mechanism to improve the project’s credit rating and Payment Security Mechanism to address off-taker risk and Dollar Tariff Regime to de -risk renewable energy projects.
Grid Curtailment Risk
With growing penetration of renewable energy in the main grid, risk of power evacuation is a critical concern for the industry in India. Unavailability of grid infrastructure, or in some cases the inability of existing assets to absorb the additional capacity leads to delays in commissioning or partial commissioning of projects. Even with the introduction of “plug and play” solar parks, the evacuation risk continues to be placed on the developer. Although the Government of India has started massive grid infrastructure upgradation drive to integrate and smoothen the renewable energy in the system, it is believed that the future risk of curtailment of power due to grid congestion especially in high renewable penetration areas, can upset project cash flows and return expectations for the renewable energy projects.
We do not own, and may not own, a controlling equity interest in some of the power plants in our portfolio and power plants that we acquire. As a result, our ability to control management decisions and other significant matters at these power plants may be limited and our interests in such power plants may be subject to transfer or other related restrictions.
We do not own a controlling equity interest in our power plants located in Malaysia and in one power plant located in India, and we do not own 100% of the equity interests in our power plants in South Africa and Thailand and certain power plants located in India, and we may not own a controlling equity interest in power plants in these and other countries, due to PPA restrictions or local law ownership requirements. In the future, we may acquire additional power plants in which we do not own a controlling equity interest. In such cases, we will seek to exert a degree of influence with respect to the management and operation of the power plants by negotiating to obtain positions on management committees or other governance rights. However, we may not always succeed in such negotiations.
A third party owns a majority of the equity interests in our Malaysia power plants. Provisions of the charter documents of Fortune 11 provide us with the right to appoint all of the board of directors; however, with respect to Corporate Season and Silverstar, we have the right to appoint only half of the board of directors, and unanimous approval of the full board is required on certain matters. In India, 100% of the equity interests in the SE-25 power plant continues to be owned by SunEdison; our economic interest in the power plant is received through the payment of principal and interest on bonds issued by the project company to the Company, which bonds are secured by a pledge over the equity in the project company for the benefit of the Company, and the board of directors of the project company is prohibited from taking certain actions without the approval of the Company pursuant to a shareholder voting agreement. In addition, 26% of the equity interests in the ESP Urja and Millenium power plants continue to be owned by SunEdison, which does not constitute a controlling equity interest. In October 2016, the Company entered into arrangements with SunEdison for the transfer of the balance of the equity interests in the Azure, ESP Urja, Millenium and SE-25 power plants, in each case following the expiration of the equity lock-up period in the applicable PPAs (ranging from November 2016 to March 2017) and without further action by SunEdison. In November 2016, the balance 26% of the equity interests in Azure were transferred to the Company in accordance with these arrangements. Finally, a minority interest in our Brakes power plant in India is owned by a third party. In South Africa, third parties own a minority interest in each of our power plants due to requirements under local law and the applicable PPAs. While a majority of the board of directors of each project company in South Africa is appointed by the Company, the unanimous approval of directors appointed by the minority shareholders is required for certain actions, including transactions between the project companies and affiliates of the Company. In Thailand, SunEdison continues to own a majority of the equity interests in the NPS Star and WXA power plants, however the Company holds a controlling voting interest, as well as substantially all of the economic interests, in these project companies.
We may be dependent on our co-venturers to operate assets in which we do not own 100% of the equity interests. Our co-venturers may not have the level of experience, technical expertise, human resources management and other attributes necessary to operate these assets optimally. In addition, conflicts of interest may arise in the future between us and our stockholders, on the one hand, and our co-venturers, on the other hand. Further, disagreements or disputes between us and our co-venturers could result in litigation, which could increase our expenses and potentially limit the time and effort our officers and directors are able to devote to our business. The approval of co-venturers also may be required for us to receive distributions of funds from assets or to sell, pledge, transfer, assign or otherwise convey our interest in such assets. Alternatively, our co-venturers may have rights of first refusal or rights of first offer in the event of a proposed sale or transfer of our interests in such assets. These restrictions may limit the price or interest level for our interests in such assets, in the event we want to sell such interests.
Our failure to comply with South Africa’s renewable energy program could have a material adverse effect on South African power plants.