The policy framework in India brought private sector interest in the electricity generation after enactment of the Electricity Act, 2003. Fuel - coal being the critical component of generation segment, was 100% guaranteed by the Coal India Limited through its subsidiaries. Over the period, private generators faced the challenges in terms of securing fuel supplies although, the long term PPAs were in place and operation. The Government of India as per the Presidential directive, changed the fuel policy by bringing New Coal Distribution Policy in 2013. The NCDP reduced the assurance of coal quantity from 85% to 65%-65%-67%-75% during the remaining four years of 12th five-year plan, and directed regulatory commissions to allow pass through of balance coal cost through alternate/ imported mode on case to case basis.
The issues of increase in costs due to shortfall in linkage coal remained in news for quite some time; first as the state and central commissions allowed it under PPA as Change in Law, secondly refusal by APTEL to treat Change in Policy as Change in Law and finally by Supreme Court allowing every Change in Policy as Change in Law.
With the mandate of compulsory procurement of power by distribution companies through competitive bidding, many discoms entered into PPAs prepared based on the Standard Bidding Documents issued by Government of India. One of the important article under this case-1 bid PPA is “Change in Law”, wherein the party affected due to any Change in Law event during operation period after the specified cut-off date, may approach the regulatory commission for allowing incremental costs due to such Change in Law event and put it to the same economic position as on the cut-off date as if, Change in Law has not occurred.
Some of the major Change in Law events which had happened during last few years were: Royalty, Excise Duty, Clean Energy Cess, Busy Season Surcharge, Development Surcharge, Swachh Bharat Cess, Krishi Kalyan Cess, Goods and Services Tax, GST compensation Cess, coal terminal surcharge. Some of the states have increased Electricity Duty on Auxiliary Power consumption and Water Charges leading to increase in overall cost of generation.
Infrastructure projects are capital intensive and inherently have long gestation period. The major issues which cause the project delays are land acquisition and procedural delays, environment/ forest clearances etc. which are generally beyond the control of the project developer. Associated with this time overrun is the cost overrun, primarily due to finance costs or interest during construction, incremental pre-operating costs viz. consultancy charges, startup costs etc. The well designed contracts do provide for appropriate compensation for such delays and costs due to reasons beyond the control of the developer in the form of liquidated damages. On the other hand, the tariff regulations for cost-plus PPAs provide for allowing time overrun and corresponding cost overrun after prudence check by the regulatory commission, which in turn would result in compensation by way of increase in tariff. The issue and whether reasons are beyond the control are of the nature of dispute, generally it faces long regulatory and legal proceedings. In case of competitively bid PPAs, the developer need to approach regulatory to claim compensation during construction period and only realize the payment after the issue is finally settled by Supreme Court. Such uncertainties have direct bearing on the serviceability of the loans and stress in asset positions of the lender banks; this has led to debt funding by lenders only for 10-15 years as against the concession period of 20-30 years.
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