In Conversation With Mr. M. Arun Kumar, Partner, INDUSLAW
There are many companies emerging in Solar Industry. What are some of the applicable law to consider while operating business in Solar?
In India there are no specific laws that govern the solar industry. In fact, we do not have any specific laws for the renewable energy sector, however, it is under the Electricity Act, 2003 that various policies, regulations and guidelines are formulated for the solar industry and other renewable projects.
Having said that, when we look at the entire lifecycle of a solar plant from its planning stage to execution, operation and all the way till the completion of its operational life, a whole gamut of laws are involved including contracts and mercantile laws, import-export laws, environment laws, land laws, corporate and financial laws and laws relating to dispute resolution as well.
How does a law firm like yours, help different stakeholders of the Solar Industry?
At IndusLaw, our experience in the power sectors spans all verticals of the sector – generation (including thermal, hydro and renewables), transmission, distribution and trading. We are specifically recognised for our prominent alternative and renewable energy practice.
We have been closely and regularly involved in advising project developers, project sponsors, contractors, vendors, equity investors/private equity funds, development platforms, and project lenders, in the solar industry. Hence, as legal specialists, we end up playing a significant role in advising stakeholders in the renewable industry throughout a project’s life cycle in the following key aspects:
� Bid stage advisory, term sheet discussions and finalization, risk identification and risk allocation in relation to offtake arrangements, etc
� Land title diligences and acquisition,
� Project procurement contracts, EPC and O&M contracts,
� Debt/ equity project fundings,
� Regulatory advisory, and
� Structuring and documentation in relation to investments, acquisition and disposition transactions.
At IndusLaw, our specialised renewable energy practice group consists of 8 partners and nearly 30 lawyers. We have established a reputation for providing tailored and thought through legal solutions in the renewable energy sector and especially the solar industry.
What legal issues do developers face while developing solar project?
Industry stakeholders are well aware of the tariffs at which solar projects are being tendered in the recent times. Keeping that in mind, I believe the two most important issues are:
- Compliance and timely fulfillment of PPA obligations by offtaker
While in projects sponsored by Government instrumentalities like SECI, the PPA related risks like delay in payments, cancellation/ re-negotiation of PPAs are mitigated to a large extent by SECI itself purchasing power and selling back-to-back to utilities, the projects involving state governments where power offtakers are directly state discoms, the risks arising from non-payments/ delay in payments, cancellation/ re-negotiation of PPAs are generally in existence. Such situations in addition to the litigations with state utilities add up to the overall cost of the developer and end up in unviable projects. Having said that, these risks are serious for older PPAs which have been signed on higher tariffs.
- Project land issues
In Government sponsored projects (through SECI or NTPC) where land is provided (egs. in solar parks), typically it is the timely handover of the land alongwith its access rights that are an area of concern. Whereas, in privately acquired land (whether lease or outright purchase), the concern areas are around clean title, zero encumbrances, local issues and access and distance to the closest sub-station.
Are there any legal risks involved for EPC companies when it comes to working with Solar Roof projects?
While the utility scale plants have their own share of risks, the rooftop solar plants have a specific set of risks like: (i) lack of awareness, (ii) lack of rooftop space, and (iii) difficulty in obtaining credit and bankability issues.
The primary market for rooftop solar plants are factories, warehouses, educational institutions and buildings like malls, movie halls etc. This is also because rooftop companies have taken the initiative of advertising and creating awareness about the benefits of rooftop plants to the consumers of this market. But overall consumers have low awareness of rooftop solar plants, their benefits, government schemes, net metering concept etc.
Most residential consumers are apprehensive about issues like upfront costs (in CAPEX model), discom issues, structural damages to their houses, system failures etc., all of which is primarily due to lack of knowledge and awareness about installation, operation and benefits of rooftop solar systems. Moreover, another reason for the rooftop market being concentrated on factories, warehouses, and educational institutions is also because of large rooftop areas that are available at such sites. Lack of space is also therefore a risk in setting up rooftop plants.
Issues like lack of standardised power purchase agreements, customers with unclear or limited credit histories, low income residential consumers and limited performance record of rooftop solar plants cast a huge burden on the banks and lenders. This is further aggravated by lack of or limited understanding of the rooftop solar system by the banks and lenders themselves.
Can you shed some lights on any new emerging legal issues, with change in recent power sector regulations?
Some of the recent legal issues in the industry are as follows:
- Imposition of Safeguard Duty on solar cells and panels
The Directorate General of Trade Remedies (DGTR), Govt. of India, recommended that a safeguard duty be imposed on solar cells and solar panels being imported from China and Malaysia for a period of 2 years. The imposition of safeguard duty was challenged, and the Orissa High Court stayed the imposition of safeguard duties. Subsequently, setting aside the order of the Orissa High Court, the Hon’ble Supreme Court of India allowed the Orissa High Court to continue to hear the petition filed against the safeguard duty but ordered that there will be no stay on imposing it. Though the matter is under litigation, the Government may allow these duties to pass through under change in law provisions of the PPAs.
More recently, Department of Revenue on recommendations from the DGTR has imposed anti-dumping duty in the range of USD 537 to USD 1,559 per tonne, on imports of “Ethylene Vinyl Acetate sheet for solar module” which is used in solar cell making, from China, Malaysia, Saudi Arabia and Thailand for five years to safeguard domestic players against cheap shipments.
Such developments create a lot of uncertainty among the stakeholders in the sector and affect investor sentiments at large. Developers must bear in mind that clauses relating to change in law/ change in tax law are clearly defined to avoid interpretative issues when instances such as this occur.
Since the introduction of Goods and Service Tax in India, the applicability of GST rates on solar power projects has been ambiguous. This is critical especially for solar power projects where the entire input GST becomes a cost burden for the developers.
A concessionary rate of 5% GST has been provided for solar power generating systems, solar PV modules and parts for manufacture of products under GST laws.
However, with lack of clarity on the definition of ‘solar power generating system’ and coupled with the fact that turnkey EPC contracts were being consistently held to be works contracts and thus liable to 18% GST, the stakeholders have resorted to different contracting structures and negotiations based on varying interpretations of the extant GST laws. Projects which did get the benefit of change in law under their respective PPAs due to the introduction of GST, faced a different set of troubles in ascertaining the exact post-GST cost for which they could claim benefit under the PPA.
A notification which came into effect from December 31, 2018 recommended that where a solar power generating system (under chapter 84, 85 or 94) attracting 5% GST is supplied with services of construction, then in all such cases 70% of the gross value will be deemed as the value of supply of said goods attracting 5% rate and the remaining 30%, of the gross value will be deemed as the value of supply of taxable service attracting standard GST rate of 18%.
This once again gives rise to innovative contracting structures since single EPC contracts have been repeatedly held by various advanced ruling authorities to be a composite supply of works contract liable to be taxed at 18% GST.
So apart from practical challenges at the time of invoicing and payment of taxes, this recent notification has created some new ambiguities for the industry to deal with.