The Maharashtra Electricity Regulatory Commission (MERC) has ordered the Maharashtra State Electricity Distribution Company (MSEDCL) to compensate a developer for the increased cost of the project due to the basic customs duty (BCD) on solar cells and modules.

The Commission ruled that any event can be considered a ‘Change in Law’ event if it is categorically mentioned in the power purchase agreement (PPA). If a project cost increases due to such events, it must be compensated.

Background

In May 2021, MSEDCL issued a request for selection (RfS) to procure 500 MW wind-solar hybrid power on a long-term basis through a competitive bidding process from grid-connected inter-state and intra-state projects. The bid submission deadline was June 23, 2021.

At the time of the bid deadline, two taxes were applicable on solar projects – the basic customs duty (BCD) and safeguard duty (SGD). SGD ended on July 29, 2021.

Tata Power Saurya (TPSL) and Azure Power won the auction to develop the projects at a tariff of ₹2.62 ($0.031)/kWh. TPSL won the auction to develop a 300 MW (200 MW solar and 100 MW wind) project.

The MSEDCL issued a letter of award (LOA) to TPSL to develop the 300 MW project, and the PPA had to be signed within 30 days of the tariff approval by the Regulatory Commission.

Since the PPA was yet to be signed, TPSL proposed to claim relief under the ‘Change in Law’ clause.

In April 2022, TPSL filed a review petition requesting the tariff to be revised to ₹2.56 ($0.030)/kWh, considering the increase in the cost of the steel. On July 7, 2022, the Commission issued the Order adopting the tariff of ₹2.56 ($0.030)/kWh and asked for the PPA to be signed within 15 days from the date of the Order. However, the Commission had not commented on the relief sought under the ‘Change in Law’ clause. TPSL then approached MSEDCL to review the PPA with the relief requested.

MSEDCL and TPSL signed the PPA on August 3, 2022, incorporating the ‘Change in Law’ provisions.

Meanwhile, TPSL tried to avail the concessional customs duty and requested that the Energy Department, Maharashtra, issue a ‘Recommendatory Letter’ to the Customs Department to import the solar modules with customs duty concession under Chapter 98. The concessional duty could not be claimed as the letter was never received. The government later discontinued this concessional duty.

TPSL approached MSEDCL claiming compensation for the project cost increase due to the BCD considering it was a ‘Change in Law’ event. MSEDCL refused to accept the ‘Change in Law’ claim based on the office memorandum (OM) issued by the Ministry of New Renewable Energy (MNRE) on March 9, 2021. The OM alerted bidders to quote tariffs considering the imposition of BCD on 4 April 2022. This was mentioned in the RfS issued by MSEDCL.

MSEDCL further observed that since the bid submission deadline was June 23, 2021, the imposition of BCD applied per the RfS, and TPSL should have considered it in its tariff.

TPSCL highlighted that in case of ambiguity or contradiction between the provisions of RfS and PPA, the terms of the PPA will prevail over those of the RfS. Per the PPA, any change in SGD, Goods and Services Tax (GST), and BCD rates after the bid submission deadline would be treated as a ‘Change in Law’ event. Project cost escalations due to the ‘Change in Law’ event must be compensated.

Commission’s analysis

The Commission observed that TPSL made an honest effort to avail of the customs duty concession but failed due to the recommendation letter not being issued by the Energy Department, Maharashtra.

The Commission noted that any event can be considered a ‘Change in Law Event’ if such provisions are specifically made under the PPA. The PPA signed between TPSL and MSEDCL had the provisions to consider the introduction of BCD as a ‘Change in Law’ event. MSEDCL had not disputed receiving the ‘Change in Law’ Notice by TPSL.

The Commission ruled that TPSL had followed the due processes notifying the ‘Change in Law’ event to MSEDCL and is eligible to claim compensation for increased expenses because of the ‘Change in Law’ event. TPSL must file a separate petition for compensation once the project is commissioned.

In June this year, the MERC ruled in favor of TPSL, declaring the increase in GST rates as a “Change in Law” event for its 300 MW wind-solar hybrid power project.

In July 2024, the Commission also approved MSEDCL’s petition to procure 5,000 MW of solar and 1,600 MW of thermal power.