Change-in-law Payments Worth an Additional Rs 4000 Cr for Solar Sector: CRISIL

Change in Law payments by Discoms and SECI for GST to SPDs, together with SGD reimbursements will lead to Rs 4,000 crore cash inflow for the solar sector, as per CRISIL.

Recent commencement of Change in Law payments by state power distribution companies (Discoms) and the 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. Together with safeguard duty (SGD) 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, according to CRISIL.

Earlier, the research and ratings agency had said that the imposition of SGD on import of solar cells and modules had increased the implementation cost of ~5.4 gigawatts (GW) projects by as much as 15 percent and compressed the returns of developers by 160 bps. Add to this the hike in GST levy on modules and balance of the plant, and returns reduced by a further 60 bps.

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

Now, counter-parties including SECI and Discoms such as Maharashtra State Electricity Distribution Company Ltd (MSEDCL) have started making payments towards GST reimbursements for their respective projects. To ensure returns don’t diminish because of delays in payment, the reimbursement is in the form of a 13-year annuity and also factors in a carrying cost of 10.4 percent on a retrospective basis, in line with the CERC’s latest tariff orders.

Manish Gupta, Senior Director, CRISIL Ratings said “these annuity flows are not conditional upon project performance and receipt of payments by central counter-parties from the underlying Discoms. This lends more stability to these cash flows and supports the credit quality of these projects.”

As per the CRISIL note, the commencement of GST reimbursement paves the way for similar disbursements towards SGD (75 percent 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 contractual terms in line with the power purchase agreement (PPA).

These developments come on the back of continued regulatory support such as the Ministry of New and Renewable Energy’s 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. Earlier SECI had also abolished the tariff caps and continued to expand its presence as an aggregator, protecting developers from being directly exposed to weak state Discoms.

Ankit Hakhu, Director, CRISIL Ratings said “demonstration of such regulatory support has helped lower the two critical risks the renewables sector faces – weak state counter-parties 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 the renewables sector to be maintained.”