The Four-Tier REWA Payment Security Model Responsible for Low Bids
The Rewa solar park auction heralded the dawn of falling solar tariffs in India with a low levelized bid of ₹3.30/kWh. There are two major reasons for such low tariffs being quoted in the auction – the availability of cheap funds and the availability of payment security mechanisms to protect developer’s interests.
For the Rewa auction, project developers signed power purchase agreements (PPAs) with the Madhya Pradesh Power Management Corporation Ltd. (MPPMCL) and the Delhi Metro Rail Corporation (DMRC).
On September 27, 2017, the state cabinet of Madhya Pradesh approved a state payment guarantee to be provided to solar project developers in the Rewa Ultra Mega Solar (RUMS) park, thereby completing the multi-tier payment security mechanism that is being provided to solar project developers in Rewa.
Four-Tier Security Guarantee
The first tier of the security mechanism is a letter of credit provided by off-takers, DMRC, and MPPMCL, that equals a one-months bill for the energy generated by developers.
The second tier is a payment security fund operated by Rewa Ultra Mega Solar Limited (RUMS). It consists of three months of payment assurances in case the off-takers delay or make a payment error. This three-month payment guarantee comes on top of the one-month line of credit provided by off‑takers.
The third tier is the state guarantee that was recently approved by the state cabinet of the Government of Madhya Pradesh. If there are payment delays by off-takers, then the state will step in to pay the difference or the pending amount to the developers.
The state government is also providing the fourth tier of payment security by agreeing to bear the cost in cases where a transmission outage lasts beyond 50 hours.
These four layers of payment security ensure that, in the case of any delay or even natural calamities that may lead to a transmission disruption, payment to developers is still guaranteed. This has boosted the morale of developers and even those who aren’t involved in developing projects at RUMS are holding it in high regards.
An executive at ACME told Mercom, “It is a win-win situation for all parties. This was one auction where we bid low as we felt the state government and the central government put enough on the table for developers.”
“The infrastructure at RUMS is better and cheaper than in other parks, but the payment guarantee being provided is novel. It has been ingeniously designed – a separate entity (RUMS) is operating part of the funds rather than distribution company (DISCOM). The state is providing a guarantee which is better than the other two guarantees being provided. This means that, in a worst-case scenario, if there’s a delay or error of more than four months, then the state is responsible and will pay,” added the ACME executive.
Mercom’s source at Mahindra Susten said, “It would be great if such a payment guarantee was made available to developers across India. If other states want Rewa rates or even below those rates, they must try providing similar payment security. Then, developers will themselves bid low willingly. If the capital keeps flowing in, then interest payment don’t pile up. In Rewa, we went below three happily as, for the first time, we thought it was viable. The payment security mechanism is great, but the sad part is that it is a one-off, even after a year of no tenders have come out with such favorable regulations.”
Image credit: GPCL
Saumy is a senior staff reporter with MercomIndia.com covering business and energy news since 2016. Prior to Mercom, Saumy was a copy editor at Thomson Reuters. Saumy earned his Bachelors Degree in Journalism & Mass Communication from the Manipal Institute of Communication at Manipal University. More articles from Saumy Prateek.