The Central Electricity Regulatory Commission (CERC) has rejected a solar energy developer’s compensation petition for the additional tax burden on operation and maintenance (O&M) expenses and carrying costs due to a ‘Change in Law’ event.

Background

Azure Power (Rajasthan) Private Limited has developed a 5 MW solar project in Nagaur, Rajasthan. The project’s power purchase agreement (PPA) was signed with NTPC Vidhyut Vyapar Nigam Limited (NVVN) on January 10, 2011.

After that, NVVN signed power sale agreements with distribution companies (DISCOMs) to sell bundled power on January 14, 2011.

In its petition, Azure informed the Commission that the PPA was executed before the Service Tax and Goods and Services Tax (GST) laws took effect from November 15, 2015, and July 1, 2017, respectively. It said that it had to incur additional recurring costs after the PPA was signed.

The renewable energy developer argued that it was entitled to ‘Change in Law’ relief due to GST imposition after the PPA was executed.

It pleaded for an upward revision of the tariff, which was determined at ₹11.94 (~$0.16)/kWh before the service tax and GST were introduced.

Azure said it had to incur an additional ₹21.19 million (~$282,712) over the entire period of the PPA following the announcement of service tax and GST.

The developer asked for a levelized tariff increase of ₹0.143 (~$0.0019)/kWh to compensate for the additional tax burden on the solar project’s O&M.

NVVN’s response

NVVN contended that Azure was not entitled to any compensatory tariff under the ‘Change in Law’ clause in the PPA due to the imposition of service tax and GST.

The scheduled commissioning date of the solar project was much earlier than the introduction of service tax and GST. Therefore, there could not be any claim on additional O&M expenditure.

NVVN said that the PPA did not have any provisions regarding carrying costs or interest for the period until the determination of the relief sought due to the ‘Change in Law’ event.

PSPCL’s response

Punjab State Power Corporation Limited (PSPCL) said outsourcing O&M to a third party was not mentioned in the PPA or PSA. This was a commercial decision, and therefore, the renewable energy developer had to take on any increase in costs, including taxes. It also said that the PSA had no provisions for carrying cost or interest.

Commission’s analysis

The Commission noted that Azure Power claimed that the effective rate of service tax on O&M services increased to 18% from 10.30% as on the effective date of the PPA, increasing its expenses by ₹21.19 million (~$282,712).

The Commission also observed that the service tax and GST laws were covered under the PPA. Any events under Article 12.1.1 of the PPA that result in any additional recurring or non-recurring expenditure by the solar power developer is a ‘Change in Law’ event. In addition, NVVN did not dispute that the introduction of service tax and GST was a ‘Change in Law’ event.

Therefore, the Commission held that the declaration of service tax and GST was covered as the ‘Change in Law’ event under the PPA.

However, the Commission said the outsourcing of O&M services was not part of the PPA or bidding documents. It was a commercial decision of the renewable energy developer. Therefore, any increase in O&M costs, including on account of taxes, could not increase the liability of NVVN and DISCOMs.

Therefore, the Commissioned directed that the claim of the renewable energy developer for compensation on account of an additional tax burden on O&M expenses was not maintainable.

Regarding carrying cost, the Commission said if there were a provision in the PPA for restoring the renewable energy developer to the same economic position as if no ‘Change in Law’ occurred, the company would be eligible for carrying cost. However, the PPA signed by Azure Power and NNVN did not have such a provision. So, the developer’s claim for carrying costs was not allowed.

Earlier this month, CERC directed Madhya Pradesh Power Management Company Limited and Delhi Metro Rail Corporation to compensate a solar developer for the additional cost incurred due to the imposition of GST.

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