In its Union Budget, 2015, the Indian government has set an ambitious target of installing 175,000 Megawatts (“MW”) of renewable energy by 2022, which will include 100,000 MW of solar energy, 60,000 MW of wind energy, 10,000 MW of biomass energy and 5,000 MW of small hydro energy. This is in line with the objectives of the Jawaharlal Nehru National Solar Mission (the “NSM”), launched on January 11, 2010, which include, inter alia, promotion of: (i) investment in the solar sector by creating an effective regulatory mechanism; (ii) solar heating systems and off-grid solar power; (iii) research and development activities in the solar space; and (iv) achieving grid tariff parity by 2022.
As on July 29, 2015, twenty-four (24) states in India have commissioned grid connected solar power projects under various schemes, out of which Gujarat, Rajasthan, Madhya Pradesh and Andhra Pradesh have the maximum commissioned capacity in India. Projects have been commissioned under national and state schemes, including through government agencies and state power distribution companies in India.
In addition, with a view to reducing the cost of solar power, the Ministry of New and Renewable Energy (the “MNRE”) has circulated a draft scheme to the states seeking development, within a five (5) year period, of: (i) 25 solar parks each with a capacity of 500 MW to 1000 MW; and (ii) ultra mega solar power projects. The foregoing scheme recognizes the need to meet the renewable repurchase obligation and targets of solar capacity set out in the NSM and contains provisions relating to, inter alia, implementation of the scheme, eligibility criteria, land acquisition, facilities to incentivize investors, fund raising, and transmission and sale of power.
Currently, solar parks are operating successfully in Gujarat and Rajasthan. Moreover, land parcels for solar parks have been identified in Gujarat, Rajasthan, Leh, Kargil and Madhya Pradesh, and it is expected that many solar parks will be set up in India.
Solar rooftop policies
The rooftop solar market can be tapped by generating solar power using unutilized space on rooftops and wastelands around buildings. The NSM encourages implementation of rooftop solar technologies in India, and various states have issued solar rooftop policies in the last few years. In line with this, the MNRE has issued guidelines for grid connected rooftop and small solar power plants with the objective of using the power so generated: (i) to fulfill the energy requirements of the occupants of buildings; (ii) to replace air polluting diesel generator sets; and (iii) to supply the surplus power, if any, to the grid.
Foreign investment in the power sector
In India’s power sector, foreign investment up to 100% is allowed under the automatic route.
Companies active in the solar sector
Indian companies who have successfully participated in bids in the solar sector include: (a) Adani Green Energy; (b) ACME Green Energy; (c) Azure Surya; (d) Welspun Solar Punjab; and (e) Renew Solar Power Private Limited. Further, we understand that international renewable energy developers like 8minutenergy Renewables, First Solar, Solairedirect Energy, Focal Energy, EDF, Fortum, SembCorp Green Infra, and Sun Edison have made investments in the solar energy sector in India.
RFPs and bid process
Bids for development of solar power plans are issued by distribution companies of each state or by certain governmental bodies. These bids are typically referred to as Request for Proposals (“RFPs”), and RFPs may differ from state to state. Generally speaking, all RFPs contain project details, procedural information and eligibility criteria.
It is important for bidders to submit complete bid documentation within the timelines stipulated in the RFP; otherwise, the bid is likely to be rejected. After submission of the bids, they are vetted to assess whether the eligibility criteria (discussed below), and the technical and financial criteria set out in the RFP are met. Separately, bidders are required to make an earnest money deposit and give a performance bank guarantee during the bid process itself. Once a successful bidder(s) is identified, a letter of intent is issued, after which the state power distribution companies enters into a power purchase agreements (“PPA”) with the successful bidder.
Bid document requirements
Listed below are the documents that bidders have to provide online (as well as in hard copy format) and actions that bidders have to take as part of the bid process within the time frame prescribed in the RFP:
- Obtain a digital signature certificate from the prescribed authority;
- Submit the bidding company’s memorandum of association, articles of association, certificate of incorporation and annual audited accounts for the preceding three (3) or four (4) years;
- Register and submit bids online in the formats (about thirteen (13) formats) prescribed in the RFP; and
- Pay transaction fees and bid processing fees (which are generally non-refundable).
General eligibility criteria
An individual, company or a firm incorporated in India, a foreign company, or a consortium, is permitted to participate in the bid process.
Special purpose vehicles (“SPVs”) and Limited Liability Companies are also eligible to bid, subject to conditions that may be prescribed.
Bidders are generally expected to deploy only commercially established and operational technologies.
Bidders are also required to submit proof and credentials to establish the fact that the technology proposed to be used has been operating successfully in at least one project in a particular country outside India.
The bidding entity is required to meet the net worth requirements set out in the RFP, which are, typically, linked to the size of the project. One state requires the bidder to have a net worth of INR20,000,000 (approx. US$303,030) per MW (i.e., if the project size is 10 MW, then the bidder must have a net worth of INR200,000,000 (approx. US$3,030,303)), while another seeks a net worth of INR30,000,000 (approx. US$454,545) per MW (i.e., if the project size is 10 MW, then the bidder must have a net worth of INR300,000,000 (approx. US$4,545,454)).
Some states have also prescribed the net worth to be the annual turnover of a certain number of preceding years or of a fixed amount. Calculation methodologies are provided in relation to meeting the net worth criteria, but these are not being specifically dealt with here.
Certain other conditions
In case of a bidding consortium, there must be a lead member and an executed consortium agreement. In addition, if successful, a private limited company SPV is required to be formed by the consortium (keeping the original shareholding structure of the bidding consortium), and the lead consortium member is mandatorily required to be a controlling shareholder owning more than 51% of the voting rights and paid-up share capital of the SPV, generally for one (1) year after the commercial operations date.
The commercial operations of the project should commence on or before one (1) year following the execution of the PPA.
A foreign company, a firm or an individual participating in a bid on a standalone basis is also required to incorporate a private limited company before executing the PPA keeping the original shareholding structure of the bidding consortium.
Successful bidders are required to arrange the funds necessary for the implementation of the project in the manner and time prescribed in the RFP or the PPA as the case may be.
PPAs, which are usually made available at the time of bid submission, have to be executed with the state power distribution company by the successful bidder. Although some RFPs suggest that standard form PPAs cannot be negotiated, typically, there is some scope to discuss and amend the PPA.
PPAs, inter alia, contain provisions in respect of sale of energy by the generating company, billing procedures and payments, operation and maintenance of operations, interconnection facilities, wheeling, metering, commissioning of the generating facility and dispute resolution mechanisms, including arbitration or mediation by reference to a designated authority.
A common provision is that failure by the state utility to purchase power will constitute “an event of default” under the PPA, which will give the developer a right to terminate the PPA.
Risks and challenges
Investments in solar power development and transmission, while beneficial in many ways, have certain risks and challenges including:
- The regulatory framework in respect of the renewable energy and solar energy sector is scattered, and there is a need to put in place one consolidated law at the central and state level to ease business in this sector. The government has proposed a legislation to govern renewable energy in India, i.e., The National Renewable Energy Act, 2015, which inter alia sets out provisions to set up decision making and advisory bodies in the government to develop and implement the policy in the renewable energy sector, as well as to create a supportive ecosystem and establish renewable energy investment zones. This law should be passed expeditiously.
- The poor financial health of power distribution companies may pose a threat to investments, especially if they are unable to pay the agreed tariff and purchase electricity from solar power developers.
- Investments have to be made to upgrade the grid and the grid management processes to enable efficient and effective transmission of power.
- Land acquisition is costly, time-consuming and burdensome, and the central government’s inability to pass the land acquisition law in India has created uncertainty in relation to the ease of land acquisition for future projects. However, state governments also have the power to acquire land and create rules in this regard.
- Financing solar power projects requires substantial upfront investment in equity and debt. While foreign investments have been made in this sector, more sources of investment and debt are required.
- Foreign entities forming a consortium have found it difficult to meet the financial criteria effectively in the manner set out in the bid documents within the stipulated time frames.
- The renewable energy purchase obligations of captive power plants should be harmonized across states.
Tax considerations under the Income-tax Act, 1961 (the “Act”)
Extension of Tax Holiday (Section 80IA of the Act): Given India’s rising energy requirements, it is crucial for the government to expand the power generation capacity manifold. This will require the sector to be adequately profitable to attract the all-important private capital. While the current tax regime provides for a tax holiday only if an undertaking commences power generation on or before March 31, 2017, we believe the sunset clause for claiming the profit-linked incentive must be amended to extend the tax holiday period by another ten (10) years.
Exemption from Minimum Alternate Tax (“MAT”) during tax holiday period: Another important aspect will be to exempt power companies from the applicability of MAT during the tax holiday period. While power companies enjoy the profit-linked income-tax holiday, they should not be required to pay MAT on their book profits. The payment of MAT not only nullifies the objective of the tax holiday, but also results in cash outflows during the initial period, which in some cases may not be recoverable if the project fails to yield any taxable profits. Alternatively, if MAT provisions continue to remain applicable during the tax holiday period, it is recommended that the MAT rates should be substantially reduced and wherever paid, MAT credit should be allowed to be carried forward and set-off without any time limit.
Investment allowance under section 32AC of the Act: This section, subject to certain conditions, gives incentives in respect of acquisition and installation of new plant or machinery by a manufacturing company.Considering the significant capital investments involved in setting up of soar power infrastructure, this incentive should be extended to companies engaged in generation or distribution of solar power.
India has an enormous solar energy potential of about 6,000 million Gigawatt-hours per year. The Indian government is keen to facilitate solar power development as it helps reduce the carbon footprint of the country, creates employment opportunities, brings in foreign investment into India, and helps reduce the repurchase obligations required to be met in India.
Very recently, Japan’s SoftBank announced an investment of US$20 billion in the Indian solar energy sector. India is expected to be among the top five (5) countries in solar power generation and, and given the enthusiasm of the government and investors, it is clear that this sector will give good returns on investments to investors.