The recent spread of coronavirus (also known as COVID-19) has not only endangered health and safety worldwide, but has also disrupted the economy across the globe. The coronavirus, which originated in Wuhan (China), has now moved explosively through 177 countries impacting more than 600,000 people who have tested positive for the virus. Some immediate actions initiated by the countries include imposing complete lockdown (but for essential services), suspension of international flights, closing international borders and ports.
As a result of these restrictions, there is an adverse impact on the economy, meltdown in capital markets, soaring unemployment and large scale reverse migration of labour. India’s solar power sector would not be immune to such impact and these restrictions may impede India’s push to increase its renewable capacity to 175 GW by 2022.
India is heavily dependent on China to supply around 80 percent of the solar modules it needs to achieve its expansive clean energy goals. The impact of coronavirus coupled with the Chinese New Year has already hampered the production since the factories are operating at 30-40 percent of its actual capacity. Due to the quarantine restrictions and complete lockdown in India, the transport companies are finding it difficult to transport the supplies to project sites.
Further, the Transmission Utilities equally depend upon supply from China, which threatens to delay the completion of the evacuation facilities and consequentially connectivity with the grid. Considering the present economic scenario, the financial institutions may find it difficult to fund renewable projects. Thus, the threat to some projects becoming NPAs also looms large.
A recent CRISIL report suggests that over 3 GW of solar projects under construction (worth Rs. 16,000 crore) could get impacted (due to delay in commissioning) on account of the present situation. However, it appears that this study does not take into account the impact of additional payment of infrastructure usage charges, delay in constructing evacuation infrastructure, need for additional capital infusion, etc.
Due to the unforeseen and unprecedented impact of the pandemic, at the moment, it is difficult to accurately assess the direct and ancillary impact of coronavirus on the solar power sector. It is, therefore, necessary to evaluate the remedies available to developers to abate the impact of the pandemic.
Commercial contracts, including Power Purchase Agreements (PPAs), invariably contain various risk allocation clauses such as Force Majeure provision. A fundamental difference between the Doctrine of Frustration and Force Majeure is that the former brings the contract to an end (in cases of impossibility) whereas Force Majeure clauses provide freedom to parties to alter, suspend, or discharge its performance of the contract on occurrence of events specified therein. As the definition of Force Majeure is neither judicially determined nor statutorily prescribed, the scope and impact of Force Majeure clauses will have to be assessed on a case-to-case basis.
Normally, Indian Courts resort to strict interpretation of the risk allocation clauses. It is therefore vital for the developers to study these clauses closely for the risks, obligations, and solutions they offer in light of the current disruption. The developers may also evaluate invoking the regulatory powers of the Commissions to reduce the adverse financial impact.
On March 20, 2020, the Ministry of New and Renewable Energy (“MNRE”) issued an Office Memorandum stating that “delay on account of disruption of the supply chains due to spread of Coronavirus in China or any other country is to be treated as Force Majeure”. However, this Memo leaves much to be desired when it comes to ensuring utilities/ regulators implementing the same.
Currently, most standard Force Majeure Clauses, are restrictive and do not cover natural calamities as Force Majeure. Also, past experience has shown that notifications/clarifications issued by the Union Government have not always been implemented by the State Utilities.
While an accurate assessment of the impact of coronavirus on the solar energy sector is in the balance, it will be interesting to see whether the not-too-distant future is marked with pandemonium over the pandemic or witnesses an evolution of regulatory jurisprudence.
-Abhishek is a Partner with J. Sagar Associates and Kunal is a Principal Associate with J. Sagar Associates. The views expressed by authors are personal
