Safeguard Duty Knots. Azure Power Wins Reprieve from CERC

Azure Power, which had gone to the central Electricity Regulatory Commission (CERC) to get compensation from SECI for two of its bids, due to the imposition of Safeguard Duty (SGD) on 30.07.2018, has found a willing ear at CERC. The two cases here were petition numbers 356/MP/20198, and 51/MP/2019.

In an order that mirrors the now multiple orders across APTEL and other state commissions regarding the  legality of claiming compensation after SGD, the CERC, in an order dated February 3rd or this Monday, has directed SECI to consider the details submitted by Azure Power for its two projects affected, and arrive at a suitable compensation figure. Th order also follows the trend of cases where the GST has been treated as a change in law too. However, in keeping with the terms of the PPA, where there is no mention of payment of costs for delays caused by the nodal agency, the order ignores the demand for carrying costs/interest on working capital.

What is important is that the order also makes it clear that SECI, despite having back to back arrangements or PSA (Power Sales Agreement) with discoms in these cases, would still be liable, for the PPA (Power Purchase Agreement) it has signed with the developer. In other words, SECI cannot hold back payments at the enhanced rate if for any reason, if a discom were to delay the same, or even dispute the same.

The matter came up in respect of projects that were celebrated for their low winning prices, or bids of Rs 2.48 and Rs 2.53 respectively. In fact, the subsequent issue of safeguard duties, and the mess it has created in terms of legal tangles, delays in projects awarded just before and even after the duty was imposed, just goes to explain why it has been deemed a failure by most people in the industry. Developers being at the forefront of course.

The projects in question here, were clubbed together by the CERC as they had similar complaints. One was the the 5000 MW Grid Connected Solar PV Power Projects under Phase II Batch IV at Bhadla, Rajasthan where azure had won 200 MW with its Rs 2.48 per unit bid. In this one, the Rfs by SECI was released on 21.06.2017, and final PPA signed on 27.04.2019, just 3 days before the SGD notification was released, with prospective effect.

The second project, where Azure bid for, and won 600MW at Rs 2.53 per unit, again for grid connected projects from solar developers was even more interesting, as the RFS was issued only on January 2018, and the effective date of PPA was taken to be 25.10.2018. Here, despite the effective date being well past the SGD notification date, Azure Power found favour for its plea to consider its letter of allotment issued to Rizen Power, a leading China based module supplier, as a binding contract. this had been issued by it much earlier, even though it signed the formal sales agreement with Risen later on. Its contention was that the LOA constituted a binding commitment, which can be treated as effectively, a sales agreement. The other China based suppliers involved here were GCL and Zhongli New Energy (Hong Kong).

So now, even as Azure Power gets down to the finer points of appropriate compensation for the extra costs it incurred due to SGD, one has to wonder just how poorly planned policy keeps tripping  up renewable projects, rather than supporting their spread. The SGD for instance, has not only failed to achieve its objective, but caused serious delays, a jump in effective energy costs, and for many firms still going through the motions of the legal system to get their dues,  increased legals costs significantly.

It’s a phenomenon we are seeing playing out all over again, with the most recent budget 2020  announcements. True to form, the wording has been very confusing, on life after SGD ends in July 2020. Will it take the sector back to zero import duties? Or will the basic customs duty make a return at 12.5 percent or 20 percent? Experts opine the latter, considering how the government has pushed tariff rates up to 20 percent, which have to pass through parliament. Thus, it seems to have armed itself with the power to effect a duty hike as soon as SGD is over. But, that’s what the experts reckon. Complete clarity from the government, MNRE or anyone else is still awaited.