Credit worthiness of off taker- Solar PPAs

Published by firstgreen on 2023-04-19

India has emerged as one of the largest markets for renewable energy in the world, with solar power being a key contributor to this growth. The commercial and industrial (C&I) sector has been a significant driver of this growth, with many companies opting for solar power through power purchase agreements (PPAs) to meet their energy requirements. While solar PPAs have proven to be an effective way for companies to reduce their carbon footprint and energy costs, there have been instances of default on these agreements. In this article, we will discuss the reasons behind C&I solar PPA defaults in India and their impact on the renewable energy sector.

One of the primary reasons for C&I solar PPA defaults in India is the financial distress faced by companies. Many businesses in India operate on thin margins and face cash flow issues, which can make it challenging to honor long-term agreements such as solar PPAs. In some cases, companies may even go bankrupt, leading to default on the PPA. This can result in significant losses for the solar developer who may have invested a significant amount of money to set up the solar plant.

Another reason for C&I solar PPA defaults is the regulatory uncertainty faced by the renewable energy sector in India. The government of India has been introducing new policies and regulations that have had an impact on the renewable energy sector. For instance, in 2018, the government imposed a 25% safeguard duty on solar imports from China and Malaysia, which resulted in an increase in the cost of solar panels. This increase in cost had a direct impact on the viability of solar projects and led to defaults on solar PPAs.

The impact of C&I solar PPA defaults on the renewable energy sector in India is significant. For solar developers, defaults can result in losses and affect their ability to secure financing for future projects. It can also lead to delays in the completion of projects, which can result in cost overruns. For the renewable energy sector as a whole, defaults can dent investor confidence and lead to a slowdown in the growth of the sector.

To address the issue of C&I solar PPA defaults, the government of India has taken several steps. One of the measures introduced is the Solar Energy Corporation of India’s (SECI) payment security mechanism. Under this mechanism, SECI acts as an intermediary between the solar developer and the offtaker and ensures that payments are made on time. SECI also provides a letter of credit to the solar developer, which acts as a security against default by the offtaker.

Another measure taken by the government is the introduction of a partial risk guarantee fund for renewable energy projects, including C&I solar PPAs. The fund provides a guarantee to banks and lending institutions that they will be repaid in case of default by the offtaker. This guarantee makes the solar project less risky, which makes it easier for the developer to secure financing. This is especially important for small and medium-sized enterprises (SMEs) that may not have the creditworthiness to secure financing on their own.

C&I solar PPA defaults are a significant challenge for the renewable energy sector in India. While there are several reasons for defaults, the impact on the sector is significant. However, with measures such as the SECI payment security mechanism and the partial risk guarantee fund, the government of India is taking steps to address this issue. These measures can help ensure that the renewable energy sector in India continues to grow and contribute to the country’s sustainable development goals.

Examples of C&I Solar PPA disputes

In 2019, the Indian arm of French automobile manufacturer Renault defaulted on its solar PPA with SunEdison due to financial distress. This resulted in SunEdison cancelling the PPA and approaching the Maharashtra Electricity Regulatory Commission to intervene in the matter. (Source: Economic Times)
In 2018, several solar developers faced payment delays and defaults on their PPAs with Andhra Pradesh’s state distribution companies. This was due to a change in government and a shift in policies that impacted the viability of the solar projects. This resulted in several developers approaching the Andhra Pradesh High Court for relief. (Source: Livemint)
In 2017, solar developers faced delays and defaults on their PPAs with Tamil Nadu’s state distribution companies. This was due to the state’s financial crisis and the distribution companies struggling to make payments. The situation was eventually resolved after the state government intervened and provided a one-time settlement to the developers. (Source: The Hindu Business Line)
In 2016, Amplus Solar, a C&I solar developer, faced payment delays and defaults on its PPA with several offtakers due to their financial distress. To address this issue, Amplus Solar approached the Ministry of New and Renewable Energy and the World Bank for a partial risk guarantee fund. This helped the company secure financing and complete its solar projects. (Source: Livemint)
In 2015, a group of companies led by Indian Railways defaulted on their solar PPAs with SunEdison. This was due to a change in policies that impacted the viability of the solar projects. This resulted in SunEdison approaching the Madras High Court for relief. The court eventually ordered the companies to pay their outstanding dues to SunEdison. (Source: The Economic Times)

References:

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