India Announces Payment Mechanism To Help Renewable Energy Generators

As uncertainty over the future of power purchase agreements, as well as a liquidity crunch, plagues the country, the Indian government has taken measures to address some of these issues.

The Ministry of Power of India recently issued guidelines to ensure that ample liquidity is maintained by power distribution utilities to honor the power purchase agreements with power generation companies. As per the orders of the Ministry of Power, power distribution utilities are required to maintainan adequate letter of credit to ensure payment security to generation companies.

Further, to address the issue of late or non-payment of dues to the generators, the Ministry has directed the power distribution utilities to pay the generators as per the fixed tariff in case power is not procured from the generators under certain cases.

Here, it is important to understand the tariff structure followed in India. India generally follows a two-part tariff system which is comprised of a fixed tariff and a variable tariff.

The fixed portion of the two-part tariff is calculated on the basis of the capital investment made for the installation of the power plant and its equipment. This rate is fixed for the duration of the power purchase agreement as it is based upon the one-time investment made to set up the power plant.

The variable portion of the two-part tariff is calculated and revised at regular intervals and is determined on the basis of several recurring costs including those of the fuel used, taxes, etc.. Whenever the distribution utilities procure power from the generators, payment is made as per the variable portion. However, the distribution utility must make fixed tariff payments to the generators regularly even if the former does not procure any power.

However, solar and wind energy projects have a single-part tariff as there is no fuel expense during the lifecycle of the projects.

Now, the Ministry has clarified that buyers (distribution utilities, in this case) will be required to make payment to wind and solar power project developers at the full PPA tariff rate if the former refuse to procure power or curtail generation from the power plants.

The clarification comes at a time when the government of the state of Andhra Pradesh is reportedly forcing some solar and wind energy generators to curtail their generation as fallout over the sanctity of existing power purchase agreements. Similar attempts to curtail the generation of solar and wind energy projects have been prevalent in the states of Tamil Nadu and Rajasthan as well. This results in projects being idle with no revenue being earned by the generators who had to service their debt in any case.


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