Change in Law: Do solar developers really consider this risk in their long term PPAs?
The power purchase agreement (PPA) is a long-term contract which is susceptible to many risks and one of the many risks is the change in law. The PPA are susceptible to the risk of change in law when there are unexpected changes made to the laws applicable after the bidding for the tariff has been made. The change in law may affect the increase or decrease in the expenses. However, this risk is not taken into account while factoring the tariff during the bidding process and thus in some cases the risk of change in law makes the project commercially unviable. To give a better insight, this article shall discuss judgments corresponding to the risk of change in law and the problems related to it.
The risk of Change in law can be inferred better through the judgments decided in the case of Clean Solar Power Pvt. Ltd. V SECI where Clean solar (petitioner) won the bid to set up a solar plant at a fixed tariff and signed the PPA with the SECI (respondent) which also included the risk of change in law. After the signing of the PPA, the centre brought in the Goods and service tax (GST) replacing the multiple centre and state taxes. This new law led to the petitioner incurring increased costs of expenditure as GST was also levied on parts that were being used to set up the solar plant which led to the increase in the budgeted amount, with the situation being beyond their control. This led to the petitioner demanding reimbursement for the additional expenses. The CERC in this case decided that the petitioner had incurred costs of expenditure on account of the clause of change in laws in PPA and were entitled relief under the clause. Another case example for Change in law is the case of ACME Chittorgarh Solar Energy Private Limited (ACSEPL) V MSEDCL, ACSEPL (petitioner) faced increased costs of developing the solar power plant due to the centre-imposed safeguard duty of 25% which was levied from the import of solar cells to India. This led to increased additional costs incurred by the petitioner which further led to the petitioner demanding the reimbursement for the loss on account change in law. The MERC decided that the ACSEPL shall receive the costs for the reimbursement.
The risk of change in law is very evident and ever-changing and thus it becomes important for the risk to be mitigate and enhance the robust nature of the clause. One of the major problems needed to address for the compensation provided is to have a clear and swift system in place for claiming the compensation. The inordinate delay in the adjudication of the change in law petitions is hurdle in the smooth process of compensation. The second problem is not having precise and clear definition of applicable laws and the date from which the clause of change in law shall apply.
The PPA are long term contracts generally having a term of 20-25 years which makes them susceptible to various uncertainties including those in the field of law. And even though it is difficult to predict these unexpected changes, the risk arising from these can be mitigated if proper the clause of change in law is included in the PPA with clear and comprehensive definitions and specified dates.