Ratings agency ICRA today said that new bidding guidelines for solar power projects are positive for the sector and address key concerns such as grid curtailment and termination payments.
Ratings agency ICRA today said that new bidding guidelines for solar power projects are positive for the sector and address key concerns such as grid curtailment and termination payments. The recent notification of bidding guidelines by the government for the award of solar power projects is a positive development for the sector, ICRA said in a statement. The guidelines address some of the key concerns pertaining to off-taker credit profile, grid curtailment and termination payments, says an ICRA note. The guidelines require the procurers to provide a payment security through letter of credit equivalent to one-month average billing and a payment security fund to support payment for at least three months of receivables for the projects tied up. In addition, the procurer may also choose to provide state government guarantee in a legally enforceable form, both for payment of energy charges and termination compensation.
“Barring the Rewa Solar Park bid, where there is a guarantee by the Madhya Pradesh state government to cover for payment delays, the payment security approved in the bidding guidelines has not been seen in power purchase agreements (PPAs) signed directly by the state distribution utilities (discoms) under state policy framework. “This measure, if implemented in PPAs signed directly by state discoms, is favourable for the solar power developers and improves the bankability of the PPA document,” said Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings in the statement. The guidelines also provide for compensation to solar power generators in case of off-take constraints arising from the delay in commissioning of transmission infrastructure, grid unavailability and grid back-down, which is favourable for solar power generators.
While wind and solar power projects enjoy a “must run” status under the Indian Electricity Grid Code (IEGC) and have to be scheduled before any other source of power, there have been instances in a few states like Tamil Nadu and Rajasthan, where grid curtailment has been observed. Given the single-part tariff structure for these projects, the project cash flows and hence debt serviceability is directly linked to the actual generation and off-take by the procurers, it added. Further, it said that a weak termination clause without any mention of the termination liability in the solar PPAs does not provide any risk mitigation to the developers in case it decides to terminate the PPA over a procurer event of default.
In this context, the provisions for termination liability, which, along with substitution rights as approved in bidding guidelines, are expected to provide greater protection to the developers and the lenders. “It is noteworthy that these regulations shall be applicable only for new projects. The aforementioned concerns would continue to prevail for existing projects”, added Majumdar.