MNRE has announced various changes to the competitive bidding guidelines for utility scale solar projects. There are broadly two categories of changes – to address offtake risk and improve execution timelines.
- On offtake risk, the government has proposed full compensation in the event of power back-down and bolstering of the payment security fund;
- Measures to improve timelines include more time for land documentation, deemed tariff approval by the regulator in the event of delays and protection from government failure to issue project clearances;
- The changes are highly welcome and seem to have come in response to growing concerns about poor risk profile of RE projects and falling investor interest;
Mitigation of offtake risk seems to be the biggest objective. First, in the event a solar plant is asked to back down, other than for grid security or safety reasons, the developers would be offered 100% compensation (previously 50%) for loss of power output. With growing instances of curtailment across many states, the provision of only 50% compensation was increasingly untenable. Heeding further the demands of project developers, the amendment also specifies that no backdown may be ordered without formal written instruction and that the details of such backdown need to be made public by the concerned Load Dispatch Centre.
Second, there is a new provision for top-up tariff, whereby the ultimate offtakers are required to pay an extra INR 0.10/ kWh in case they are not able to provide state government guarantee to cover their PPA obligations. But this amount would be payable only to intermediary offtakers (for example, SECI or NTPC) for topping up the three month payment security fund maintained by them. It is a positive step but the amount is too small at about 3-4% of power tariff. The government ought to consider enhancing this amount as well as widening ambit of this clause to projects where there is no intermediary procurer.
Third, the developers are required to contribute INR 500,000 per MW of project capacity towards the payment security fund maintained by intermediary procurers. They would not be very pleased to cough up this amount as maintaining payment security should really be an obligation for the offtakers. The contribution would increase capital cost and raise tariff expectations by about 1%, both unwelcome in times of cash crunch. The amount is insubstantial though and would not be adequate to cover even one month of revenue shortfall.
There is also an attempt to introduce more certainty on the project execution time-table. As land acquisition and subsequent documentation formalities have posed teething problems in many states, the developers are now given time until COD to complete these requirements as against only 12 months earlier. In response to another problem faced by many projects relating to delay in approval of project tariffs by the regulators, the amendment proposes deemed approval if the regulators fail to issue a decision within 60 days of application.
The last material change in the guidelines is introduction of the concept of non-natural force majeure, in particular, failure of a government authority to provide any project clearances. If such an event persists for more than 6 months, the developers are entitled to terminate PPA and seek full termination compensation as under the offtaker default scenario.
The changes are highly welcome and seem to have come in response to concerns about deteriorating risk profile of RE projects and falling investor interest. They are also consistent with the recent draft guidelines for solar-wind hybrid projects. But the move is largely reactionary and akin to a sticking plaster. To build new growth momentum, RE needs a new procurement model and some fresh thinking. MNRE guidelines are not binding on the DISCOMs in theory, but they would be compelled to accept these changes as investors get more demanding.