Change-in-law payments a Rs 4,000 cr booster for solar

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Recent commencement of Change in Law1 payments by state power distribution companies (discoms) and Solar Energy Corporation of India (SECI) for Goods and Services Tax (GST) to solar power projects, comes as a shot in the arm for the sector. Together with safeguard duty (SFD) reimbursements, which also qualify under ‘Change in Law’, the payments will lead to Rs 4,000 crore cash inflow for the sector. This can restore project returns by as much as 220 basis points (bps) and is positive for credit quality.

CRISIL had, in its July 9, 20192 press release, said that the imposition of SFD on import of solar cells and modules had increased the implementation cost of ~5.4 giga watt (GW) projects by as much as 15% and compressed the returns of developers by 160 bps. Add to this the hike in GST levy on modules and balance of the plant, and returns reduced by a further 60 bps.

While Central Electricity Regulatory Commission (CERC) was quick to recognise the SFD imposition as a Change in Law event, uncertainty prevailed over the timeliness and mechanism of its reimbursements.

Now, counterparties including SECI and discoms such as Maharashtra State Electricity Distribution Company Ltd have started making payments towards GST reimbursements for their respective projects.

To ensure returns don’t diminish because of delays in payment, the reimbursement is in the form of 13-year annuity and also factors in a carrying cost of 10.4% on a retrospective basis, in line with the CERC’s latest tariff orders3.

Says Manish Gupta, Senior Director, CRISIL Ratings, “These annuity flows are not conditional upon project performance and receipt of payments by central counterparties from the underlying discoms4. This lends more stability to these cash flows and supports the credit quality of these projects.”

Commencement of GST reimbursement paves the way for similar disbursements towards SFD (75% of overall Change in Law payouts) where the payment mechanism is also established on similar lines and is awaiting submission and verification of cost documents by developers. This strengthens the sectors’ outlook as, apart from claw-back of returns, it yet again demonstrates upholding of contractual terms in line with power purchase agreement.

These developments come on the back of continued regulatory support such as the Ministry of New and Renewable Energy’s memorandum upholding the ‘Must-Run’ status of renewable energy amid the Covid-19 pandemic5, and extension of completion timelines for under-construction projects by the authorities in view of the lockdown. Earlier SECI also abolished the tariff caps and continued to expand its presence as aggregator, protecting developers from being directly exposed to weak state discoms.

Says Ankit Hakhu, Director, CRISIL Ratings, “Demonstration of such regulatory support has helped lower the two critical risks the renewables sector faces – weak state counterparties and contractual uncertainties — and has been pivotal in upholding the sector’s resilience during the pandemic. This will need to continue for a stable credit outlook for renewables sector to be maintained.”

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