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FACTS:

  • Solar Energy Corporation of India Limited (SECI) proposed a $220 million (Rs. 1,500 crore) Payment Security Fund for solar developers in August 2016 to instill faith in the Indian renewable energy investment landscape. SECI, a public company, is responsible for implementing the Indian Ministry of New and Renewable Energy’s renewable energy mandate.
  • The Payment Security Fund is meant to serve many purposes: ensure timely payments to solar developers, provide payment security through bank guarantees, compensate developers in the event of tariff changes by distribution companies, compensate for lack of access to the grid for evacuation of power, and cover other defaults or delays not foreseen at the time of signing power purchase agreements (PPAs) with solar project developers.
  • Solar projects approved by the ministry under the phased implementation of the Jawaharlal Nehru National Solar Mission (JNNSM)—a 2010 Indian government program to deploy 100,000 megawatts of grid-connected solar power by 2022— be eligible for support from the Payment Security Fund.
  • The new fund comes on top of several other measures SECI has put in place For the implementation of JNNSM, a viability gap funding mechanism was introduced. Under this, solar projects selected through a transparent process would receive government subsidies of up to 30 percent of the project cost to make up for project-related capital expenditures that could not be recovered from tariff-related revenue.
  • This is not the first payment security scheme introduced by SECI. In June 2011, it introduced a payment security mechanism to encourage distribution companies (DISCOMs) to make timely payments to grid-connected solar plants. The mechanism provided for a 2 percent rebate to DISCOMs when payments were made to developers the day after the bill is raised and an escrow account with six months’ worth of payments, which can be invoked in the event of nonpayment.
  • Despite these measures, between June and August 2016, as many as 16 solar and wind project developers claimed that their investments were in jeopardy, owing to delays in signing of PPAs, delays in payments on commissioned plants, and forced reduction/shutdown of their power plants. The list included Indian electricity sector majors like ReNew Power, Adani Power, ACME Solar, and Hero Futures Energy.

OPINION:
India has set a target of 175 gigawatts (GW) of power from renewable sources by 2022, of which 100 GW is set to come from solar energy. India’s renewable energy plans are predominantly financed by the central government or by debt financing through banks. The role of institutional investors in developing and financing renewable energy projects in India is crucial. Therefore, having a good investment environment is important to maintain investor involvement.

Solar project developers in India are faced with off-taker risks that stem from nonpayment for power purchased by distribution utilities or the refusal of utilities to off-take power. Poor financial health and credit worthiness of the DISCOMs exacerbates this off-taker risk. India is no newcomer to infrastructure project–related problems because of institutional and payment delays. This has earned it a low rank of 130 among 190 countries in the Ease of Doing Business rankings by the World Bank (India ranks a low 178 in Enforcing Contracts). In this environment, solar project developers require a safety net.

The Payment Security Fund envisaged by the Ministry of New and Renewable Energy essentially makes the Indian government a guarantor for the investment by solar project developers. By making SECI the implementation agency for the fund, the government know-how of the financial health of DISCOMs (which are public companies) can be leveraged to ensure that payments are made to project developers. Government underwriting of solar project investment and the built-in mechanism to ensure that the DISCOMs honor their contracts reduce investor risk. This could in turn create a lower-risk investment atmosphere for solar project development.