The Central Electricity Regulatory Commission’s (CERC) recent order entitling the developer of Bhadla solar park projectⁱ to reimbursement of safeguard duty would set a beneficial precedent for as much as ~5.4 GW of solar projects.

Potentially, this can add back 190-220 basis points (bps) to project equity returns.

After the safeguard duty was imposed on the import of solar cells and modules on July 30, 2018, equity returns had fallen from the typical 12-15%, affecting investor confidence in the sector.

The duty cranked up the cost of solar projects by ~15% because the modules, which were largely imported from China, accounted for ~60% of the project cost.

Because it was levied after ~5.4 GW projects were auctioned in 2017 and early 2018, it was not factored in by developers, which lowered their returns.

While classifying the reimbursement of safeguard duty under ‘Change in Law’ provision, the CERC allowed the developer of the Bhadla solar park project to be compensated by counterparties (including the Solar Energy Corporation of India Ltd and electricity distribution companies of Rajasthan).

If the CERC order becomes a precedent – similar to the sequence of events allowing Goods and Services Tax reimbursements for solar projects – it would come as a shot in the arm for the sector.

Says Manish Gupta, Senior Director, CRISIL Ratings, “To be sure, the incremental returns of 190-220 bps won’t be enough to fully recover what was lost because of more than a year’s delay in the reimbursement order, but it will still be substantial. Continuing interest of solar project developers is a function of how much gets left on the table.”

As per the order, compensation will be in the form of one-time payment. Alternatively, if both the developer and counterparty agree, then compensation could be on an annuity basis as a percentage of tariff.

The payments have to be made within 60 days of the CERC order or submission of claims, whichever is later. Any delay will invoke a penalty as per the terms of the power purchase agreement.

Says Ankit Hakhu, Associate Director, CRISIL Ratings, “Apart from benefiting affected projects, the reimbursement order provides much-needed clarity by emphasising a definite timeline for payments, and gives preference to the one-time payment mechanism. Such steps will build investor confidence in both the authorities and the regulators, and are essential to the sector’s growth.”

Timely compensatory payments from counterparties are essential to ensure developers do not lose time value of their investments.

ⁱ ACME Rewa Solar Energy Pvt Ltd was one of the developer in the solar park who petitioned for declaring the imposition of safeguard duty on the import of solar modules as Change in Law in terms of the PPA, among other requests