Regulator Allows Solar Developer’s Compensation Claim Due to GST Imposition

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The Central Electricity Regulatory Commission (CERC) has ruled that Tata Power Renewable Energy (TPREL) is entitled to compensation for the increased expenses incurred due to the imposition of Goods and Services Tax (GST).

It said the contracting parties should reconcile the incremental impact, including operation and maintenance (O&M) expenses due to the promulgation of the GST laws and carrying costs by correlating the projects and the invoices raised.

The Commission noted that DISCOMs are liable to reimburse the Solar Energy Corporation of India (SECI) for the payments made to the solar power generator.

However, payment to the petitioners by SECI was not conditional upon the payment to SECI by DISCOMs.

TPREL had filed a petition seeking compensation on account of the ‘Change in Law’ events due to the enactment of GST laws.

Background

TPREL had signed power purchase agreements (PPAs) with SECI for three solar projects with a total capacity of 155 MW in Maharashtra, Andhra Pradesh, and Gujarat between July 2016 and January 2017.

On July 1, 2017, GST laws were introduced subsuming multiple extant indirect taxes.

TPREL  submitted that the underlying principle of having the ‘Change in Law’ provision in the PPAs was to restore the affected party to the same economic position as if the ‘Change in Law’ event had not occurred.

It added that the new tax regime had escalated the cost of solar power projects, making the quoted tariff at the time of bidding unviable. There was an overall increase of ₹488.84 million (~$5.97 million) in the project cost due to the enactment of the GST laws. The cost of O&M had also gone up.

SECI responded with its own assessment of GST claims at ₹475.37 million (~$5.81 million) until the commercial operation date and said TPREL was not entitled to its claimed sum.

TPREL also argued that it was entitled to ‘Carrying Cost’ which was inherent to the very provision and the concept of relief to be granted to a generating company.

The solar power generator noted that while the invoices were raised post-commercial operation date the material was received before the commercial operation date.

The two sides agreed that the payment of compensation to TPREL would be made on an annuity basis per the Commission’s order in August 2021.

Commission’s analysis

The Commission observed that the enactment of the GST laws constituted a ‘Change in Law’ event as per the provisions of the PPA.

The Commission noted that once it was established that the levy of a tax had an impact on the project’s cost or revenue from the business of generation and sale of electricity, compensation must follow. Hence, the Commission approved the compensation for additional tax burden towards O&M activities, if incurred on account of the imposition of GST.

Further, the central regulator noted that the solar power generator was also entitled ‘Carrying Cost’ on the compensation on account of incremental impact due to the ‘Change in Law’ event.

It also said 10.41% should be the discount rate of annuity payments towards the expenditure incurred on account of the ‘Change in Law’ event.

Recently, CERC directed the Madhya Pradesh Power Management Company and Delhi Metro Rail Corporation to settle the balance GST claims along with the payment of the late payment surcharge.

Earlier, CERC had reiterated that solar developers were entitled to compensation due to the higher expenses incurred after the GST laws came into force. Azure Power, Azure Power Uranus, and Tata Power Renewable Energy had filed sought compensation to offset the financial impact of GST implementation.

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