Developers can invoke ‘force majeure’ clause in power purchase aggreement
They may choose to implement projects with more expensive modules
New Delhi: In what may impact India’ green energy trajectory, around 3 giga watt (GW) of solar projects, worth ₹16,000 crore, could be at risk of penalties for missing their project completion deadline if the coronavirus impact prolongs, according to CRISIL.
“As per the standard terms of power purchase agreements, non-adherence to completion timelines attracts penalties, including downward renegotiation of tariffs," CRISIL said in a report on Monday.
Power purchase agreements signed by developers have strict commissioning deadlines and a failure to meet them can result in fines and encashment of bank guarantees.
Mint reported on 6 February that power project developers in India, who source solar modules from China, plan to declare force majeure on meeting project completion deadlines because of supply disruptions caused by the coronavirus outbreak.
“Also, developers can invoke the ‘Force Majeure’ clause in the PPA under which they can seek relief under unforeseen and uncontrollable events. However, this is yet to be tested and may face legal and regulatory hurdles," the statement said.
Chinese vendors have alerted Indian developers about delays in production, quality checks and transport of components due to the outbreak. Modules account for nearly 60% of a solar project’s total cost. Invoking the force majeure clause enables a developer to cite disruption from an unforeseen event—in this case the flu epidemic—to justify the delay.
Anand Kumar, secretary in the new and renewable energy ministry told Mint no such cases of force majeure have yet been declared.
“CRISIL understands that measures such as restricted movement of people and/ or shut down of factories have disrupted module manufacturing in China and its feeder industries. The clampdown has forced several manufacturers to run their plants at low utilisation, or to stall operations altogether. Indeed, even the modules already manufactured are facing delays in transit to project sites on account of precautionary restrictions on transit at ports," the statement said.
Chinese companies dominate the Indian solar components market, supplying about 80% of solar cells and modules used here, given their competitive pricing. The virus scare and the proposed customs duty on solar module imports threaten to raise costs for developers and potentially impact India’s solar trajectory.
“This puts at risk around 3 GW of solar projects auctioned between July and August, 2018, which need to meet their SCODs (scheduled commercial operation date) by July 2020. Given that orders for modules are typically placed with a lead time of six months from SCOD, these projects are now in the process of either placing orders or receiving delivery of modules. Hence, any delay at this stage can prove costly," said Manish Gupta, senior director, CRISIL Ratings in the statement.
Chinese solar module manufacturers supplying to India include Trina Solar Ltd, Jinko Solar Co. Ltd, JA Solar Holdings, ET Solar, Chint Solar Co. Ltd and GCL-Poly Energy Holdings Ltd. With China clamping down on travel to contain the outbreak, Indian solar power developers are concerned about the timely delivery of components to commission their solar parks and rooftop projects.
“In a bid to meet the commissioning timelines, the developers may choose to implement projects with more expensive modules sourced from locations other than China. But this could erode returns as the modules may be 15-20% costlier, shaving as much as three percentage points off their returns," the statement said.
The latest developments come at a time when India’s solar space is struggling due to mounting payments to generators and banks wary of lending to renewable energy developers. There has also been a backlash from global investors over the Andhra Pradesh government’s decision to have a relook at renewable energy contracts and the Union budget approving an enabling mechanism to raise tariffs on imports of green energy equipment such as solar cells and modules.
However, there are good tidings as well. Global crude oil price volatility has brought the much-awaited good news for Indian economy and major user industries such as aviation, shipping, road and rail transportation, and petrochemicals among others in the backdrop of oil demand forecasts being slashed due to coronavirus outbreak, Mint reported on Monday.