National Solar Mission: Brighter days ahead?

By Neeraj Menon and Shashank Jain, Trilegal
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After successfully implementing phase I of the Jawaharlal Nehru National Solar Mission the Ministry of New and Renewable Energy (MNRE) has issued guidelines in connection with batch I of phase II. This batch is to set up a total capacity of 750 megawatts.

Neeraj Menon
Neeraj Menon

Unlike phase I where the bundling scheme and generation-based incentive schemes were used as incentives to set up solar projects, a viability gap funding (VGF) scheme has been proposed for batch I of phase II. It is proposed that the developer will be paid a fixed tariff during the term of the power purchase agreement (PPA) with Solar Energy Corporation of India (SECI), and will additionally receive VGF, to be implemented by SECI.

The bids for batch I of phase II were delayed twice due to concerns of industry participants on provisions of the guidelines, the draft PPA and the draft VGF securitization agreement (VGFSA). However the mission now seems to be on track as companies have bid for 2,170 MW of solar power capacity, almost three times the proposed 750 MW.

While MNRE and SECI have amended the draft PPA and VGFSA, and from time to time have issued clarifications, certain issues stemming from the documentary framework remain.

Key issues

As in phase I batch II of the mission, the PPA requires the developer to commission the project within 13 months from the date of signing of the PPA. This issue continues to be of concern to small and relatively inexperienced developers as they fear that they may not be able to meet this timeline. Further, stakeholders have identified acquisition of land and local approvals as a key challenge to meeting the commissioning schedule.

VGF will be implemented through a VGFSA between the developer and SECI, and will be released by SECI in six annual tranches, with the first tranche released only on completion of the project. This denies the developer any fiscal relief during the entire construction phase and requires the developer to rely on its own resources and on debt financing to meet the construction expenses.

The VGFSA provides that the first 50% of VGF will be paid “not earlier than” three months from the scheduled commissioning date as per the PPA (subject to compliance with certain conditions). SECI has not explained the reason for delaying release of the VGF and suggests that even when commissioning is achieved on schedule, the developer will not receive the first tranche of VGF until, at the earliest, three months from the scheduled date of commissioning.

Shashank Jain
Shashank Jain

A developer may be required to return VGF if certain events of default occur, for instance, if the project fails to generate any power continuously for one year, or the developer fails to maintain its controlling shareholding for a period of one year after the commercial operation date. To ensure repayment of VGF in such circumstances, security interest will be created over the project assets.

Taking on board stakeholder concerns, SECI has done away with the requirement of creating a first ranking pari passu charge over the project assets along with the lenders, and has agreed to a second ranking security interest. However, SECI has retained its right to step in and take over the project along with lenders for recovery of the disbursed VGF. Lenders are sceptical of the mechanism that SECI will adopt to jointly exercise the step-in rights and the manner in which security interest will be accelerated.

The VGFSA provides that, after disbursement of first tranche of VGF, if a project fails to meet the criteria for VGF disbursement – for instance, maintenance of capacity utilization factor (CUF) – for any year then the VGF tranche for that year will not be disbursed. It has however not been clarified whether the developer would be entitled to receive the undisbursed tranche of VGF if it meets the eligibility criteria in a subsequent year.

Further, while the VGFSA provides that the developer will benefit from a CUF adjustment for an abnormally low annual global horizontal irradiance year, it does not clarify the manner in which this adjustment will be effected and leaves the methodology to the discretion of SECI and MNRE.

Conclusion

The number of bids submitted for batch I of phase II seems to suggest that industry participants have generally accepted the overall framework. Given that the VGF model is untested in the solar sector and SECI is the new torchbearer of the mission, it would help reassure stakeholders if SECI were to continue with the consultative approach for resolving issues during the project implementation stage.

It will be interesting to follow the implementation of the modified VGF approach as its success may merit a re-look at the state support model in other sectors.

Neeraj Menon is a counsel at Trilegal and Shashank Jain is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.

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