The Ministry of New and Renewable Energy (MNRE) has announced the guidelines for the payment security mechanism (PSM) for projects allocated under the viability gap funding (VGF) program. This has now received approval from the President of India.

The MNRE has designated the Solar Energy Corporation of India (SECI) to implement these guidelines that list down the scope, objective, utilization, maintenance, and procedure of implementing the PSM.

As per MNRE’s guidelines released in 2016, it was required to set up a mechanism with a grant of up to ₹5 billion ($69 million) in order to ensure timely payments for power generated to project developers. The fund has been released to SECI in tranches which was made available to MNRE by the Ministry of Finance.

The PSM fund of ₹5 billion will be made available to cover energy payment risk from grid connected solar PV projects under the 750 MW, 2000 MW & 5000 MW VGF programs.

The goal of setting up the fund was to avoid operational difficulties for large capacities of power purchase agreements (PPA) and to create confidence among the project developers and financial institutions investing in them. The amount for the payment security mechanism has been realized from encashment of bank guarantees from developers and/or discount attributed to early payments by SECI.

Utilization of the PSM

• The PSM is to be utilized to make timely payment to project developers in case of delay in realizing the payment from the power procuring utilities
• PSM can also be used to provide security in the form of bank guarantees or letters of credit for the purpose of obtaining long-term open access, transmission charges, not foreseen at the time of signing the PPA and applicable charges as per bulk power transmission agreement signed with central or state transmission utilities in line with the applicable regulations
• Funds can be used to make the differential payment to the developers from the agreed PPA rate in case of short recovery of tariff from the buyer due to policy or regulatory issues and transmission-evacuation or open access constraints
• PSM can also be used to make the payment on account of short-term open access charges and deviation settlement mechanism (DSM) charges, as per applicable regulations
• PSM can be utilized for any charges on account of litigations and arbitration award related to implementation of the program including issues arising out of operational difficulties of PPA securitization

In the event SECI cannot meet a default by utilities from letters of credit, it would then tap into the mechanism after providing necessary evidence for confirming the inadequacy of existing instruments. Further, the payment security mechanism must disburse the required amount within 21 days to the developers.

These guidelines for the PSM is expected to create a certain level of comfort for the developers. However, the application of the mechanism seems broad and the amount dedicated to secure payments does not seem sufficient for the volume of projects it is supposed to back in case of payment defaults.

Even though payment delays continue to be a problem in many states, this program just addresses a specific set of projects under the VGF program.

Recently, the ministry announced that it has received the approval for the implementation of a subset of the existing 5,000 MW viability gap funding (VGF) program that includes developing 1,000 MW of solar projects in the northeastern states under Jawaharlal Nehru National Solar Mission (JNNSM).

In December 2018, MNRE amended the guidelines for the implementation of its program under which the government aims to develop 2 GW of solar PV projects with VGF as part of the the third batch of the National Solar Mission Phase-II.

The MNRE has amended guidelines for implementation of VGF program a few times.  In June 2018, MNRE amended the guidelines for the implementation of the VGF program for solar PV projects under NSM Phase-II.

In the same year, the MNRE also amended, for the fourth time, the VGF guidelines to develop 5 GW of solar projects with VGF under the fourth batch of the NSM Phase-II.