Payment security mechanism in Indian solar PPAs.

Most solar power procurement in Indian solar projects is done by SECI, a central government agency, while the power purchases are also done by state Discoms to meet their RPO targets and the rising power demand. As observed in most of the solar PPAs, the solar tariff discovered in State level solar PPAs, is typically about 15-20% higher as compared to the central government-organized (SECI) solar bids. one of the major factors of the limited success of state solar bids is the lack of assured payments, and addressing the payment security in the PPAs.

As part of payment security in SECI  solar bids, a monthly unconditional revolving and irrevocable letter of credit (LC) is issued by SECI to the solar developer. SECI has an INR 500 Crore payment security fund to protect its bidders. While the payment security in the state-level procurements is done by revolving LC backed with the Discom/State government assurances which do not suffice to meet the financial closure in the event of payment default by the off-taker. The one-month revolving LC is a very short period back up as [art of payment security, and developers generally demand for a 12-month revolving LC to be renewed thereafter. In the case of the Rewa ultra mega solar power project, this method was adopted by the procurer. While the ultimate offtake from SECI is the state Discoms, hence there is a need to back up the payment security through a tri-party arrangement. For example, in the case of the Rewa ultra solar project, the MP government has extended a counter-guarantee for payment security through LC as well as the creation of a payment security fund, backed by the assurance of the state government. In the case of the SECI procurement, there is an LC, payment security fund, and a triparty agreement with GOI, RBI, and stage governments as ultimate offtake of power.

While the SECI has an AAA-rated credit rating, most of the Discoms are not having the BB+ rating, except a few Discoms, this leads to a level that the offtaker poor credit rating makes the solar financing exposed to credit risk. While SECI suffices this requirement of offtaker credit risk, the added capacities of solar PPAs make the requirement of the payment security fund to be an increased capital infusion. Over 80% of the solar power generated in the country, the final offtaker of the power is the Discoms, which are nonbankable due to poor financial health. The accumulated losses and outstanding payments of generators make the way forward for solar projects highly challenging. SECI is not able to take up new solar bids, as much of the contracted solar capacity remains unassigned to Discoms due to the non-signing of the PSA between the SECI and the Discoms.

Though the one-month LC for solar is not enough as part of payment security, the Discoms are not able to maintain the reserves to meet the payments to the solar developers. As per ICRA monthly payments of solar developers requires at least INR 386 Cr. to keep the LCs against the solar PPAs. Again the financial health of Discoms becomes critical in achieving the solar capacity targets of GOI.