Discount Rate of Annuity Payments to Solar Developers Will be 10.41%: CERC

The Central Electricity Regulatory Commission (CERC), in a recent order, has reiterated Solar Energy Corporation of India’s (SECI) proposal for a 10.41% discount rate on annuity payments towards the additional expenses incurred by solar power developers on account of ‘Change in Law’ events.

It, however, rejected the request of solar power developers that interest on customs bonds should be covered under the Change in Law and paid in a lump sum. The Commission directed solar power developers to pay all statutory taxes, duties, levies, and cess on monthly annuity payments as per the terms of power purchase agreements (PPAs).

Background

SECI had requested the Commission to direct distribution companies (DISCOMs) to pay the amount evaluated as the impact of ‘Change in Law’ on account of Goods and Services Tax (GST) and Safeguard Duty on an annuity basis. SECI requested CERC to direct DISCOMs to comply with the order and release the amount towards the evaluated claims of solar power developers on account of GST and safeguard duty.


SECI noted that the Commission had decided that the introduction of GST laws and imposition of safeguard duty were ‘Change in Law’ events as per the terms of various PPAs and power sale agreements (PSAs).

In an earlier order, the Commission ruled that GST claims must be paid within 60 days from its order (February 2019) or from the date of submission of claims by solar power developers, whichever is later. If SECI or DISCOMs failed to pay, it would attract late payment surcharges as per PPA terms.

Thereafter, the Ministry of New and Renewable Energy (MNRE) directed the central agencies to proceed with payments against the ‘Change in Law’ claims as per the annuity model.

To design the methodology for monthly (annuity) payments, SECI considered a discounting factor of 10.41%, an interest rate for loan component of the capital cost as provided in the renewable energy tariff order dated March 19, 2019. The period of payment of compensation on account of GST and Safeguard Duty was set at 13 years from the commercial operation date (COD).

Regarding the discounting factor, solar power developers said that SECI reevaluated and calculated the monthly annuity payment, with the proposed annuity rate of 10.41% for the entire 100% of additional CAPEX (capital expenditure) incurred by solar power developers on account of ‘Change in Law’ event. However, the rate of 10.41% was applicable only for the debt part (70%) of the additional CAPEX and cannot apply to the remaining 30% equity portion.

Solar power developers argued that SECI’s method of arriving at annuity payments was incorrect and not in line with the CERC’s Renewable Energy Tariff Regulations.

After examining documents submitted by solar power developers, SECI evaluated solar power developers’ claims regarding GST and safeguard duty and notified solar power developers and DISCOMs purchasing the power. However, only Rajasthan DISCOMs released some amount towards GST claims of ACME Jodhpur Solar Power, ACME Rewa Solar Energy, and Phelan India RJ. Despite the efforts of SECI, other DISCOMs did not make payments to settle the claims as per the provisions of PPAs and PSAs.

SECI said DISCOMs had to pay ₹1.04 billion (~$14.13 million) as compensation on account of GST claims. Of this, SECI would pay ₹803.11 million (~$10.82 million) to solar power developers. The outstanding amount of ₹562.38 million (~$7.58 million) was due from DISCOMs as of April 20, 2021.

As compensation for safeguard duty imposition, DISCOMs had to pay ₹8.15 billion (~$110 million) to SECI. In turn, SECI had to pay ₹803.11 million to solar power developers on an annuity basis. DISCOMs had only paid ₹274.36 million (~$3.69 million) to SECI.

In the light of the pending payments from DISCOMs, SECI proposed to pay compensation to solar power developers on an annuity basis through the payment security fund.

Commission’s analysis

The Commission observed that SECI had proposed the annuity payment with a discounting factor of 10.41%. Solar power developers stated that the discounting factor should be 12.90% annually by factoring in the interest on loans at 10.41% and the return on equity of 14% and applying a debt-equity ratio of 70:30 as per Renewable Energy Tariff Regulations. Some solar developers said that the discounting factor should be 13.14% annually or higher.

On the other hand, DISCOMs proposed a discounting factor of 9.36% as per the Commission’s Renewable Energy Tariff order dated March 19, 2019.

In its analysis, the Commission stated that SECI and solar power developers are in consensus regarding interest rates on loans. The individual tariff components such as capital cost and expected return on equity are ‘unknown’ as the tariff is determined through a competitive bidding process.

Therefore, the Commission said that it would not consider the contentions of solar power developers for a discounting factor of 12.90% or 13.14% and of the DICSCOMs for a discounting factor of 9.36%.

The Commission stated that the annuity rate should be 10.41% towards the expenditure incurred by solar power developers on account of the ‘Change in Law’ events. In addition, SECI or DISCOMs must pay a late payment surcharge for the delayed period as per respective PPAs or PSAs, if they failed to pay monthly annuity payments on time.

The Commission also directed solar power developers to pay all statutory taxes, duties, levies, and cess on monthly annuity payments as per the terms of PPAs.

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