Solar is a buzz in the market right from beginning. Earlier it was considered as a costly affair. With time, we all witnessed steep decline in the solar prices. From the last one year rooftop segment of the solar market is hot selling cake. The one might wonder that to use clean solar power, one does not need to make investment. Various investing companies are coming forward and take responsibility to manage the funds as well as installation & operation of solar power plant. Roof owner will indulge into a power purchase agreement with the investing company and enjoy cheap and clean electricity.
Whenever, two parties want to indulge into a contract where money is concerned, there are some obvious doubts or in other words we can say there is a lack of trust on each other. To cover this risk, some security mechanisms are commenced by the market. In this article, we will understand and discuss various Payment Security Mechanisms, which are generally adopted by the market. Now let start it.
For a solar PPA investing company ask for either letter of credit (LC) or a bank guarantee. A bank guarantee and a letter of credit are similar in many ways but they’re two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned.
A letter of credit is a responsibility taken on by a bank to make a payment once certain conditions are met. Once these conditions are fulfilled and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed. Further, for solar power revolving LC is created. Instead of arranging a new LC for each separate delivery, the buyer establishes a LC that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period).
In case of a Bank Guarantee (BG), the sum is only paid if the opposing party does not fulfill the predetermined commitment under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract. For example: if solar power purchaser (rooftop owner) defaults the payment the investing company can encash the BG. For further perusal, there shall be competent clauses in the contract that will become active. The validity of a bank guarantee (1 year) is more than a letter of credit (6 months).
On this note we would like to close this article. We shall share the more information about related aspects in our upcoming articles. We would be happy to receive comments on this topic.
Written by: Gaurav K. Sharma| email@example.com