The Maharashtra Electricity Regulatory Commission (MERC) has directed the Maharashtra State Electricity Distribution Company (MSEDCL) to pay ReNew Sun Bright ₹32.8 million (~$397,190) towards increased Basic Customs Duties (BCD) on solar inverter imports and ₹26.9 million (~$325,744) towards increased Goods and Services Tax (GST) rate on renewable energy devices.

The Commission directed MSEDCL to decide and inform the mode of payment – lumpsum or instalments – within a month.

Background

In June 2019, MSEDCL and ReNew, a renewable energy company, entered into a power purchase agreement (PPA) to develop a 300 MW solar project in Jaisalmer, Rajasthan. However, several “Change in Law” events occurred during the project, which significantly impacted the project’s cost and financial viability.

One of the changes was the removal of exemptions on BCD for machinery and equipment. As a result, ReNew was required to pay a higher BCD of 20% on imported solar inverters, increasing project costs. Additionally, there was an increase in the GST rate on renewable energy equipment from 5% to 12%, further adding to the financial burden on ReNew.

ReNew claimed it had notified MSEDCL regarding these Change in Law events, seeking compensation for the increased project costs. However, it did not receive any response from MSEDCL. According to the PPA, ReNew said it was entitled to relief and needed to approach the Commission for approval of their compensation claim.

ReNew argued that the increased project costs directly impacted the required debt and equity, which had been considered during the tariff bid. It contended that it should be reimbursed for carrying costs and interest on incremental working capital to restore their economic position to what it would have been if the Change in Law events had not occurred.

MSEDCL stated that the project’s original completion date was November 2021, with an extension due to the COVID-19 pandemic. It contended that ReNew’s notice for reimbursement of BCD was sent after the required timeframe.

MSEDCL stated that it was reviewing the documents provided by ReNew, including invoices, payment records, and material utilization certificates, to verify the impact of these events. Furthermore, MSEDCL expressed concerns about the applicability of safeguard duty on solar module procurement and the GST impact.

MSEDCL argued that the compensation claim for BCD should be dismissed due to the delayed notice. It referred to previous orders and regulations to support their position. MSEDCL also contended that additional interest charges beyond the late payment penalty stated in the PPA should not be allowed. It emphasized the need for a specific approach to determine compensation and carrying costs.

In its reply, ReNew clarified its position regarding issuing the notice related to the Change in Law. According to the terms of the PPA, ReNew was required to notify MSEDCL within seven days of becoming aware of any Change in Law that could impact their project. ReNew argued that it had complied with this requirement by issuing the notice well before importing the inverters affected by the BCD. It highlighted that the right to claim a Change in Law does not expire until three years have passed.

ReNew argued that the compensation for a change in law event should not be restricted to the scheduled commercial operation date (SCOD) and that the linking of invoice issuance to reimbursement is unfounded.

ReNew emphasized that as long as the event qualifies as a change in law and results in a cost increase or decrease of at least 1% of the estimated revenue, it is entitled to seek compensation.

It also cited a judgment by the Appellate Tribunal for Electricity that rejected the restriction of benefits until SCOD. ReNew pointed out that GST laws allow issuing an invoice after the delivery of goods, and the delivery date can be contractually agreed upon without being directly tied to SCOD.

Additionally, ReNew refuted MSEDCL’s counterclaim regarding the safeguard duty, stating that their imports were planned after the expiry of the relevant notification and therefore did not incur any safeguard duty. ReNew argued it should be entitled to claim carrying costs based on the normative debt-equity ratio.

Commission’s Analysis

The Commission determined that the notifications regarding the changes in BCD and GST qualified as a Change in Law event under the PPA. ReNew fulfilled the required notice requirement within the specified timeframe, making it eligible to claim compensation for the increased expenses resulting from these changes.

The Commission rejected MSEDCL’s claim on safeguard duty, considering the timing of bid submission and project commissioning. For the principal claim, the Commission allowed 50% of the claimed BCD impact for recovery, pending joint scrutiny of invoices. Adjustments were made for the GST impact based on invoices issued after the relevant dates.

The Commission suggested using an allowed interest rate to calculate carrying costs, although ReNew did not provide the actual interest incurred.

As ReNew requested either a lumpsum payment or an alternative payment method, the Commission left the decision to MSEDCL. If compensation is paid over the PPA period, a methodology for per unit rate computation will be as follows:

This methodology ensures a systematic calculation and payment of compensation over the PPA period, considering the specific terms and conditions related to the declared CUF and energy generation.

Subscribe to Mercom’s real-time Regulatory Updates to ensure you don’t miss any critical updates from the renewable industry.