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India's New Guidelines for Solar & Wind Projects: A New Bankable Model?

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We were delighted to present recently on the subject of India's new bidding guidelines for renewable energy projects and share our thoughts on off-take risks and other bankable issues. Will the new guidelines pave the way forward for a new wave of projects?

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India's New Guidelines for Solar & Wind Projects: A New Bankable Model?

  1. 1. The New Competitive Bidding Guidelines: Addressing DISCOM Offtake & PPA Risks? Ran Chakrabarti Partner 17 January 2018
  2. 2. Overview • The New Solar Guidelines • The New Wind Guidelines • Drawbacks • Conclusion 2
  3. 3. The New Solar Guidelines • New guidelines for the Tariff Based Competitive Bidding Process for Procurement of Power from Grid Connected Solar PV Power Projects were published on 3rd August 2017 (the “New Solar Guidelines”) • Objectives - Further promote competitive bidding - Facilitate transparency and fairness - Provide a framework for an Intermediary Procurer as an aggregator for the sale and purchase of power - Standardization, uniformity and a risk sharing framework, encouraging investment and increasing bankability and profitability 3
  4. 4. The New Solar Guidelines • The New Solar Guidelines are issued pursuant to section 63 of the Electricity Act for procuring long term electricity from solar projects of 5MW and above • Defined Terms - “Appropriate Commission” means: - the State Electricity Regulatory Commission where the Distribution Licensee is located - Where there are more than one Distribution Licensees, it is the Central State Electricity Regulatory Authority - “Authorized Representative” means, where the PPA signing agency and the agency tendering the project are different, the agency tendering the project - “Distribution Licensee” means a DISCOM - “End Procurer” means a Distribution Licensee 4
  5. 5. The New Solar Guidelines • Defined Terms - “Intermediary Procurer” means a trading entity that aggregates the solar power purchased by different Solar Power Generators, selling it to a Distribution Licensee - “Procurer” means a Distribution Licensee, Authorized Representative or an Intermediary Procurer - “PSA” means a power sale agreement between the the Intermediary Procurer and the End Procurer - “PPA” means a power purchase agreement between the Intermediary Procurer and the Solar Power Generator - “Solar Power Generator” means the generator - “Standard Bidding Documents” include the model Request for Selection, the PPA and the PSA 5
  6. 6. The New Solar Guidelines • Bid Documentation - Standard form in accordance with the New Guidelines and the Standard Bidding Documents - Deviations must be approved by the Appropriate Commission - Standard Bidding Documents have not yet been published? Conflict? - Procurement of Clearances - Lease agreement, cleared by relevant authority - End Procurer clearance of the draft Standard Bidding Documents - (If applicable) clearance by the Solar Power Park Developer, with a draft Implementation Agreement consistent with the Standard Bidding Documents 6
  7. 7. The New Solar Guidelines • Bid Structure - Package of a minimum 50MW (subject to exceptions) and bidder to quote for entire package - Selection of fixed tariff or escalating tariff (cannot be more than the tariff for grid connected solar projects notified by the Appropriate Commission) - Possibility of VGF based bidding offered by the Procurer to the Solar Power Generator • Eligible Bidders - Procurers may set minimum technical criteria depending on the effect it would have on the pool of eligible bidders - Financial criteria (Net Worth of at least 20 per cent of the CERC Benchmark Capital Cost) - Additional liquidity tests (including annual turnover, bank references) 7
  8. 8. The New Solar Guidelines • Eligible Bidders - Successful bidder must ensure shareholding in SPV remains at least at 51 per cent until one year from the Commercial Operation Date - Post COD, the developer can exit, creating a secondary market and releasing capital • The PPA - Longer terms at lower tariffs (but tariffs keep dropping) and not less than 25 years - Capacity Utilization Factor (“CUF”) (the ratio of actual output to maximum possible output) - If below minimum CUF, penalty for shortfall (for all potential costs of the Procurer, subject to a [minimum] of 25% if the cost of the shortfall calculated at PPA tariff (Clause 5.2.1(a)) - Excess of the maximum CUF specified can be sold to third parties subject to right of first refusal - If Procurer purchases excess, then it will be at 75% of the PPA tariff 8
  9. 9. The New Solar Guidelines • Payment Security - Scenario 1 (Direct Procurement) • Procurer to provide Solar Power Generator with an revolving Letter of Credit for not less than one months’ average billings • Payment Security Fund to provide at least 3 months’ billings • Procurer may also choose to provide a State Government Guarantee, providing adequate security for energy charges and termination compensation if any • Condition that recourse is first made to the Letter of Credit and the Payment Security Fund 9
  10. 10. The New Solar Guidelines - Scenario 2 (Intermediary Procurer to Solar Power Generator) • Intermediary Procurer to provide Solar Power Generator with - A revolving letter of credit for not less than one months’ average billings - Payment Security Fund to provide at least 3 months’ billings • End Procurer to Intermediary Procurer (back-to-back) - Payment Security from End Procurer to Intermediary Procurer - Revolving letter of credit for not less than on months’ average billings and - State Government Guarantee for energy charges and termination compensation if any - Payment Security Fund 10
  11. 11. The New Solar Guidelines • Off-take Constraints (Transmission Infrastructure not built) - Compensation? • 19% of CUF or committed CUF, whichever is lower – generation loss • Any compensation from grid builder offset amounts owed by End Procurer? • Off-take Constraints (Temporary Grid Unavailability) - Compensation? • Generation loss formula (average generation x unavailability) or • Generation compensation at PPA tariff for the generation loss 11
  12. 12. The New Solar Guidelines • Events of Default - Solar Power Generator Event of Default • PPA damages and forfeiture of bank guarantee (limitation of liability and consequential loss?) • Lender right of substitution (step-in) • If no step-in, then the Procurer may terminate and acquire the asset at 90 per cent of the debt due, or failing which, the Lenders may exercise their security - Procurer Event of Default • Novation to a third party procurer with consent of Solar Power Generator • Solar Power Generator may terminate, triggering debt due and 150 per cent of adjusted equity 12
  13. 13. The New Solar Guidelines • Events of Default - Procurer Event of Default • Pay the Solar Power Generator damages equal to 6 months of revenue, or the balance of the amount due under the PPA and keep the project assets • Procurer takes the risk for failure of STU or CTU to build out the transmission line • Change in Law - Compensation to put the suffering party in the position it would have been otherwise • Includes change in taxes having a direct effect on the project • Exclude tax on corporate income or withholding tax on income or dividend 13
  14. 14. The New Solar Guidelines • Bank Guarantees - Solar Power Generator shall provide the following bank guarantees • Earnest Money Deposit of 2% of the project cost • Performance Bank Guarantee of between 4 and 5% of the project cost • Financial Close - Within 7 months from the date of execution of the PPA or Performance Bank Guarantee is lost • This will be challenging • Land acquisition and other conditions precedent? Extensions possible • Better to have land acquisition as a pre-condition to bid? 14
  15. 15. The New Solar Guidelines • Commissioning Schedule - 13 months from date of execution of PPA - 15 months for projects over 250 MW • What happens if Financial Close does not happen for 7 months? • Delay liquidated damages? • Extension for delay in handing over land up to one year • Transmission Connectivity - Who constructs the transmission line and what happens if it’s delayed or terminated? - Who pays to have it built? 15
  16. 16. The New Solar Guidelines • Transmission Connectivity - Where project site is not specified by the Procurer, it’s up to the Solar Power Generator to connect with the CTU or the STU - If the site is not a solar project park, the Procurer may specify that the Solar Power Generator be responsible for building out connectivity and arranging access - Is this realistic given the short Commissioning Schedules? - Only sensible for a Solar Power Generator to develop in an existing solar power park? • Disputes - Disputes over tariff (CERC) - Other disputes, arbitration under the Arbitration Act 16
  17. 17. The New Wind Guidelines • New guidelines for the Tariff Based Competitive Bidding Process for Procurement of Power from Grid Connected Wind Power Projects were published on 6th December 2017 (the “New Wind Guidelines”) - New Wind Guidelines broadly similar to the New Solar Guidelines - Similar defined terms, bid documentation and bid structure • Bid Submission - Identification of 100 per cent of land acquisition at time of bid and acquisition of all the land within 7 months - Different from the New Solar Guidelines • Availability of 25 per cent of land at bid initiation, possession of 90 per cent within one month of the signing of the PPA, with the balance 10 per cent within 2 months thereafter) - Why different? 17
  18. 18. The New Wind Guidelines • The PPA - Broadly similar to the New Solar Guidelines, term not less than 25 years - Capacity Utilization Factor (“CUF”) slightly different - Declared annual CUF shall be no less than 22% - Similar compensation provisions for failure to meet CUF • Payment Security - Similar to the New Solar Guidelines • Force Majeure - In accordance with industry standards 18
  19. 19. The New Wind Guidelines • Off-take Constraints (Transmission Infrastructure not built) - The provisions in the New Solar Guidelines appear to be absent – why? - Surely, the same risks arise? • Off-take Constraints (Grid Unavailability) - Compensation? • Generation loss formula (average generation x unavailability) or • Generation compensation at PPA tariff for the generation loss - Similar to the New Solar Guidelines 19
  20. 20. The New Wind Guidelines • Events of Default - Broadly same as under the New Solar Guidelines • Change in Law - Broadly same as under the New Solar Guidelines • Bank Guarantees - Wind Power Generator shall provide the following bank guarantees • Earnest Money Deposit of 2% of the project cost • Performance Bank Guarantee not more than 5% of the project cost 20
  21. 21. The New Wind Guidelines • Financial Close - Within 7 months from the date of execution of the PPA or Performance Bank Guarantee is lost - Force majeure extension and discretionary extensions for other reasons? • Commissioning Schedule - 18 months from the date of execution of the PPA • Eligible Bidders - Similar to the New Solar Guidelines - Procurers may set minimum technical criteria depending on the effect it would have on the pool of eligible bidders - Financial criteria (Net Worth of at least 20 per cent of the capital costs of the project) - Additional liquidity tests (including annual turnover, bank references) 21
  22. 22. The New Wind Guidelines • Transmission Connectivity - Obligation on the Wind Power Generator - Broadly similar to the New Solar Guidelines • Arbitration - Same as the New Solar Guidelines 22
  23. 23. Drawbacks • Payment Security - One months revolving letter of credit? - Off-set by potential termination payments? • Payment Security Fund - How will it be funded? - Condition precedent to Financial Close - Lender security over the account • Transmission line risk? • Timelines realistic? 23
  24. 24. Conclusion • Generally, the payment security approved in the New Solar Guidelines has not been seen in PPAs signed by the DISCOMS in the past, which is a step forward • Specific references to State Government Guarantees for Procurer’s off-take obligations is encouraging • Clarification of termination payments to cover debt an encouraging step forward to bankability 24
  25. 25. Contact BANGALORE DELHI 101, 1st Floor, “Embassy Classic” 2nd Floor, Block D, The Mira #11, Vittal Mallya Road Mathura Road, Ishwar Nagar Bangalore, 560 001 New Delhi 110 065 T: +91 80 4072 6600 T: +91 120 472 8100 E: bangalore@induslaw.com E: delhi@induslaw.com HYDERABAD MUMBAI 204, Ashoka Capitol 1002A, 10th Floor, Tower 2, Indiabulls Financial Center Road No.2, Banjara Hills Senapati Bapat Marg, Lower Parel (W) Hyderabad, 500 034 Mumbai, 400 013 T: +91 40 4026 4624 T: +91 22 4920 7200 E: hyderabad@induslaw.com E: mumbai@induslaw.com DISCLAIMER This presentation is for information purposes only. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Although we have endeavored to accurately reflect the subject matter of this presentation, we make no representation or warranty, express or implied, in any manner whatsoever in connection with its contents. No recipient of this presentation should construe it as an attempt to solicit business in any manner whatsoever. 25

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