The Continued Rise of Renewable Corporate PPAs in
A power purchase agreement, or a "PPA", enables an entity to procure electricity directly (i.e., 'offtake') from a producer of power. State-owned/licensed distribution companies ("discoms") are the main off-takers in
However, 'corporate' PPAs have proliferated over the past few years, including in
Why are so many corporate PPAs getting signed in
To begin with, an entity may have some unique consumption needs, whether sector- or company-specific, including in terms of running and/or expanding its business. For example, companies engaged in sectors such as technology, infrastructure, construction, automotive, textile, etc. - especially those with high power requirements (like running a data center or a high-load factory in a concentrated hub) - may find it worthwhile to secure their power supply in order to reduce business disruption.
More generally, however, one key reason for the growth of Indian corporate PPAs in respect of RE is the coal-centric reality of high tariffs on the grid - coupled with the fact that non-fossil RE is now widely available in
Further, sustainability and climate awareness are both worthy pursuits today, what with robust Environment, Social and Governance ("ESG") norms, alongside green taxonomies, bound to arrive in the country soon - possibly extending to unlisted companies as well. Even while pursuing creative eco-labeling practices (whether to impress investors and/or customers, or to distinguish one's brand from the rest), companies need to look out for 'greenwashing' laws that are expected to go beyond extant corporate governance-related disclosure and reporting standards.7 Accordingly, a demonstrable trail of direct RE procurement (through renewable PPAs) might enable such entities which are involved in environment/climate-friendly messaging to not run afoul of the law, including in the future.
In addition, the Indian government's firm pivot towards RE - pursuant to ambitious climate goals under the Paris Agreement - has produced a plethora of green policies and regulation (including the democratized 'open access' and RE certificate (REC) regime, as recently modified, in 2022). Increasingly, the government has created an environment punctuated by incentives and opportunities to go green. As a result, the number of corporate PPAs in the RE sector has mushroomed and is likely to grow further still.
On the supply side generally, the energy market is dominated by private players (barring a few notable exceptions like
Will this trend continue? Why?
To be sure, corporate PPAs have (thus far) mainly been entered into by the big boys of Indian business. What about the rest, however? The US, for instance, has seen smaller companies enter the renewables market. To overcome the burden of long-term, high-volume commitments, smaller companies can pool their power needs together and each claim a portion of the aggregate capacity. Additionally, these participants can partner with an 'anchor tenant' - a larger and more experienced purchaser with a strong balance sheet, superior bargaining power, and previous accounting/legal experience in this regard. In
Examples of 'group captive' projects
For instance, the Nellai power plant in
Further, a combination of discoms could also constitute the captive group - although, from the genco's perspective, this leads to a counterparty credit risk, with more than 50% of the project's capacity (potentially) exposed to payment delays. Meanwhile, a diversified portfolio of C&I customers could constitute a separate off-taker group, pursuant to a separate network of PPAs - albeit within, and in respect of, the same RE project.
For example,
Recent regulatory developments
Among other things, the open access rules of 2022 in respect of green energy (the "Open Access Rules")9 reduce transactional thresholds in respect of RE from 1 MW to 100 kW, thus paving the way for small consumers to purchase 'green energy'10 easily. Earlier, on account of higher eligibility thresholds in respect of load, only large C&I establishments found open access feasible. Pursuant to the new relaxation, however, even small and medium-sized enterprises with modest energy requirements can procure RE via open access. Since C&I consumers constitute more than 50% of the aggregate power demand (and consumption) in
Renewable purchase obligations
Further, the Open Access Rules stipulate a uniform regime of 'Renewable Purchase Obligations' ("RPOs") for obligated entities in respect of a particular distribution area. Such purchase obligations apply across multiple categories of obligated entities - which include open access customers, along with discoms and captive power producers. All of such entities11 are obligated to purchase a minimum share of their electricity from RE sources as per RPO targets. Thus, both the avenues and reasons for entering into a corporate PPA have burgeoned.
A few things to look out for in corporate PPAs
There has been substantial litigation around 'change in law' ("CIL") provisions in Indian PPAs. Corporate buyers are likely to resist bearing a CIL risk. Where a PPA has been signed on a long-term and fixed price basis, a corporate buyer may feel that the benefit provided to the genco pursuant to such arrangement (i.e., by fixing both price and tenor upfront) is adequate reason for the project to bear potential CIL risks on is own. Gencos, on the other hand, will want a CIL risk to be well-defined.
Indeed, corporate buyers tend to make economic assumptions based on the expected performance of an RE technology and/or in respect of the project itself. Reflecting this expectation in the corporate PPA can provide comfort as well as a potential exit route with regard to a suboptimal asset. On the other hand, gencos may consider performance guarantees unnecessary in light of their own economic incentive to maximize output. If and when agreed upon, however, a genco might want to ensure that the performance requirements are realistic, achievable, and aggregated over time (this is especially relevant in case of intermittent sources of power, such as with respect to RE).
Further, certain extraneous events may occur which neither the genco nor the corporate buyer can address or control. Such extraneous events may delay the completion of the project and/or compromise its performance. A PPA will thus need to provide a mechanism to allocate responsibility for such risks. For example:
-
The corporate buyer may want to retain a choice to purchase RE from an alternative source upon the occurrence of such events. Further, if such events are prolonged, the corporate buyer may want to retain the right to unilaterally terminate the PPA.
- The genco, on the other hand, might seek to ensure that suitable protections are available in situations of construction delay or underperformance. Where there are termination rights in favor of a corporate buyer for a prolonged 'force majeure' event, a genco may insist on a reasonable notice period before such termination rights can be exercised.
- Lenders may wish to ensure that the responsibility and risk of extraneous events are fairly shared between the parties. Lenders may also have step-in rights that can be exercised prior to such termination.
Conclusion
While the growth in corporate PPAs is expected to continue, such agreements are bound to become complex, customized, as well as sites of potential dispute. Accordingly, lawyers need to account for nuances in RE technology and related policy while negotiating renewable PPAs. In particular, judicial and regulatory trends might inform the future interpretation of commercial understandings in this regard.
Footnotes
1. Private utilities serve only 10% of the country's power consumers. Globally, too, 70% of distribution utilities are publicly owned; the remaining 30% of the privately owned companies are located primarily in middle and high-income countries.
2. Gencos, too, can be either state-owned or private. For instance,
3. Private discoms may also own assets on the grid, in whole or part (the distribution licensee model - as opposed to the franchisee model, where the grid assets are not owned). E.g.,
4. The vast majority of consumers in
5.
6. Such selection typically happens at the end of the bidding process through a pre-announced and templated mechanism, subject to financial and technical qualifications.
8. A special-purpose project company (SPV) within the wider
7.Including the extant Business Responsibility and Sustainability Reporting (BRSR) framework for large listed companies
9. The Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022 (the "Open Access Rules"), notified on
10. Section 2(d) of the Open Access Rules define "green energy" as the electrical energy from renewable sources of energy, including hydro and storage (if the storage uses renewable energy) or any other technology as may be notified by the
11. An 'entity' (as defined under section 2(b) of the Open Access Rules) may set up a power plant from RE sources of whatever capacity for its own consumption anywhere in
This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.
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