Analysis of Solar Energy Corporation of India (SECI) Power Purchase Agreement (PPA) – A Legal Perspective

Background: In India, coal contributes to more than half of the source of the total energy produced and is still considered as the most critical source of energy. However, with the limited resource available and the increase in demand of electrical energy for a developing economy like India clubbed with the rise in global warming, alternative sources of energy is the need of the hour. 

Last year in the month of November 2021, for the first time at the global level a United Nations summit was held in Glasgow which was about climate change and how countries are planning to tackle it. In the said United Nations climate change conference (COP26), there was an explicit plan to reduce use of coal, which is responsible for 40% of annual Carbon Dioxide (CO2) emissions and developing countries like India have committed and pledged to “phase down” coal instead of “phase out” coal. [1]

It is interesting to note that we as a developing country had already realized the adverse impact climate change would have not only in India but throughout the rest of the world more than a decade back and as a responsible country had started to frame policies to find ways to mitigate the same.

As a first step to reduce dependency on coal and focus on renewable sources of energy, the Government of India (GOI) in 2010 launched the National Solar Mission (NSM) and set a target of deploying 20 GW of grid connected solar power by 2022 and later on revised the same to 100GW in 2015.

The mission was one of the several policies of the National Action Plan on Climate Change for India which is basically a GOI’s programme launched in 2008 to mitigate and adapt to the adverse impact of climate change. To facilitate implementation of the NSM, the Ministry of New and Renewable Energy, GOI on September 09, 2011 incorporated a company i.e. the Solar Energy Corporation of India Limited (“SECI”) dedicated to promote solar energy in India. However, subsequently the GOI mandated SECI to cover all segments of renewable energy namely, wind, geo-thermal, tidal, etc. and proposed to rename the company to Renewable Energy Corporation of India (“RECI”) instead of SECI, which is yet to be implemented. [2]

The role of SECI is basically to act as an intermediary between the power generator (“Developer”) and the distribution licensee (“Buying Entity”) for the purposes of buying power from the Developer and sell it to the Buying Entity and carry out bidding as per the Wind Competitive Guidelines, 2017 or the Solar Competitive Bidding Guidelines, 2017, as the case may be (hereinafter collectively “2017 Guidelines”). SECI enters into a power purchase agreement with the Developer (“SECI PPA”) and also a power sale agreement (“PSA”) with the Buying Entity. The PSA contains relevant provisions of the PPA on a back-to-back basis.

Unlike thermal power purchase agreements (PPAs) or road PPAs which are standardized in the form of model contracts, renewable energy PPAs are not standardized because the 2017 Guidelines permit deviation from the prescribed guidelines with the prior approval of the requisite appropriate state or central electricity regulatory commission (“Appropriate Commission”).

Some of the key provisions in a SECI PPA are enumerated below:

1. Key obligations of Developer:

a. To obtain and maintain all approvals, clearances and permits required for the project;

b. To acquire project land including for evacuation and transmission of power;

c. To set up and commission the project;

d. To ensure delivery of contracted power throughout the operations period;

e. To obtain long term access (LTA) and execute transmission service agreement (TSA) with Central Transmission Utility (CTU)/State Transmission Utility (STU), as the case may be, for evacuation of contracted capacity of power; and

f. To coordinate with Buying Entity with respect to inter alia declaration of availability, scheduling and dispatch of power and due compliance of applicable Grid Code/State/Central regulations.

2. Financial Closure (FC):

Meaning: FC in project finance essentially means the date on which a Developer has been able to achieve final closure of the funds required to develop, construct and operate a project. Hence, generally the date on which such Developer has been able to tie up with banks/NBFCs/financial institutions (“Lenders”) for arranging the means of finance, execution of financing agreements documenting the terms of such finance and satisfaction by the Developer of conditions stipulated by the Lenders to avail the funds, is considered as FC for a project. 

Key Provisions: Consequently, some of the conditions which are required to be satisfied by a Developer in a SECI PPA for a project to be considered to have achieved FC are as below:

a. Arrangement of financing for the project and providing necessary certificates to SECI in this regard by the Developer; and

b. Submission of details of all planned/proposed wind turbine generators (in case of wind projects) and production of all documents evidencing the same by the Developer.

Generally, a timeline of 7 (seven) months from the date of the SECI PPA (“Effective Date”) for wind projects and 12 (twelve) months from the Effective Date for solar projects, is provided for submission of the documents.

3. Change in Law (CIL):

Meaning: A CIL event is one which results in imposition of additional costs or expenses on the Developer and/or on the revenue owed to it. The primary intent of having such provision in the SECI PPA is to: (a) insulate the parties from the financial impact arising out of events that take place after the effective date of the SECI PPA, which were not within the control of the Developer; and (b) restore the affected party to the same economic position as if the CIL had not occurred.

Key Provisions: The events which are considered as CIL under the SECI PPA include: (a) enactment of any new law; (b) amendment, modification or repeal of an existing law; (c) requirement to obtain a new consent, permit or license any modification to conditions prescribed for obtaining consent, permit or license, not owing to any default of the Developer; (d) any change in the rates of any taxes/duties/cess or introduction of any new tax which have a direct effect on the project; (e) changes in rates of safeguard duty (SGD), GST and basic customs duty.

However, for the affected party to be entitled for compensation, the CIL event:

a. needs to be recognized by the Appropriate Commission; and 

b. the compensation on account of such CIL event shall be determined and shall be effective from such date as may be decided by the Appropriate Commission.

In the event CIL leads to delay in commissioning or supply of power, SECI may provide extension of Scheduled Commissioning Date (SCD) with intimation to the Buying Entity.  It the event of any decrease in project cost or any income to the Developer on account of change in law events, benefit of such reduction is passed on to SECI, and further to the Buying Entity. On failure to do so by the Developer, SECI can make deductions in monthly tariff payments immediately. Further, every net increase/decrease of Rs.1 lakh per MW in the project cost, shall be liable for corresponding increase /decrease of an amount equal to Rs. 0.0045/kWh in the monthly tariff payable.

4. Termination Events:

Some of the key defaults of the Developer and SECI leading to termination of the SECI PPA are below: 

5. Key rights of Lenders, SECI and Developer:

The key rights which are available to the Lenders, SECI and Developer under a SECI PPA and the liabilities of SECI under the same are as below:

a. Lenders rights on Developer event of default:

1. Upon occurrence of an event of default by the Developer, the Lenders in order to ensure that the total outstanding dues owed to it by the Developer is repaid in full may exercise their rights under the financing documents to seek substitution of the Developer by a selectee for the residual period of the SECI PPA in concurrence with SECI and the Buying Entity. However, the selectee proposed to substitute the Developer will be required to meet the eligibility requirements of Request for Selection (RfS) issued by SECI and accept the terms and conditions of the SECI PPA.
2. In the event, the Lenders are not able to substitute the defaulting Developer within the stipulated period, SECI may terminate the SECI PPA and the Buying Entity may acquire the project assets for an amount equivalent to 90% of the debt due or less as mutually agreed, failing which the Lenders may exercise their mortgage rights and liquidate the project assets.

b. SECI’s right on Developer event of default: 

1. After issuance of a preliminary default notice by SECI and end of the consultation period of 90 (ninety) days, SECI may terminate the PPA by providing a termination notice of 60 (sixty) days, if the event of default by the Developer has not been remedied within a period of 7 (seven) days following the expiry of aforesaid consultation period. 
2. Thereafter, the Developer is liable to pay liquidated damages for: (i) failure to commission within stipulated time; and (ii) failure to supply power in terms of the SECI PPA. For other cases, the Developer shall be liable to pay damages to SECI equivalent to 6 (six) months or balance PPA period, whichever is less, of charges for its contracted capacity.

c. Developer’s right on SECI event of default:

1. Pursuant to the SECI PPA if there is an event of default by SECI (including default in payment of tariff obligations), then after issuance of a preliminary default notice by the Developer and end of the consultation period of 90 (ninety) days and a further period of 210 (two hundred ten) days following expiry of the aforesaid consultation period, SECI under intimation to the Developer and Buying Entity, subject to prior consent of the Developer novate the PPA to any third party including its affiliates.
2. In the event, the aforesaid novation is not acceptable to the Developer, or if no offer of novation is made by SECI, then the Developer may terminate the SECI PPA and at its discretion require the Buying Entity to either: (i) takeover the project assets by making termination compensation equivalent to amount of debt due and 110% of adjusted equity less insurance cover, if any; or (ii) pay the Developer damages equivalent to 6 (six) months or balance PPA period, whichever is less, of charges for its contracted capacity, with the project assets to be retained by the Developer.
3. At the end of 3 (three) months from the time period mentioned above, the Developer may terminate the SECI PPA and any damages or charges payable to the STU/CTU for the connectivity of the plant shall be borne by the Buying Entity.

d. SECI’s liability:

As per the terms of the SECI PPA, notwithstanding anything to the contrary contained in the SECI PPA, the performance of obligations of SECI towards the Developer under the SECI PPA is subject to the ability of SECI to enforce the obligations of Buying Entity, to buy power under the PSA entered into between the Buying Entity and SECI.

However, the SECI PPA makes it very clear that with respect to payment obligations of SECI towards the Developer for supply of power to the extent of the contracted capacity, the same shall be discharged as per the tariff payment obligations provided in the SECI PPA i.e. 

1. Letter of credit provided by SECI in favour of the Developer through a Scheduled Bank; 
2. State Government guarantee/Tripartite agreement signed between Reserve Bank of India (RBI), Central Government and State Government of the Buying Entity covering security for payment of energy charges; and 
3. Payment security fund provided by Buying Entity, 

and shall not be on a back-to-back basis.

6. Assignment:

The SECI PPA does not permit the Developer to assign its rights and obligations under the SECI PPA or create any encumbrance over all or any of its rights and benefits other than the assignment of its rights and obligations in favour of project Lenders or Lender’s representative as security for the debt to be availed by the Developer under the financing documents subject to compliance by the Developer of its obligations under the SECI PPA. Any assignment, mortgage or creation of charge by the Developer over any of its assets or rights related to the project or transfer or novation of its rights and obligations under the SECI PPA, in contravention of the provisions of the SECI PPA will constitute an event of default by the Developer.

However, SECI is permitted to transfer any of its rights and obligations under the SECI PPA to any of its affiliate and the Developer shall not withheld its consent for the same. 

Any successor or permitted assign may be required to execute a new agreement on same terms and conditions as are included in the SECI PPA.

7. Lock – in for transfer of shares of the Developer:

The Developer is required to ensure that: (i) there is a lock-in for transfer of its shares for a period of 3 (three) years from the commercial operation date (COD) of the project; and (ii) during this time more than 50% of the voting rights and paid-up share capital in the Developer is maintained by its holding company. 

However, transfer of shareholding in the Developer within the same Group Companies is permitted with prior consent of SECI after COD, subject to management control remaining with the same Group Companies.

8. Liquidated Damages:

The Developer is required to pay damages to SECI in the event there is: (a) delay in commissioning of the project up to 270 (two hundred seventy days) days from SCD; and (b) failure to supply power in terms of the PPA. However, in case of defaults other than as mentioned hereinabove, SECI shall have the right to recover the damages for the said defaults by way of forfeiture of bank guarantee provided by the Developer.

9. Dispute Resolution:

Any claim, dispute or difference between the Developer and SECI shall be amicably resolved within 30 (thirty) days of issue of a written notice by a party or 30 (thirty) days from the date of furnishing of counter claims or defence by the other party, whichever is later.

However, if such dispute is not resolved amicably between the parties, the dispute shall be submitted to the Appropriate Commission for adjudication. Any appeals to the decision of the Appropriate Commission shall be as per the Electricity Act, 2003.

Views:

In light of the above, it is quite evident that the SECI PPA permits the Developer to assign its rights and obligations in favour of project Lenders or Lender’s representative as security for the debt to be availed by the Developer from the Lenders under the financing documents. However, as a matter of abundant precaution and to ensure that the Lenders establish privity of contract with SECI and are able to enforce their security in a smooth manner, as a condition precedent to disbursement by the Lenders, the Developer should make an application to SECI informing them that their rights and obligations under the SECI PPA are assigned in favour of the Lenders as security for the debt obtained from them and obtain an acknowledgement from SECI on the same. The no objection certificate (NOC) from SECI for the aforesaid assignment may be obtained as condition subsequent.

Further, Lenders also have the right to substitute the Developer with a selectee for the residual period of the SECI PPA in concurrence with SECI and the Buying Entity, in the event of default by the Developer to the Lenders under the financing documents. Lenders may also exercise their mortgage rights and liquidate the project assets in the event substitution does not work out and the Buying Entity also fails to acquire the project assets.

With respect to the liability of SECI, although the SECI PPA states that the obligation of SECI with respect to payments to be made to the Developer for supply of power to the extent of the contracted capacity is not on a back-to-back basis, the same does not seem to be true since under the PSA signed by SECI with the Buying Entity, SECI has a back-to-back arrangement in its favour as mentioned below:

1. Letter of credit is provided by Buying Entity in favour of SECI for payment of monthly bills;
2. State Government Guarantee/Tripartite agreement is executed between the RBI, Central Government and State Government guarantying the payment of charges towards energy procured from the Developer. SECI invokes this guarantee and passes on the same to the Developer to the extent of the amounts due by it under the SECI PPA; and
3. Payment Security Fund suitable to support at least 3 (three) months billing.

This may be because the role of SECI is to primarily act as an intermediary between the Developer and Buying Entity and not be liable in case power is not generated by the Developer or payment is not made by the Buying Entity for buying the contracted capacity of power. 

[1] https://www.bbc.com/news/science-environment-56901261
[2] Wikipedia