The Karnataka Electricity Regulatory Commission (KERC), in a recent order, ruled that Adyah Solar Energy, a subsidiary of ReNew Solar, was entitled to compensation for the additional cost incurred due to the imposition of safeguard duty. The Commission noted that safeguard duty imposed on imported solar cells and modules constituted a ‘Change in Law’ event.

The Commission asked the distribution companies (DISCOMs) to pay the supplementary bills of the incremental tariffs from the commissioning dates of the projects to the order date in three equal installments.

The Commission also directed the developer to abide by the affidavit dated January 6, 2021, to reimburse the amount received by DISCOMs if the Supreme Court order sets aside the safeguard duty notification regarding ‘Change in Law’.

Adyah Solar had filed petitions, seeking reimbursements from the Bangalore Electricity Supply Company, Hubli Electricity Supply Company, and Gulbarga Electricity Supply Company for the additional cost incurred due to safeguard duty being imposed.

Background

A special purpose vehicle of Renew Solar, Adyah Solar is registered under the Companies Act, 2013.

The Karnataka Renewable Energy Development Limited had invited bids to develop 1.2 GW of solar projects at the Pavagada Solar Park in January 2018.

Renew Solar was one of the winners in the auction and had won the bid to develop 300 MW of solar projects. The projects were to be developed in six different blocks at the Pavagada Solar Park.

Shortly after the power purchase agreements (PPAs) were signed, the Ministry of Finance imposed safeguard duty on the import of solar cells and modules from China, Thailand, and Vietnam. The developer contended that the imposition of safeguard duty was a ‘Change in Law’ event.

The developer also argued that the ‘carrying cost’ was compensation for the time value of money and an inherent provision under the ‘Change in Law’ clause of the PPA. Since the ‘Change in Law’ clause was based on the principles of restitution, relief of carrying cost on the additional cost incurred on account of the ‘Change in Law’ was implicit in the PPAs.

Commission’s analysis

The Commission observed that the decision on the validity of the safeguard duty notification considered ‘Change in Law’ was pending before the Supreme Court of India. However, the Supreme Court had not issued any specific or general direction to the Commission not to hear the claims in this regard.

The developer had appealed to the KERC to declare that the imposition of safeguard duty as a ‘Change in Law’ event. Furthermore, it had requested the Commission to direct the DISCOMs to reimburse it for the additional expenses incurred with a proportionate hike in the agreed-upon tariffs.

The Commission noted that the notification issued by the Ministry of Finance on the imposition of safeguard duty on import of solar cells and modules was an event of ‘change in law’ in terms of Article 15 of the PPA.

However, the Commission held that the claims to grant carrying cost on additional working capital on payment of safeguard duty and the integrated goods and services tax were not sustainable. Compensation of carrying cost has been a bone of contention with the developers and the DISCOMs. Recently, Mercom reported that in the case of an imported coal-based thermal power generator, the Commission ruled that the generator was eligible for ‘carrying cost’ arising out of approved ‘Change in Law’ events from the effective date of ‘Change in Law’ until the actual payment was made. The generator would be eligible for ‘carrying cost’ at the actual interest rate paid for arranging funds or the rate of interest on the working capital. The carrying cost was allowed per the explicit restitution clause in the PPA.

The DISCOMs had argued that the developer’s claims for reimbursement of the additional expenses could have been avoided if it had imported solar modules from countries that did not attract safeguard duty instead of sourcing them from China.

The Commission agreed with the contention of the DISCOMs that the developer had imported more modules than was necessary for the generation capacity, and it could not allow a safeguard duty reimbursement on the additional quantity of solar modules. In a similar case concerning another solar developer Fortum, KERC had declined to allow safeguard duty reimbursement on the additional quantity of solar modules.

The Commission determined the amount of reimbursement to Adyah Solar for the additional capital cost incurred due to the imposition of safeguard duty for the minimum contracted capacity through incremental tariffs for all the six projects. The DISCOMs are directed to reimburse the amount from the commissioning dates of the projects to the order date in three equal installments.

Recently, the Appellate Tribunal for Electricity had directed the KERC to decide on the incremental tariff payable as compensation to the solar project developer Fortum Solar. The developer had to be compensated for the additional expenses incurred due to the imposition of safeguard duty, which was a ‘Change in Law’ event.

Earlier, the Central Electricity Regulatory Commission had directed the Solar Energy Corporation of India to compensate a solar developer for the increase in cost incurred due to the imposition of goods and services tax (GST) and safeguard duty. The Commission noted that the enactment of GST laws and the imposition of safeguard duty qualified to be processed under the ‘Change in Law’ clause.

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