News and developments
COVID-19: Impact on power generation companies!
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,
- the event should have occurred in India;
- it should affect performance of the party claiming the benefit of FM;
- should be beyond the reasonable control of the affected party;
- the affected party could not have prevented or overcome the FM event by the exercise of due diligence and following Good Industry Practice; and
- the event or act should have a material adverse effect (“MAE”) on the affected party.
- wholly or partly prevent or unavoidably delay the party concerned in the performance of its obligations under this Agreement,
- the event or circumstance is not within the reasonable control, directly or indirectly, of the affected party,
- such events or circumstances could not have been avoided despite reasonable care and compliance with prudent utility practices.
- 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”).
- The PPAs executed by SECIwith solar power developers (“SECI PPA”), and the Power Sale Agreement between SECI and DISCOMs (“SECI PSA”).
- The PPAs executed by SECI with wind power developers and the PSAs between SECI and DISCOMs.
- 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;
- …..
- …….
- …….” (emphasis supplied)
- wholly or partly prevent or unavoidably delay the party concerned in the performance of its obligations under this Agreement, and
- the event or circumstance is not within the reasonable control, directly or indirectly, of the affected party
- such event or circumstances could not have been avoided despite reasonable care and compliance with prudent utility practices.