The Ministry of Power (MoP) has drafted new electricity rules to make the compensation process easier for renewable project developers. The proposed regulations, if implemented precisely, will bring a huge relief to the solar project developers.
The draft addresses several important aspects like the change in law and the must-run status of renewables, among other important concerns for renewable energy projects.
The Ministry noted that the deadline for stakeholders to submit their comments is October 22, 2020.
The rules are proposed to be issued under the Electricity Act. They deal with the “pass-through” option in the event of a change in law and compensation to renewable energy generators for losses due to power not being scheduled by procurers.
Notably, the Ministry has proposed a pass-through mechanism that will allow power project developers to modify tariffs to compensate for any change in law events within 30 days without the need to file petitions with regulatory bodies. Here is a brief overview of the proposed rules:
Adjustment in Tariff Due to Change in Law:
As per the proposed rules, parties affected by a change in law event must be restored to the same economic position as before the event by way of adjustments to the monthly tariff. The pass-through is set to take place within 30 days of the event. The formula to calculate the pass-through is to be specified in the bidding document. The final pass through based on the formula is to come into effect after 30 days of the change in law event and is to be set on a per-unit-of-electricity-basis.
Accordingly, the generator, procurer, or intermediary procurer will need to submit the relevant documents and calculation sheets to the respective Commission for truing up the rate of pass-through per unit. Subsequently, the regulator will verify the calculation and true it up within 60 days of the pass-through coming into effect.
Earlier, if a change in law event occurred after the bidding was concluded and resulted in an additional cost for the developer, it was allowed as pass-through. The pass-through meant they would be reimbursed for the additional cost due to the change in law. But, to claim reimbursement, developers had to file a petition with the regulatory commission. This caused a considerable delay and distress to developers, and many of them are yet to be compensated.
This new proposal of adjusting the tariffs within 30 days of the change in law event could solve stranded investments and lengthy regulatory processes.
Commenting on the development, Aditya Singh from HSA Advocates said, “This proposed rule, if implemented, will be beneficial for the industry. It could give relief to those PPAs in which carrying cost clauses have not been incorporated. After the Supreme Court judgment in the case of Gujarat Urja Vikas Nigam Ltd, commissions have taken a view not to provide carrying cost to those developers where the PPA does not have a restitution principle clause. This proposed rule clearly states that the tariff will be adjusted with the principle that the affected party is compensated to restore it to the same economic position as if such the change in law has not occurred.”
Singh also points out that the ministry has considered the interest on the loan component to be monthly. He suggests that the developers demand a monthly rate of interest on both equity and debt component while calculating interest rate (70% rate of the interest on loan and 30% post-tax return on equity).
Any wind, solar, wind-solar hybrid, hydropower project, or any other renewable energy-based power project will be considered a must-run power project as per the proposed rules. These must-run projects should not be subjected to power curtailment or regulations on account of merit order dispatch or other commercial considerations.
The only exceptions for curtailment of these projects must be in the event of any technical constraints or grid security reasons. In these cases, the power procurer is expected to compensate the generator for any losses as per the rates prescribed in the PPA.
The rules added that if a notice of curtailment is provided 24 hours before the scheduled supply, the generator is required to sell the unscheduled power to the power exchange. The amount from such sales must be adjusted against any compensation payable as per the PPA every month. Any excess amount is to be carried forward and adjusted in the next month.
The Ministry also stated that when the rate of compensation is not specified in the PPA or the power sale agreement (PSA), the rate will be set at 75% of the PPA rate per unit.
“Recent PPAs include such compensation. However, old PPAs do not provide such a provision, and many regulators have refused to provide any such compensation in the absence of a specific clause. The proposed rule, post-implementation, will bring statutory force to the argument that the power generator should be compensated in cases of curtailment’, added Aditya.
Power curtailment has been plagued the solar and wind sector alike even with the must-run status in place. But the new compensation proposed is expected to make the DISCOMs cautious of taking such steps in the future.
Trading Licensee to Procure Power for Distribution Licensees:
According to the Ministry’s draft rules, intermediary procurers are allowed to bid for purchasing power competitively. If bids are made on the bucket filling method, and multiple suppliers are selected at different rates to meet requirements, the weighted average of all the bids received will be the final rate at which an intermediary procurer can sell power.
The rules also made provisions for trading licensees and distribution licensees who have already signed agreements to sell renewable power before the date of effect of these new rules. They said that the tariff would be set based on the weighted average of all tariffs quoted by other selected suppliers. The appropriate Commission is also expected to adopt the weighted average tariff after hearing the concerned parties and true up the tariff annually. Trading licensees are also likely to set a trading margin as specified in the agreements or regulations or as determined by the appropriate commission, the draft added.
These new rules come in light of recent issues developers have been facing while claiming compensation due to change in law events like the Goods and Services Tax (GST), Safeguard Duty (SGD), and the demonetization in 2017. Mercom has covered these cases extensively.
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Nithin is a staff reporter at Mercom India. Previously with Reuters News, he has covered oil, metals and agricultural commodity markets across global markets. He has also covered refinery and pipeline explosions, oil and gas leaks, Atlantic region hurricane developments, and other natural disasters. Nithin holds a Masters Degree in Applied Economics from Christ University, Bangalore and a Bachelor’s Degree in Commerce from Loyola College, Chennai. More articles from Nithin.