Change-in-Law Payments a Rs 4k Cr Booster for Solar: CRISIL

Recent commencement of Change-in-Law payments by state power distribution companies (Discoms) and Solar Energy Corporation of India (SECI) for Goods and Services Tax (GST) to solar power projects, comes as a shot in the arm for the sector, said CRISIL, a leading ratings and research company in its report.

It further added that, together with safeguard duty (SFD) reimbursements, which also qualify under ‘Change in Law’, the payments will lead to Rs 4,000 crore cash inflow for the sector. This can restore project returns by as much as 220 basis points (bps) and is positive for credit quality.

Last year the rating agency said that, the imposition of safeguard duty on import of solar cells and modules had increased the implementation cost of ~5.4 GW projects by as much as 15 per cent and compressed the returns of developers by 160 bps. Adding to this the hike in GST levy on modules and balance of the plant, and returns reduced by a further 60 bps, it added.

While Central Electricity Regulatory Commission (CERC) was quick to recognise the safeguard duty imposition as a Change in Law event, uncertainty prevailed over the timeliness and mechanism of its reimbursements, CRISIL commented.

Now, counterparties including SECI and Discoms such as Maharashtra State Electricity Distribution Company Ltd (MSEDCL) have started making payments towards GST reimbursements for their respective projects.

The report further said that, to ensure returns don’t diminish because of delays in payment, the reimbursement is in the form of 13-year annuity and also factors in a carrying cost of 10.4 per cent on a retrospective basis, in line with the CERC’s latest tariff orders.

Speaking on the development, Manish Gupta, Senior Director, CRISIL Ratings, explained that “these annuity flows are not conditional upon project performance and receipt of payments by central counterparties from the underlying Discoms. This lends more stability to these cash flows and supports the credit quality of these projects.”

Commencement of GST reimbursement paves the way for similar disbursements towards safeguard duty (75 per cent of overall Change in Law payouts) where the payment mechanism is also established on similar lines and is awaiting submission and verification of cost documents by developers. This strengthens the sectors’ outlook as, apart from claw-back of returns, it yet again demonstrates upholding of contractual terms in line with power purchase agreement, according to the CRISIL analysis.

As per the rating and research agency, these developments come on the back of continued regulatory support such as the Ministry of New and Renewable Energy’s (MNRE) memorandum upholding the ‘Must-Run’ status of renewable energy amid the Covid-19 pandemic, and extension of completion timelines for under-construction projects by the authorities in view of the lockdown.

“Demonstration of such regulatory support has helped lower the two critical risks the renewables sector faces – weak state counterparties and contractual uncertainties -- and has been pivotal in upholding the sector’s resilience during the pandemic. This will need to continue for a stable credit outlook for renewables sector to be maintained,” said Ankit Hakhu, Director, CRISIL Ratings.

Earlier SECI also abolished the tariff caps and continued to expand its presence as aggregator, protecting developers from being directly exposed to weak state Discoms.

Power R&D | News published on 05/08/2020 by Manu Tayal

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