COVID-19: Impact on and Response of the Indian Renewable Energy Sector

The ongoing COVID-19 crisis has had an unprecedented impact on all sectors in India, including the growing renewable energy (“RE”) sector. The crisis has seen plummeting of power demand by reportedly 25-30%[1] on account of a halt in economic activity and has led to liquidity concerns for the already cash-starved distribution companies (“DISCOMS”) struggling to fulfill their mandatory clean energy sourcing obligations. In this piece, we have attempted to outline and analyze the measures taken by the Ministry of New and Renewable Energy (“MNRE”) and the relevant regulatory authorities in the renewable sector to arrest the effects of the crisis on RE producers.

MNRE Clarifications and Measures

The MNRE has adopted a pro-active and pragmatic approach to the COVID-19 crisis and introduced a host of measures intended at alleviating the adverse impact on RE producers:

(a) Force majeure classification and consequent extension to RE projects: Pursuant to the directive by the Ministry of Finance that disruption of supply chains due to the spread of COVID-19 in China or any other impacted country be considered a case of ‘natural calamity’, the MNRE acted swiftly at the onset of the crisis in India by clarifying that delay in projects on account of disruption of supply from countries affected by the pandemic would be treated as force majeure and RE producers would be entitled to claim consequent extension of time. This was an essential move considering the heavy reliance of RE producers on imports from countries like China.

As a further relaxation, the MNRE on April 17, 2020 issued a notification directing that COVID-19 must be treated as an event of force majeure and accordingly, all RE projects shall stand automatically extended for the period of the lockdown (as finally determined by the Indian government) plus an additional thirty days after the expiry of the lockdown, without having to submit any evidence or information to demonstrate impact.

(b) Must-run status and continued payment cycles: In order to ease the liquidity-crunch faced by the DISCOMS, the Ministry of Power allowed a temporary moratorium on payments and eased payment security mechanisms required to be maintained by DISCOMS under contracts for purchase of conventional power. As an unintended consequence, certain state DISCOMS started curtailing off-take of power from RE producers by invoking the force majeure provision under their contracts. MNRE came down strongly on this move and reiterated that the ‘liquidity crunch’ faced by DISCOMS cannot impact RE projects in any manner since they have been accorded a “must-run” status, which was to be preserved even during the lockdown. Moreover, as RE comprises only a minor portion of the total electricity generation in India, the MNRE directed that “the payments to renewable energy generators be done on a regular basis as was being done prior to the lockdown” [2]. MNRE issued a further clarification on April 04, 2020 stating that DISCOMS must not curtail power for any reason (other than grid security) and any curtailment would amount to ‘deemed generation’ for the RE project.

Thus, on the ‘supply side’, the MNRE has recognized the difficulties being faced by the developers/ power producers on account of the COVID-19 crisis and introduced necessary relaxations in timelines for completion of projects (and meeting various milestones thereunder). In parallel, the MNRE (honoring the ‘must run’ status accorded to RE projects) has sought to curb any attempts of curtailment of RE power by DISCOMS on the ‘demand side’.

Taking a step further, the Solar Energy Corporation of India (“SECI”) – the nodal intermediary responsible for tying up sale and purchase of solar power in India – has disallowed the plea of an Uttar Pradesh DISCOM regarding occurrence of a force majeure event on account of not having adequate funds to discharge payments of RE producers. Reports indicate that SECI relied on the force majeure exclusion for insufficiency of funds under the power purchase/ power sale agreements and clarified that a claim for force majeure has to demonstrate impact on the ability of the DISCOM to offtake power (and does not envisage inability to service dues). To clarify, this position is consistent with the power purchase agreements executed in relation to RE projects, which usually exclude insufficiency of funds or the agreement becoming onerous to perform from the list of force majeure events.

Further, relief measures ordered by relevant adjudication authorities (i.e. the Central Electricity Regulatory Commission and State Electricity Regulatory Commissions) have been limited to the extent of relaxing rates of late payment surcharge and payment security mechanisms to ease the burden on DISCOMS, but have not allowed any relaxation with regard to offtake of power or payment moratoriums.

The approach of the adjudicatory bodies in disallowing DISCOMS from claiming force majeure on account of a ‘liquidity crunch’ reflects the position adopted by the apex court as well,[3] which has accepted that a force majeure defense under a contract is not available solely on account of the contract becoming commercially onerous or impractical.

Takeaway

The global pandemic has had a detrimental effect on RE developers due to a number of factors linked to the nature of RE projects, such as dependency on pandemic epicenters such as China for imports, reliance on statutory approvals amidst sub-optimal functioning of government departments and requirement of migrant workforce. In such a situation, the MNRE’s proactive response in issuing timely notifications in response to the COVID-19 crisis is a welcome development to balance the supply-side constraints.

On the other hand, the ‘must-run status’ of RE projects being reinforced by the MNRE in recent times, has been ingrained as a sacrosanct feature of the energy policy framework of the country, and is also incorporated in the bidding documentation/ power purchase agreements for RE projects. A similar, essential provision on which power purchase agreements have been premised is the provision of a ‘firm’ tariff (arrived as a result of a regulatory mandated competitive bidding process) for the duration of the project. However, in the past, despite MNRE airing its apprehension regarding re-opening of concluded contracts, some states such as Andhra Pradesh have gone against the grain by attempting to re-negotiate power purchase agreements (and the ‘firm’ tariffs thereunder) on technical and frivolous grounds, which caused a lot of uncertainty and resulted in loss of investor confidence.

To sum up, it would be safe to conclude for now that the timely notifications and measures by MNRE coupled with the decisions/ directions of the regulatory bodies to errant DISCOMS have inspired confidence of RE developers, even in the face of a crisis such as the COVID-19. Considering the reliance of the RE sector on foreign investment and offshore financing, these steps have contributed to overall stakeholder confidence and should go a long away in enabling the sector to tide through this unprecedented phase.

Authors:

Pallavi Meena, Partner
Pragya Sood, Senior Associate
Pooja Menon, Associate

Footnotes:

[1] India’s power demand falls over 25 pc to 125.81 GW on April 2, The Economic Times (April 03, 2020) available at https://economictimes.indiatimes.com/industry/energy/power/indias-power-demand-falls-over-25-pc-to-125-81-gw-on-april-2/articleshow/74965504.cms?from=mdr
[2] Office Memorandum, F. No. 283/20/2020-GRID SOLAR (ii), Ministry of New and Renewable Energy (April 01, 2020) available at https://mnre.gov.in/img/documents/uploads/file_f-1585801699131.pdf
[3] Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others 2017 (4) SCALE 580 (Supreme Court of India)