COVID-19: Impact on power generation companies!

Authored by Abhishek Tripathi & Anura Gupta

The impact of COVID-19 on the power sector is likely to manifest in many forms for the foreseeable future. Following up on our earlier articles, examining the legal impact of COVID-19, which may be found on our website, this piece assesses various legal issues that may arise for the power generators. COVID-19 has affected the power sector at multiple levels: (i) the construction schedule of under-construction power projects has been impacted for a variety of reasons, such as lockdown, shortage of manpower, material and equipment and supply chain disruptions, (ii) generation companies have already faced and are likely to face requests for curtailment of power due to fall in demand; (iii) distribution companies (DISCOMs) may witness steep fall in revenue realisation, fall in commercial and industrial consumption and increase in domestic consumption may also put pressure on DISCOMs’ finances; and (iv) transmission utilities too will face cash flow issues if demand falls, besides due to likelihood of payment delays from the DISCOMs.

Government’s Interventions

There have been some interventions by the Government to address some of the concerns, while many other concerns still remain. The measures include requesting state governments to enable movement of staff and equipment for inter-state power generating stations, and power transmission activities. On March 28, 2020, aiming to protect thermal power plants, MoP followed up with another request to the state governments asking them not to restrict production or movement of critical materials for power generation such as coal, chemicals, gases etc, and intermediate or finished products to or from such power plants. Upon extension of the lockdown, the request was reiterated again on April 15, 2020.

Apart from this, the Ministry of Power has also granted fiscal relaxations to Discoms in respect of their payment obligations, ordered a reduction in late payment surcharge and asked generating CPSEs to not take coercive steps to recover dues from Discoms.

For the renewable power developers, particularly the solar and wind developers, the lock down presented the real risk of curtailment due to fall in demand. While these developers have must-run status under law, except for grid security and safety concerns, in reality the developers have faced curtailment often without reason. Many attempts made in the past to restrain the practice of curtailment have not had the desired effect. The Ministry of New and Renewable Energy (“MNRE”) through an office memorandum, dated April 1, 2020, reiterated the position that renewable energy generating stations have must-run status, and they should not be curtailed. The office memorandum also asked DISCOMs to continue making payments to such generating stations. Despite such reiteration by the MNRE, reports suggest that several states (such as Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Punjab) sought curtailment of renewable power on the ground of force majeure. Reports also suggest that a view has been taken by Solar Energy Corporation of India (“SECI”) that due to the directions issued by Central Government granting the must- run status to renewable generators, it is not open to DISCOMs to take recourse to Clause 7 of the Power Sale Agreement (relating to the Force Majeure).

A separate article on the steps taken by the Indian Government has been contributed by Sarthak Advocates & Solicitors in the upcoming issue of India Business Law Journal.

Contractual Treatment of Force Majeure 

The fact that the relationship between the power generators and the Discoms is separately governed by a contract makes it difficult to take a definitive view on the rights and obligations of the contracting parties merely on the basis of the directions/ advisories of the Government. We take a look at the contractual obligations, based on the standard power purchase agreement that are available in the public domain. In doing so, we have examined the power purchase agreements (“PPAs”) for thermal power projects, solar power projects, and wind power projects separately, with each having distinct treatment of force majeure (“FM”) events.

Force Majeure in Thermal PPAs

While many forms of PPAs have been executed for thermal power projects over the years and it is difficult to examine each such PPAs, we have taken into account some of the widely prevalent model PPAs over the last one decade. We have reviewed the (i) model power purchase agreement for thermal power generation issued by the Ministry of Power, Government of India (“2019 Model”), (ii) Model Power Purchase Agreement, issued by the Planning Commission, Government of India (“PC PPA”), and (iii) standard power purchase agreement of the MOP for Case 1 Bidding Procedure through competitive bidding process (“Case 1 PPA”).

Has the force majeure occurred?

The definition of FM event is identical in the 2019 Model and the PC PPA, while it differs in the case of Case 1 PPA. Both 2019 Model and PC PPA categorize FM events into Non-Political Events, Indirect Political Events and Political Events, however, for an event to qualify as FM event,

1. the event should have occurred in India;
2. it should affect performance of the party claiming the benefit of FM;
3. should be beyond the reasonable control of the affected party;
4. the affected party could not have prevented or overcome the FM event by the exercise of due diligence and following Good Industry Practice; and
5. the event or act should have a material adverse effect (“MAE”) on the affected party.

For the effects of Covid 19 prior to its declaration as an epidemic in India, jury may be out on whether it will still be considered as FM under the PPA, considering that until then it was not an event that had occurred in India. Further, quite similar to the contracts in the road sector examined in our earlier post, the definition of FM requires that the event or act should have a MAE on the affected party. To establish MAE, the affected party would have to satisfy the twin standards, (i) the event must have materially affected its ability to perform the contract, and (ii) it must cause “material financial burden or loss” to it. The additional MAE standard may not make it easy for parties to agree on COVID-19 as a FM event merely on supposed declarations by the Government authorities, as each case will require a factual analysis. This may even open the balance sheets of the affected party to scrutiny by the counter-parties, as well as arbitrators and other dispute adjudicators, prolonging the process of determination of the FM event itself. Many factors may help establish financial burden or loss, such as increase in cost due to supply chain disruptions, and increased cost of construction, interest, or labour due to prolongation, especially for projects under construction.

Case 1 PPA does not specifically include epidemic or pandemic as a FM event, however the generic definition may include epidemic as well. For an event to be an FM event under Case 1 PPA, it must

1. wholly or partly prevent or unavoidably delay the party concerned in the performance of its obligations under this Agreement,
2. the event or circumstance is not within the reasonable control, directly or indirectly, of the affected party,
3. such events or circumstances could not have been avoided despite reasonable care and compliance with prudent utility practices.

Further, the developers can claim the benefit of FM events if their contractors are affected by the FM event leading to late deliveries of plant, machinery material, fuel etc., or delayed performance by such contractors. However, given the fact that power plants have been declared as essential services and are continuing their operations, it will be interesting to see if either of the parties are able to claim the epidemic as a FM event. However, under construction plants with Case 1 PPAs may be able to use disruptions to supply chain affecting their contractors as FM event.

Duty to Report 

Under all the standard thermal PPAs examined, there is a requirement to report the FM event if the affected party seeks to take any relief from the FM event, within 7 days from the date the affected party comes to know of it, or when it ought to have known it. The notice by the affected party needs to specify in detail the nature and extent of the FM event, the estimated duration and the probable effect, measures being taken to alleviate the effects of the FM event and any other information.  The PPAs also require the affected party to continue providing periodic reports of any update on the FM event from what has been reported in the notice. Case 1 PPA requires the update to be given on a monthly basis, while the other two PPAs require the updates to be given on a weekly basis. Developers need to take particular care in complying with this requirement, although it may increase compliance costs.

Consequences of Natural FM event 

All the PPAs examined entitle the affected party to be excused from performance of the contract during the period of a natural FM event, to the extent its performance was impacted by the FM event. Additionally, the developers are entitled to extension of time for scheduled commercial operation of the plant for the duration of the FM event, where the scheduled commercial operations have not been achieved. Where commercial operations have started before the FM event, the 2019 Model and the PC PPA provide for extension of the concession period to compensate for the loss,  however, Case 1 PPA does not expressly provide for the same, although it leaves the window open to parties to consider claiming other reliefs. As regards claiming other reliefs including payments, all the PPAs excuse the procurer/ purchaser of the power from payment obligations accruing during the period of the FM event, although payments accrued for any period prior to the FM event are not excused. Furthermore, the 2019 Model and the PC PPA clearly state that any FM costs due to natural FM event (which will include any FM due to Covid 19 pandemic) shall have to be borne by the respective parties. The developers in such situations may have to depend on insurance claims to tide over any losses that they may have suffered.

If a FM event is prolonged (i.e. subsisting for more than 180 days in 2019 Model and PC PPA, and 12 months or 02 months [1] in the Case 1 PPA), either party has the right to terminate the agreement. Upon such termination, under the 2019 PPA and PC PPA, the seller/ developer is entitled to termination payments equal to debt due less insurance cover.  Case 1 PPA only entitles the developer to return of the contract performance guarantee. Also, termination of the PPA at the instance of developers may require the consent of the project lenders which may not be easy to secure given the limited benefits that the termination may offer.

Recourse to “Unforeseen Events” Clause 

2019 Model and PC PPA also provide the mechanism to tackle unforeseen events not contemplated by the agreement. Depending on the effect that the Covid 19 pandemic has had on specific power projects, the affected parties may seek conciliation through a conciliation tribunal about determination of this event as an ‘unforeseen event’.  The conciliation tribunal will have the right not only to determine if an unforeseen event has occurred, but to also make recommendations for mitigating the effects of such unforeseen events. Such recommendations may be adopted by the parties to amend the PPA. This mechanism may be handy given the limited reliefs available under the FM mechanism for natural FM events.

Force Majeure in Renewable Power Projects 

In the renewable space, a large number of power purchase agreements have been executed at the state level, by individual state agencies. Many PPAs have been executed under Jawaharlal National Solar Mission (“JNNSM”) with solar power developers, by NTPC Vidyut Vitaran Nigam Limited, and SECI. PPAs have also been entered into with wind power developers by SECI and other agencies. The implementing agencies have also entered into back-to-back power sale agreements (“PSAs”) with DISCOMs.  For the purposes of our analysis in this piece, we have attempted to examine the following PPAs and PSAs:

1. The PPAs executed byNTPC Vidyut Vitaran Nigam Limited (“NVVN”) under Jawaharlal Nehru National Solar Mission- Phase I (“Phase I PPA”) and  the consequent Power Sale Agreements executed by NVVN (“Phase I PSA”).
2. The PPAs executed by SECIwith solar power developers (“SECI PPA”), and the Power Sale Agreement between SECI and DISCOMs (“SECI PSA”).
3. The PPAs executed by SECI with wind power developers and the PSAs between SECI and DISCOMs.

Has the force majeure occurred?

The PPAs and the PSAs examined define the term ‘FM event’ in substantially similar terms. The term ‘FM event’ in these contracts has been defined in an exhaustive, as opposed to inclusive manner. It is only the occurrence of the events listed or a combination of those events that entitle an affected to claim the benefit of FM.  For ease of reference, the definition may be viewed below:

“A ‘Force Majeure’ means any event or circumstance or combination of events those stated below that wholly or partly prevents or unavoidably delays an Affected Party in the performance of its obligations under this Agreement, but only if and to the extent that such events or circumstances are not within the reasonable control, directly or indirectly, of the Affected Party and could not have been avoided if the Affected Party had taken reasonable care …….:

1. Act of God, including, but not limited to lightning, drought, fire and explosion (to the extent originating from a source external to the site), earthquake, volcanic eruption, landslide, flood, cyclone, typhoon or tornado;
2. …..
3. …….
4. …….” (emphasis supplied)

The FM events in the PPA and the PSA are interconnected, in so far as the FM event in one is also an FM event for the other. In order to establish if an FM event has occurred due to Covid-19 pandemic, not only it must be established that it is an ‘Act of God’, but it must also:

1. wholly or partly prevent or unavoidably delay the party concerned in the performance of its obligations under this Agreement, and
2. the event or circumstance is not within the reasonable control, directly or indirectly, of the affected party
3. such event or circumstances could not have been avoided despite reasonable care and compliance with prudent utility practices.

In addition, ‘insufficiency of finances or funds or the agreement becoming onerous to perform’ or ‘unavailability, late delivery, or changes in cost of the plant, machinery, equipment, materials, spare parts or consumables for the power project’ are expressly excluded from the definition of FM event, unless it can be established that they are result of an FM event.

In so far as the projects under constructions are concerned, the MNRE has already determined and issued directions to various agencies such as SECI, NTPC and its other implementing agencies to grant extension of time in scheduled commissioning dates on account of FM, where supply chain disruptions have caused delays in commissioning of projects. For projects that have been commissioned, since power generation has been considered as an essential service, it has not affected the ability of the generators to generate, or DISCOMs to purchase. Moreover, MNRE has also clarified that renewable power projects have must-run status, which means that power production in such projects cannot be curtailed. Under the PSAs, the financial difficulties that the DISCOMs face to the extent that it predates the Covid-19 situation may in itself not help them claim FM.  However, if it can be established by DISCOMs that Covid-19 has directly resulted in their finances or funds becoming insufficient, or reduction in demand due to Covid-19 is making it more onerous for the DISCOMs to perform the contract, DISCOMs may still have a claim of FM on NVVN/ SECI. Since the FM event under PSAs is also a FM under the PPAs, it may eventually affect the developers if the claim of the DISCOM is upheld.

Duty to Report

The duty to report is similar to what is found in thermal PPAs. For brevity, these are not being reproduced.

Consequences of Natural FM event 

When an FM event occurs, the obligations of the parties for the period of the FM event are excused. Further for projects that are under construction, an extension of time may be sought in the scheduled commissioning dates. Such projects may be able to obtain the extension of time in their scheduled commercial operation date pursuant to the circular issued by MNRE. For projects that have been commissioned, the payment obligations in so far as they relate to amounts due prior to the FM event are not excused, however, for the period of the FM event, the payment obligations are suspended. Where the FM event extends beyond 12 months, either party under the PPA and the PSA has a right to terminate the agreement without any further consequence.

Conclusion

Force majeure is clearly the preferred option for many contracting parties to deal with consequences of Covid-19. For already commissioned power projects, this may not be an easy call given the fact that power generation has continued during this period. The DISCOMs, however, will be tempted to use FM provisions to curtail power offtake particularly due to their precarious financial position. Such temptations, even if contractually permissible, should be resisted given the cascading effects that it will have for the sector as a whole. The MoP will play a crucial role in bringing the state DISCOMs on board to prevent frivolous invocation of FM clause.

[1] 12 months for long term PPA, and 2 months for medium term PPA.