CERC_ Demonetization a Force Majeure Event, SECI to Refund ₹30 Million to Wind Developer

The Central Electricity Regulatory Commission (CERC) has ruled in favor of the Solar Energy Corporation of India (SECI) that had encashed the performance bank guarantee of a solar developer for a delay in commissioning of its 10 MW project in Maharashtra.

The petitioner Krishna Wind Farm Developers Pvt Ltd. is a generating company and a subsidiary of MITCON group. It had developed a solar project of 10 MW capacity in the state of Maharashtra.

SECI has been designated as the nodal agency for the implementation of the Ministry of New and Renewable Energy (MNRE) programs for developing grid-connected solar power capacity through the Viability Gap Funding (VGF) mode.

The respondents in the case were SECI and Maharashtra State Electricity Distribution Company Ltd (MSEDCL). MSEDCL was the final offtaker of the power from this project.



The main issues in this case were: (i) whether the scheduled date of commissioning of the project should be considered as within 13 months from the date of signing (August 3, 2016) of the power purchase agreement (PPA) or from the effective date (April 10, 2016) of the PPA. (ii) Whether the delay in the completion of the project was due to a force majeure event (demonetization). (iii) Is the petitioner liable for payment towards an extension of the timeline as approved by the SECI, or should SECI refund the ₹5.6 million ($78,176) paid by the petitioner towards the extension of the timeline from January 31, 2017, to March 27, 2017, along with interest? (vi) Is the letter of invocation of bank guarantee dated September 29, 2017, issued by the SECI illegal and should be directed to return the ₹30 million ($420,898) along with 1.25% interest per month as per the PPA clause. SECI has retained the amount and it has been deducting the equivalent amount from the invoices raised by the petitioner from the supply month of September 2017 to January 2018. (v) Whether the downward revision of the tariff by ₹0.015 ($0.0002) by SECI violates the terms and conditions of the PPA, which it plans to enforce.

Background

Back in 2015, SECI had invited proposals from various solar developers for the development of 500 MW of solar projects in the state of Maharashtra on Build-Own-Operate basis though e-reverse auction.

In April 2016, SECI issued a Letter of Intent (LoI) to Krishna Wind Farms for the development of a 10 MW solar power project.

Then in July 2016, Krishna Wind Farm furnished two irrevocable and unconditional Performance Bank Guarantees (PBG) for a total amount of ₹30 million ($420,898). In the next month, it signed a power purchase agreement with SECI.

On November 8, 2016, the BJP government led by Prime Minister Narendra Modi announced the demonetization of certain denominations of currency notes.

Later that month, Krishna Wind Farm informed SECI about the delay caused in the execution of the project for the reasons beyond its control, including demonetization and on account of the delay in execution of the power sale agreement by SECI.

Further, the petitioner and other solar developers facing difficulties in completion of the project made representations to the MNRE, and the ministry agreed to give time until January 31, 2017, without penalty for complying with the requirements of financial closure. However, it specified that it should not affect the effective date of the financial closure or the scheduled commissioning date.

After this deadline lapsed, SECI informed the Krishna Wind Farm in February 2017 that it had failed to fulfill the conditions, and therefore would need to seek an appropriate time extension after depositing an amount of ₹10,000 ($143)/MW per day, as per the provisions of the PPA.

Further, in May 2017, the developer informed SECI about the progress that was made in the execution of the project, requesting another extension to commission its project without levying liquidated damages for such delay.

The project was finally commissioned in August 2017.

Later, Krishna Wind Farm informed the Government of Maharashtra that the project had been delayed due to force majeure events and requested it to advise SECI not to take any punitive actions as stipulated in the PPA for the delay in fulfillment of the obligations stated in the PPA.

However, SECI invoked two PBGs of the developer. The solar developer approached the Delhi high court against the encashment, and the bench restrained the banks from making payments to SECI for encashing the said bank guarantees. But later, the bank further liquidated the petitioner’s fixed deposit and remitted the amount to SECI.

Now, Krishna Wind Farm has stated in its petition that the SECI had levied an undue charge without acknowledging the government’s ‘demonetization’ implementation as a ‘force majeure’ event, which had caused delays in the scheduled commercial operation date (SCoD).

A ‘force majeure’ is declared in the event of unforeseeable circumstances that prevent parties from fulfilling a contract. Krishna Wind Farm stated that the implementation of ‘demonetization’ in the country in November 2016 caused a delay in the completion of the conditions mentioned in the PPA and must be considered a ‘force majeure’ event.

The Commission, in this case, has decided to take the scheduled date of commissioning of the project as 13 months from the effective date of the PPA rather than the date of signing of the PPA.

SECI has submitted that due to ‘demonetization’, it granted additional time until January 31, 2017, to the petitioner given the office memorandum issued by the Government of India on December 2, 2016, but the PPA does not specifically consider ‘demonetization’ as either ‘force majeure’ or ‘change in law’. So, the extension of the commissioning date cannot be allowed with demonetization as the reason. Furthermore, the petitioner failed to issue a notice of force majeure as a pre-condition for claiming relief.

In response, the commission noted that the event of demonetization was not a force majeure event in terms of the PPA.

Moreover, the commission held that there was a total delay of 138 days in achieving the financial closure of the project, and the delay was not on account of any force majeure events.

The commission observed that in case the commissioning of the project is delayed by more than three months after the SCoD, the pre-fixed tariff given should be reduced at the rate of ₹0.50 ($0.0002)/kWh per day of the delay for the postponement in commissioning of the remaining capacity.

As per the PPA for this project, the SCoD was May 10, 2017. To retain the prefixed tariff, the petitioner had to commission its project within three months, by August 10, 2017. However, the project was commissioned on August 11, 2017. Therefore, there was a delay of just one day. Considering this, the commission has also asked the SECI to downward revise the tariff strictly in line with the PPA.

The commission in its order has also upheld that SECI was well within its rights to encash the performance bank guarantee of Krishna Wind Farm.

Recently, the MNRE directed NTPC and SECI to release performance bank guarantees for the solar and wind power projects that have been commissioned. According to the letter, PBGs may be released within 45 days from the commercial operation date, subject to the fulfilment of requirements of submission of all the requisite documents. Further, MNRE also mentioned that in case any developer finds delays in the release of PBGs, it should be brought to the notice of the MNRE and the managing director of the concerned intermediary procurer.

In a recent case, the Central Electricity Regulatory Commission (CERC) had ruled in favor of three independent power producers (IPPs) regarding the payment of their performance bank guarantee (PBG) to the tune of ₹255 million ($3.7 million). The three IPPs had petitioned the CERC seeking the release of the performance bank guarantees retained by the NTPC. In its order, the commission has ruled that the retention of the performance bank guarantees by NTPC is illegal and arbitrary.

 

Update: Previously, this article erroneously stated that demonetization was considered as a ‘force majeure’ event by the CERC. The article has been corrected and updated accordingly.