The Prime Minister, Dr. Manmohan Singh lighting the lamp to launch the Jawaharlal Nehru National Solar Mission – Solar India, in New Delhi on January 11, 2010. The Union Minister of New and Renewable Energy, Dr. Farooq Abdullah is also seen.
The image above is from the website of the Press Information Bureau here.
In June 2011, the Ministry of New and Renewable Energy (“the MNRE”) of the Government of India announced the implementation of a Payment Security Scheme (“PSS”) for grid-connected solar power projects under Phase-I of the Jawaharlal Nehru National Solar Mission (“the JNNSM”). The PSS is being implemented by the MNRE under the Electricity Act, 2003. The Central Electricity Regulatory Commission (“the CERC”) has also approved the decision in relation to the implementation of the PSS.
The PSS is intended to address the concerns of developers and financiers in relation to the fiscal ability of state distribution utilities, which are the ultimate purchasers of power under the JNSSM, and whether they would be able to pay the elevated prices for solar power. The Government of India felt that without the Government stepping up and providing financial comfort, many of the projects would not be able to obtain financial closure. From a long-term perspective, a failure of the initial projects would likely have a long-term detrimental impact on India’s fledgling solar industry.
Existing mechanism under the JNNSM
Presently under the JNNSM, NTPC Vidhut Vaypar Nigam Limited (“NVVN”), a subsidiary of the state owned National Thermal Power Corporation (“NTPC”) has been appointed the nodal agency for the purchase of power from developers who have qualified to supply power under the JNNSM. These developers enter into power purchase agreements (“PPAs”) with NVVN.
NVVN in turn enters into power sale agreements (“PSAs”) with state utilities, which are the ultimate purchasers of power. In terms of the PPAs, NVVN has no obligation to make payment to the developers unless it receives payment from the PSAs. Given the already doubtful track record of Indian utilities in relation to payment for power purchased, this meant that the developers and financiers were taking a considerable risk in relation to the financial ability of the utilities.
Payment Security Scheme
The main objective of the PSS is to provide a mechanism where developers would get paid, even if the state utilities do not make payment to NVVN. To this end the MNRE has set aside budgetary support of Rs. 486.05 crores for the period of 2011 to 2015. This amount is expected to cover a third of the total expected revenue from power developers of Phase I (of 699 MW capacity). It is anticipated that this measures will encourage independent financing and improve the financial viability of the first phase projects.
Nature of the budgetary support
Under the PSAs, the state utilities are required to provide to NVVN a letter of credit (“LC”), backed up by an escrow arrangement where revenues received by the utilities from an identified circle of consumers is deposited. In case of the failure by a state utility in making payment under the PSA within the stipulated due date, NVVN has the right to encash the LC or sell the bundled power to the third party. In case the amount recovered by NVVN by sale of power to the third party is less than the cost of such power under the PSA, the utility would be required to pay the difference. If the utility fails to do so, then the payment shall be made by NVVN to the developer from the Solar Payment Security Account (“the SPSA”) set up under the PSS. Therefore, there is an additional layer of protection for the developer.
The PSS is in the nature of a “fall-back” arrangement. Only when the other payment security mechanism under the PSA is exhausted, can the SPSA be drawn upon to make payment to the developers.
Process of third party sale
The process of third party sale outlined in the PSA is as follows:
1. In case of default in payment by the utilities under the PSA, which is not remedied, NVVN shall sell the power to third parties.
2. Till the conclusion of bilateral negotiations with purchasers, such power shall be sold on a day-ahead basis on a power exchange within twenty-four hours of NVVN being entitled to sell the power to third parties under the PSA.
3. In case of bilateral sale, power should first be offered to the non-defaulting procurers of solar power under Phase I of JNNSM. The purchase by such procurers will entitle them to additional RPO (removal projects obligation) benefits.
4. Bilateral negotiations for the sale of solar power shall then be concluded with third party procurers as soon as possible. NVVN should seek to at least negotiate short-term sale with the top three procurers of power in the power exchanges in the past month. NVVN should also ensure that the sale of power should not be at a price less than the average rate of NTPC unalloted power.
NVVN as administrator of the SPSA is required to maintain a record of negotiations with third parties for the sale of power. If the MNRE or the Ministry of Power has reason to believe that NVVN has not exercised due diligence in sale of the power to third parties subsequent to default, then MNRE may deduct a suitable amount from the SPSA. Such reduction would not absolve NVVN from making payment to the developers under the PPA.
The establishment of PSS is welcome step. Additional innovations, which will enhance the veracity of the PSS, can also be thought of. For example, in case NVVN sells power to consumers or on the power exchanges other than at the designated special tariff for solar plants, NVVN should consider registering for renewable energy certificates for additional revenue. NVVN should also have a clear mandate (and more importantly the political go-ahead) to act against defaulting utilities to recover unpaid amounts and replenish the SPSA. However, till such time, PSS will pay a vital role in the development of India’s solar sector.