Solar Energy Corporation of India (SECI) has started reimbursing renewable developers’ claims falling under the ‘change in law’ clause. These reimbursements have been filed for the additional costs incurred by developers due to the imposition of Goods and Services Tax (GST) and safeguard duty.

With so many power purchase agreements (PPAs) being executed, developers are concerned about the bankability of SECI. The situation can deteriorate further if SECI keeps reimbursing all the developers for ‘change in law’ without distribution companies (DISCOMs) paying them back. Lenders who were already worried about the financial health of the DISCOMs are now uneasy about the financial situation of SECI.

Background

Most PPAs signed between the project developer and SECI come with a “change in law” clause. According to the clause, if a new law comes into force after the execution of the PPA and if a developer incurs additional costs as a result of that “change in law,” then the developer will be entitled to an adjustment in the tariff or reimbursement to the extent of the loss suffered. For this, the developer must submit a petition to the relevant authorities for reimbursement or adjustment.

In the case of solar projects implemented by SECI, the developer signs a PPA with SECI, and SECI, in turn, signs a power sale agreement (PSA) with the DISCOM, which agrees to buy the solar power.

So, in case of a “change in law,” the developer who has incurred additional costs must be reimbursed. The Central Electricity Regulatory Commission (CERC) has ordered that since the PPA and PSA are interconnected, SECI has to reimburse the developers’ claims and collect the same amount from the DISCOMs back-to-back. The back-to-back nature of the agreements means that the DISCOMs are liable to pay SECI the amount that SECI has to pay to the developers.

Impact of reimbursements on SECI

Owing to this regulation, SECI must now reimburse all the developers’ claims related to safeguard duty and GST. Wherever these laws came into effect after the PPAs were signed, the developers are entitled to compensation.

In October, SECI paid ₹70.8 million (~$966,632) to solar and wind developers against GST claims and safeguard duty reimbursement.

These reimbursements could be either in a lump sum or by way of an annuity (a series of payments made at equal intervals). SECI has proposed a monthly annuity payment method spread over 13 years for the claims made by solar developers to manage the cash outflow.

Lenders’ and Developers’ Concerns

Developers suffering from investments being stranded due to delayed reimbursements are now relieved as SECI has started to process their claims.

But there is also a cause for concern. According to Vinay Kumar Pabba, CEO and co-founder of Varp Power Private Limited, “SECI collects only a trading margin on the power that is generated by the developer. In almost all cases, SECI faces pushback from DISCOMs, when it tries to pass on the extra burden on account of ‘change of law’ compensations to them.”

The change in law clause is a concern for lenders, as the DISCOMs are not processing the reimbursements, and SECI is under pressure to make these payments as ordered by CERC. Lenders see it as a double whammy, earlier they were anxious about the DISCOM finances, and now they are worried about the financial health of SECI.

“Noting the difficulties that the developers were facing in getting back the GST and safeguard compensations, in recent tenders, SECI has wisely introduced a clause that affects an automatic tariff adjustment linked to the extra CAPEX incurred because of these taxes. This should hopefully make it easier for developers and will obviate the need to go through the time-consuming regulatory process,” Vinay added.

“SECI’s primary source of income is the fixed trading margin of ₹0.07 ($0.0009)/kWh it charges for the power sale and doesn’t have a strong balance sheet”, a developer told Mercom.

Speaking to Mercom, a lender said, “If GST and safeguard duty reimbursements are determined and added to the tariff to be paid over 25 years, lenders are glad to extend support and fund it. Instead of ₹2.52 (~$0.034)/kWh if the bids had closed at ₹2.57 (~$0.036)/kWh, would it have made a huge difference? Wouldn’t it still be the cheapest power available in the country? For that, can’t we pay ₹0.05 (~$0.0008)/kWh more and account it for GST or safeguard duty? A pragmatic solution is needed.”

How is SECI managing the issue?

While the lenders’ fears are justified considering the reluctance of the DISCOMs to pay the safeguard duty and GST compensation to the developers, things may not be as bad as they seem.

SECI indeed must reimburse the developers whether the DISCOMs pay it or not. Still, there is a payment security mechanism that takes care of the nodal agency’s financial health and enables it to pay the developers’ compensation.

“DISCOMs are delaying the payments and are also reluctant to pay the GST and safeguard duty reimbursements. But according to the CERC order, SECI must reimburse the generators. SECI uses funds under the payment security mechanism and the tripartite agreement to make these payments. SECI’s finances are not used to make these payments, so the question of financial stress on SECI doesn’t arise,” an official from SECI remarked.

The payment security fund is a capital reserve where interest-free capital is provided to its beneficiary if a DISCOM defaults payments. Besides this, there is also the tripartite agreement, which takes care of the nodal agency’s financial health.

Under the tripartite agreement, the central government can withhold payments under the central financial assistance made to state governments whose DISCOMs have defaulted payments. The agreement is signed between the central government, state government, and the Reserve Bank of India and acts as a powerful check against delays or defaults by DISCOMs.