs because the Wind Competitive Guidelines, 2017 and Solar Competitive Bidding Guidelines, 2017 (hereinafter \u201c2017 Solar Guidelines\u201d<\/em><\/strong>) 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<\/em>, 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<\/em><\/strong> for M.P. No.<\/em><\/span>17<\/em><\/a> and<\/em><\/span>18<\/em><\/a> of 2018<\/em>\u00a0by the Tamil Nadu ERC (TNERC). This essentially defeats the purpose of the guidelines, i.e., to account for as many contingencies as possible. Thirdly<\/em>, 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, in<\/span>Gujarat Urja Vikas Nigam Limited v. Gujarat Electricity Regulatory Commission<\/em><\/strong><\/a>, 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 \u201cunderlying Tariff Order<\/em>\u201d did not incorporate a Change in Law provision\/clause to account for such Change in Law events. Similarly, in<\/span>Regen Powertech Pvt Ltd v. TANGEDCO<\/em><\/strong><\/a>, 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<\/em> and lastly, it has also led to ambiguity in the scope for the \u201cChange in Law<\/em>\u201d provision\/clauses if included in the PPA. For example, the PPAs \u2014competitively bid RE projects issued by the Solar Energy Corporation of India and National Thermal Power Corporation<\/span>stipulate<\/a> the imposition of a new tax under the scope of Change in Law. However, PPAs issued by Gujarat Urja Vikas Nigam Limited (GUVNL)<\/span>only have<\/a> 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\u2019s operating or capital expenditure. Thus, the benefits of uniformity in quality improved productivity and efficacy, and the scope for incorporating best practices is lost.<\/span><\/span><\/p>\n b. Mismatched treatment of Change in Law as Force Majeure<\/em><\/strong>: In the past, Solar PPAs<\/span>have been approved<\/a> that treat Change in Law events as Force Majeure events. This leads to multiple problems. Firstly<\/em>, the<\/span>only remedy<\/a> for Force Majeure is extending the scheduled commercial operation date. Secondly<\/em>, such PPAs<\/span>account only<\/a> for those Change in Law events that occur during the project development phase and not after the project has been commissioned. Thirdly<\/em> and lastly, Change in Law events affects the Parties<\/span>in a two-fold manner<\/a>: the project\u2019s timeline and the Parties\u2019 finances. However, the PPAs<\/span>do not include a remedy for providing monetary compensation relief<\/a> 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.<\/span><\/span><\/p>\n c. <\/em>Scope of \u201cChange in Law\u201d provision\/clause is incoherent and limited<\/em><\/strong>: Various PPAs have Change in Law provision\/clause that included the existing laws but excluded the following \u2013 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<\/em>, these<\/span>PPAs do not establish<\/a> a procedure to follow if a Change in Law event occurs.<\/span>Some PPAs mandate<\/a> the Parties to approach the concerned ERC directly. However, these PPAs<\/span>do not suggest<\/a> mediating the situation before approaching the ERC. Some of these PPAs do not make it mandatory for the aggrieved Party to notify \u2014 that they are approaching the ERC \u2014 to the other Parties. Further, these PPAs<\/span>do not mandate<\/a> risk-sharing obligations between Parties. Secondly<\/em>, 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. It<\/span>was found<\/a> that various PPAs, quite often, fail to mention the<\/span>following fundamental principle<\/a> 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<\/em> and lastly,<\/span>some Wind PPAs<\/a> 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.\u00a0<\/span><\/span><\/p>\n Considering the preceding arguments, we have discussed how Change in Law events \u2014 like tax changes \u2014 impact RE projects. Moving on, it is also imperative for us to explicitly discuss the intersection between Safeguard Duty and Change in Law.<\/span><\/p>\n B.<\/strong><\/em>\u00a0Change in Law and Safeguard Duties in India<\/em><\/strong><\/span><\/p>\n Solar panels or modules<\/span>constitute 45-50% of the capital expenditure<\/a> for a solar power project. Further, India<\/span>imports approximately 90% of its solar equipments<\/a>. 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 Government<\/span>imposed<\/a> a 2-year Safeguard Duty (SGD) on the import of solar cells (in panels or modules). SGD\u2019s rate<\/span>was<\/a> 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 rate<\/span>was<\/a> 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\u2019 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\u2019s<\/span>April 2018 office memorandum<\/a>, 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:<\/span><\/span><\/p>\n a. Regulatory approval would still be necessary to pass through the SGD\u2019s 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.<\/span><\/p>\n 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.<\/span><\/p>\n 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\u2019 cash flows.\u00a0<\/span><\/p>\n Thus, the imposition of SGD has left a plethora of things unanswered that shall be discussed in the following sections of this blog post.<\/span><\/p>\n <\/strong><\/p>\n 2. Effect of Change in Law on distressed DISCOMs and the Consequential Impact on Solar Power GENCOs<\/strong><\/span>\u00a0<\/span><\/p>\n When a Change in Law event occurs, the adjudicating authority<\/span>passes through the impact of the SGD onto the DISCOMs<\/a>. 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\u2019 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-distressed<\/span>with an existing debt<\/a> 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.\u00a0<\/span><\/span><\/p>\n The reasons attributable to DISCOMs\u2019 current status are multiple. Firstly<\/em>, the provision of cross-subsidies is highly detrimental to the DISCOMs because the industrial and commercial consumers had to face an increased cross-subsidy burden<\/span>of Rs. 75,027 crores in the fiscal year of 2019-20<\/a> as opposed to the cross-subsidy burden<\/span>of Rs. 67,785 in the fiscal year of 2016-17<\/a>. This<\/span>essentially leads<\/a> industrial and commercial consumers to purchase power through \u201copen access<\/em>\u201d routes and even build captive power generation plants for cheaper and affordable electricity. Further, there is<\/span>a significant delay by the Government<\/a> in the release of the additional amount received from industrial and commercial consumers to subsidize domestic and agricultural consumers. Secondly<\/em>, 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<\/em> and lastly, there<\/span>is a rapid and continuous rise<\/a> in the Aggregate Technical and Commercial (AT&C) losses due to DISCOMs\u2019<\/span>operational and management inefficiencies<\/a> 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:<\/span><\/span><\/p>\n a. It<\/span>can cause<\/a> substantial strain on the RE GENCOs to maintain enough cash flows to \u201c<\/em>pay their vendors, service their debt, and meet Operation and Maintenance (O&M) costs<\/em>.\u201d<\/em><\/span><\/span><\/p>\n b. It<\/span>can impact international investor confidence<\/a> 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\u2019 inappropriate behavior further exacerbates this wherein it<\/span>was reported<\/a> that they had asked the RE GENCOs to waive the \u201clate payment surcharge<\/em>\u201d and have also requested \u201cdiscounts<\/em>\u201d in due amount payment.<\/span><\/span><\/p>\n c. RE GENCOs<\/span>have limited capital and facilities<\/a> in comparison to traditional GENCOs. Delayed payments by DISCOMs<\/span>makes it even more difficult<\/a> for such RE GENCOs to survive in the market.<\/span><\/span><\/p>\n d. RE GENCOs\u2019 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. It<\/span>was found<\/a> 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.\u00a0<\/span><\/span><\/p>\n Thus, it is imperative to note that the DISCOMs\u2019 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.<\/span><\/p>\n 3. Effect of Change in Law on Pass-Through of Duties and Project Viability: Case Law Analysis<\/strong><\/span>\u00a0<\/span><\/span><\/p>\n According to the Indian Contract Act, 1872 (hereinafter \u201c1872 Act\u201d<\/strong>), compensation to be granted for a contract is fixed. However, as earlier discussed, there may be a change in circumstances \u2014 such as regulatory and legal framework \u2014 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.\u00a0<\/span><\/p>\n Change in taxes and duties can be considered a Change in Law event to trigger the Change in Law provision\/clause. For example, in<\/span>