India - Covid-19 Cloud Cover: Not So Sunny Times For Renewable Energy Sector!
Legal News & Analysis - Asia Pacific - India - Energy & Project Finance
29 June 2020
After more than three months of lockdown, there is no denying that the Indian economy has been impacted. This is also evidenced by the stimulus packages announced by the Government of India, in an attempt to protect and revive the economy. With most people staying indoors 24*7, electricity consumption in the commercial sector was also impacted initially, although the levels have been restored in a phased manner. This coupled with different lockdown strategies in different states, is also continuing to impact business at large. Taking into account the impact of COVID-19 across the globe, and the lockdown in the country, the government of India and certain central agencies have been providing clarification and issuing memorandums/notifications to guide the infrastructure industry, specifically the renewable energy (RE) sector, and RE projects in terms of COVID-19 being declared as a force majeure (FM).
How does a renewable energy project get hurt?
A power producer to ensure commercial viability of a power project signs up long-term power purchase agreement (PPA) with power distribution companies or trading entities for selling power, appoints contractors vide project documents (including but not limited to the construction contracts, land lease/ land use agreements, modules/inverters/turbine generators supply contracts and operation and maintenance agreements) and enters into financing agreements for availing financing for the projects. In ‘COVID times’, when most of the contractors and suppliers have been rendered non-operational and movement is restricted (and other challenges including non-availability of labour, impact on subcontractors and supply chain disruptions), performance of obligations under the aforementioned contracts are affected. In such a scenario, projects under construction are likely to not achieve completion or commissioning in a timely manner, leading to delay in revenue generation for the developer as well as for contractors. Lenders financing such projects are dependent on timely commissioning and consequent revenue generation under PPA for their repayment. For operational projects, the adverse impact seems to be less severe since unlike traditional sources of power, renewable energy plants require minimum level of O&M activity. The regular on-site O&M activity will be hindered and hence impact power generation.
Throwing the long rope of time!
The first step towards acknowledging the impact of the Covid-19 scenario was by the Ministry of Finance (Department of Expenditure Procurement Policy Division) on February 19, 2020, wherein the government acknowledged that disruption of supply on account of Covid-19 in China and other countries can be considered as a ‘Force Majeure’. This was, however, applicable for government ministries and departments and not the private sector. The Ministry of New and Renewable Energy (MNRE), vide its office memorandum dated March 20, 2020, issued directions to all RE implementing agencies (i.e. the nodal agencies or departments of government under the RE sector) of the MNRE (which includes SECI, NTPC and Secretaries of Power/Energy/RE Departments), to consider delay on account of disruption of supply chains due to the spread of COVID-19 in China or any other country, as “Force Majeure”, and provided an opportunity to project developers to get extension of time for commissioning of projects on account of COVID-19. Therefore, to begin with, the MNRE suggested a case-by-case analysis to determine the delay in commissioning. Irrespective of the benefits available to developers, contractors had already started seeking extensions from developers without specific relief being in place for developers. However, it would be important to note that most of the project documents in the RE space have an equivalent project relief position, therefore, the clauses may be invoked by contractors, but relief would be subject to relief being extended to developers under the PPA.
However, later another notification dated April 17, 2020, was issued, which modified the earlier notification, after taking into account the national lockdown as FM and granted a blanket extension for the period of lockdown and additional 30 days after the lifting of the lockdown. This subsequent notification also clarified that, delay or disruption prior to lockdown, resulting in delay of commissioning will continue to be governed on a case-by-case basis, as provided for in the earlier notification and will require satisfactory evidence for a valid claim.
Power as an Essential Service
MNRE, also issued a notification on March 26, 2020, confirming renewable power generation as an essential service for securing smooth and uninterrupted power flow across the country. Therefore, operations could continue during the lockdown and may not be treated as a FM for such projects to the extent of the lockdown. However, if operations are affected due to disruption of supply due to COVID-19, the FM clauses may still be invoked.
Not only this, one month into the lockdown, the Ministry of Power had also issued notifications on April 20, 2020, in view of the notification(s) dated April 15, 2020, and April 16, 2020, providing for consolidated revised guidelines, regarding selected permitted activities allowed during the nationwide lockdown for COVID-19, including construction of all kinds of industrial projects in rural areas, as one of the items on the list.
A strong statement was also made in the recent Vanilla Clean Power Private Limited vs. M/S Inox Wind Infrastructure Services judgement, wherein the power generating company and its contractor were directed to maintain status quo with respect to continued power and evacuation of power till the date of the next hearing. However, while the ruling was in favour of maintaining status quo and continued operation, the issues at the ground level may have to be acknowledged, if not considered for continued operations of the plant. Not all developers are immune to the migrant worker exodus.
If relief under FM could be claimed, the companies/special purpose vehicles/entities developing a RE project may have recourse to the FM clause in the PPAs with SECI or NTPC or other RE implementing agencies. A typical FM clause in the PPA provides that a project developer shall not be in breach of its obligations, pursuant to the PPA, to the extent that the performance of its obligations was prevented, hindered or delayed due to a FM event. Similar relief may be available to NTPC/ SECI under the power sale agreement (PSA) against its obligations to Discoms. A typical FM clause in a PSA has similar provisions like the PPA. Further, the FM clauses in PPA as well as the PSA, also provide for prolonged FM event as a ground for termination of the PPA or the PSA, respectively. It remains to be seen, if this FM event, due to COVID-19, subsists for such period as agreed for termination under the PPA/PSA, whether contracts will be terminated.
Any construction or O&M contracts that explicitly recognises FM events under the PPAs as an FM, under such contracts as well, similar relief may be claimed by virtue of the notifications referred above. In certain cases, the definition of force majeure under the contracts are inclusive and provide an open scope for interpretation of additional events under the FM clause. In such cases, the supply chain disruption or lockdown being classified as FM event under the PPA or falling under the definition of FM under such contracts may provide relief to relevant contractors, though the respective parties under each of the contracts will have to establish that they are affected by such an event, to claim a relief. In such a situation, it may be pertinent to note that majority of the project documents have similar remedies available as that of a PPA and thus, relief under other project documents would be subject to relief being extended to the developer under the PPA.
Preventing the domino effect
In March, 2020, certain relief measures were issued by the Ministry of Power to help the cash starved Discoms, which included, instructions to transmission and generating companies to continue electricity supply to Discoms, which have huge outstanding dues, reduction of payment security, a moratorium to Discoms to make payments to generating companies and transmission licensees and reduction of late payment surcharge on Discoms. These measures, although aimed at reducing the burden on Discoms and ensuring uninterrupted power supply to consumers during the nationwide lockdown, were a setback for the generation sector, which has been troubled with delayed payments for long. However, MNRE once again came to the rescue of generators and clarified vide notification dated April 4, 2020, that irrespective of the reliefs granted to the Discoms, the ‘must run’ status (i.e. continue to supply power under all conditions) of renewable energy plants shall not change and therefore power supply from such projects shall not be curtailed, other than for grid security reasons and any curtailment but for grid safety would amount to deemed generation. It was also clarified that the payments to renewable energy companies shall be done on a regular basis as was being done prior to the lockdown due to COVID-19.
Despite the notification, certain Discoms have still been curtailing power without any valid reasons. The same has brought Solar Energy Corporation of India (SECI) to the forefront, wherein SECI issued notifications to the Discoms, directing that force majeure claims by Discoms will not be taken on board, considering the clarifications issued. However, certain Discoms have continued to curtail power on the grounds of fall in the collection of revenues, effect on consumer’s capacity to pay bills amidst lockdown, etc.
While all the aforesaid reliefs/ measures were taken at ministerial or departmental levels, the Finance Minister on May 13, 2020, announced one time relief to the crisis-hit power sector, wherein it was decided to infuse Rs 90,000 crore (Ninety Thousand Crores) liquidity into the cash-starved state electricity Discoms (central public sector power generation companies, transmission companies, independent power producers and renewable energy generators). The State-owned Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will infuse the fund, by raising INR 90,000-crore loan from the market against the receivables of Discoms and such debt will be backed by guarantees from the respective states and will be subject to performance obligations to be met by Discoms. The funds will be utilised for clearing the dues of private and central government-owned power generating units. It is expected that such liquidity infusion in Discoms will trickle down to the generators and improve the credit outlook of the industry.
Clear sky in sight?
One will have to wait to view the impact of these government initiatives on an industry working on thin margins. Balancing the difficulties being faced at both the supply end (power producer), as well as the demand side (power offtaker) will require clear navigation during such cloudy times. The RE sector plays a critical role in the country’s aspiration to become a power surplus country and proactive steps will be required to rejuvenate the interests of the various stakeholders of the industry.
For further information, please contact:
Subhojit Sadhu, Partner, Cyril Amarchand Mangaldas