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Safeguard duty reimbursement may restore returns for 5.4 GW solar projects

Safeguard duty reimbursement may restore returns for 5.4 GW solar projects


The Central Electricity Regulatory Commission’s (CERC) recent order entitling the developer of Bhadla solar park project to reimbursement of safeguard duty would set a beneficial precedent for as much as ~5.4 GW of solar projects.

Potentially, this can add back 190-220 basis points (bps) to project equity returns. After the safeguard duty was imposed on the import of solar cells and modules on July 30, 2018, equity returns had fallen from the typical 12-15%, affecting investor confidence in the sector.

The duty cranked up the cost of solar projects by ~15% because the modules, which were largely imported from China, accounted for ~60% of the project cost.

Because it was levied after ~5.4 GW projects were auctioned in 2017 and early 2018, it was not factored in by developers, which lowered their returns.

While classifying the reimbursement of safeguard duty under ‘Change in Law’ provision, the CERC allowed the developer of the Bhadla solar park project to be compensated by counterparties (including the Solar Energy Corporation of India Ltd and electricity distribution companies of Rajasthan).

If the CERC order becomes a precedent – similar to the sequence of events allowing Goods and Services Tax reimbursements for solar projects – it would come as a shot in the arm for the sector.

Says Manish Gupta, Senior Director, CRISIL Ratings, “To be sure, the incremental returns of 190-220 bps won’t be enough to fully recover what was lost because of more than a year’s delay in the reimbursement order, but it will still be substantial. Continuing interest of solar project developers is a function of how much gets left on the table.”

As per the order, compensation will be in the form of one-time payment. Alternatively, if both the developer and counterparty agree, then compensation could be on an annuity basis as a percentage of tariff.

The payments have to be made within 60 days of the CERC order or submission of claims, whichever is later. Any delay will invoke a penalty as per the terms of the power purchase agreement.

Says Ankit Hakhu, Associate Director, CRISIL Ratings, “Apart from benefiting affected projects, the reimbursement order provides much-needed clarity by emphasising a definite timeline for payments, and gives preference to the one-time payment mechanism. Such steps will build investor confidence in both the authorities and the regulators, and are essential to the sector’s growth.”

Timely compensatory payments from counterparties are essential to ensure developers do not lose time value of their investments.

About CRISIL Limited
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About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 110,000 MSMEs have been rated by us.

Source: crisil
Anand Gupta Editor - EQ Int'l Media Network


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