The Central Electricity Regulatory Commission (CERC) has ruled that the Goods and Services Tax (GST) rate increase notified on 30 September 2021 qualifies as a ‘Change in Law’ event under the Power Purchase Agreement (PPA) dated August 20, 2021, between Thar Surya 1 (TS1PL) and the Solar Energy Corporation of India (SECI).

The Commission ruled that Thar Surya 1 is entitled to compensation for the additional project cost arising from the increase in GST rates applicable to solar power generating systems.

The project was commissioned on November 24, 2022.

CERC further allowed carrying cost on the approved Change in Law compensation, subject to prudence checks and reconciliation of actual expenditure supported by auditor-certified documents.

However, enforcement of compensation for the period post-Commercial Operation Date (COD) and carrying cost (both pre- and post-COD) has been kept in abeyance, subject to the final outcome of pending proceedings before the Supreme Court.

Background

TS1PL developed a 300 MW solar power project in Bikaner, Rajasthan, under a tariff-based competitive bidding process conducted by SECI.

The bid was submitted on June 22, 2020, with a discovered tariff of ₹2.37 (~$0.026)/kWh, and the project was commissioned in November 2022. Therafter, SECI issued the Letter of Award (LoA) in the name of Avikiran Surya India. TS1PL executed the PPA with SECI on August 20, 2021.

The dispute arose after the Government of India and the Government of Rajasthan issued notifications on September 30, 2021, which increased the GST rate on renewable energy devices and related supplies from 5% to 12%.

TS1PL argued that this change occurred after the bid cut-off date and directly increased its project cost, thereby qualifying as a ‘Change in Law.’ The company claimed compensation for the additional tax burden and for carrying costs.

TS1PL had incurred an estimated additional expenditure of approximately ₹642.89 million (~$7.08 million) on the development of the project cumulatively under its module supply agreement and the EPC Contract on account of issuance of the GST notifications, of which ₹548.48 million (~$6.03 million) is principal and ₹ 94.42 million is towards the ‘Carrying Cost’ computed till July 31, 2023.

SECI broadly accepted that a post–cut-off date change in GST could qualify as ‘Change in Law’ but argued that compensation should be limited to verified actual costs, subject to reconciliation.

Commission’s Analysis

CERC rejected the objections raised by the distribution companies, holding that the GST changes were issued prior to the notification of the Change in Law Rules, 2021, and therefore, the claim must be adjudicated strictly under the PPA framework.

After examining the GST notifications, contractual provisions, and past regulatory precedents, the Commission concluded that the increase in GST from 5% to 12% resulted in a higher effective tax incidence on solar EPC and supply contracts, increasing project costs from an effective 8.9% to 13.8%.

The Commission noted that the petitioner commissioned the full capacity of its project on November 24, 2022, whereas the GST notification was issued on September 30. As such, the project was affected by the GST notifications, and the developer is entitled to relief under the GST Laws.

CERC directed the parties to undertake a detailed reconciliation of actual additional expenditure, supported by invoices and an auditor’s certification, and to allow carrying cost at the lowest applicable rate (actual borrowing cost, regulatory working capital interest rate, or late payment surcharge rate).

At the same time, the Commission clarified that the ‘interest on carrying cost’ as a separate component was not admissible.

Finally, in view of the interim orders of the Supreme Court in related matters, CERC ruled that the enforcement of compensation for the post-COD period and carrying costs would remain subject to further directions of the Supreme Court.

In November last year, the Rajasthan Electricity Regulatory Commission allowed a solar developer to claim up to ₹488 million (~$5.5 million) in compensation due to a ‘Change in Law’ event. The Commission allowed the petitioner, ACME Aklera Power Technology, to claim compensation of ₹309.7 million (~$3.5 million) to ₹399 million (~$4.5 million) for the imposition of basic customs duty, and ₹89 million (~$979,703) for the increase in GST.

Earlier, CERC had issued a suo motu order directing that monthly tariffs or charges must be adjusted or refunded from the date the GST reduction event occurs, affirming that renewable energy generators must pass on the benefit of lower tax rates to procurers.

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