Changing laws, rules and regulations and legal uncertainties in India may adversely affect our business and operations.
The business and operations of our power plants located in India are governed by various laws and regulations, such as the Electricity Act, 2003, National Electricity Policy, 2005 and National Tariff Policy, 2006, corporate, environmental and labor laws and other legislation enacted by the Indian government and the relevant state governments in India. The business and financial performance of our Indian operations could be adversely affected by any change in laws or interpretations of existing, or the promulgation of new laws, rules and regulations applicable to our Indian operations. For example, the Indian government recently adopted a new company law framework, which, among other things, imposed significant and new corporate governance requirements, accounting policies and audit matters and certain spending requirements for corporate social responsibility activities in the event a company’s net worth or turnover meets the prescribed thresholds. The Indian government also recently adopted new legislation to facilitate the acquisition of land in India, which may affect our Indian subsidiaries, including provisions stipulating restrictions on acquisition of certain types of agricultural land and compensation, rehabilitation and resettlement of affected people residing on such acquired land. The Indian government is also undertaking an overhaul of the existing indirect tax regime with the introduction of the Goods and Services Tax (“GST”), which is likely to be implemented from July 1, 2017. While the generation and sale of electricity is not subject to GST, capital goods and services used in the energy sector will be subject to GST. Currently, tax concessions and exemptions, both at the central and state level, are available on specified goods and services which are used in the energy sector. However, the GST regime is generally intended to trim such exemptions and concessions, and so the effect on the renewable energy sector may be significant. There can be no assurance that the Indian government or any state government in India will not implement new regulations and policies that will require our Indian subsidiaries to obtain additional approvals and licenses or impose onerous requirements and conditions on their operations. Any such changes and the related uncertainties with respect to the implementation of regulations may have a material adverse effect on our Indian power plants and our business, financial condition and results of operations.
Credit market risks in the Indian renewable energy project financing sector
A significant portion of finance to achieve India’s renewable energy target will need to be from foreign investors and, in that context, a key concern is the requirement for a currency hedge to protect against the risk of devaluation. Currently market based currency hedging in India is very expensive.
Another key issue that affects credit markets is the Indian state offtaker risk. The distribution companies in the past have delayed payments to project developers, which has severely affected the viability of renewable energy projects . Consequently, a considerable number of projects have come under financial strain, with developers failing to meet their debt service obligations. Despite securing favorable orders from electricity regulatory commissions on tariff payments, distribution companies have continued to delay these tariff payments.
Further, the absence of attractive payment security mechanisms to support government power procurement increases offtaker risk. Under the PPAs entered into by the government entities, payment security mechanisms are either absent or not implemented, even if included in the PPA.
With the objective of improving the operational and financial efficiency of state-owned distribution companies, in 2015, the Indian government launched the Ujwal Discom Assurance Yojana (the UDAY scheme). The states participating in the UDAY scheme are required to assume over 75% of the debt of their distribution companies by way of a grant over a period of two years. Over 25 states in India have already signed up for UDAY scheme, with almost all the major distribution companies in the country covered. The Indian government has also been exploring innovative credit enhancement tools such as a partial credit guarantee mechanism to improve the credit rating of project companies, a payment security mechanism to address offtaker risk, and a U.S. dollar tariff regime to reduce the currency risk of renewable energy projects.
Additionally, the recently issued draft guidelines for procurement of power through competitive bidding route for both wind energy as well as solar energy have detailed provisions for payment security mechanisms, including issuance of letters of credit for unpaid bills and payment security fund by distribution companies in favor of the project developers. The procurer may also choose to provide legally enforceable state government guarantees. However, the final guidelines have not yet been issued for both sectors.
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