LoU from IREDA, PFC, REC to Serve as Bank Guarantees for Solar Tenders

The letters of undertaking can be obtained by offering due security to the three financial institutions

September 8, 2020


Union Power Minister R.K. Singh has approved the proposal to accept letters of undertaking (LoU) from three non-banking financial institutions that can be used like bank guarantees in renewable tenders.

These three lenders are the Indian Renewable Energy Development Agency Limited (IREDA), Power Finance Corporation Limited (PFC), and REC Limited (REC).

The Ministry of New and Renewable Energy (MNRE) had been considering an alternative to the earnest money deposits (EMDs) and performance guarantees (PBGs) submitted by developers. The ministry had given the implementing agencies time to provide their comments.

In a letter written to the implementing agencies Solar Energy Corporation of India (SECI), NTPC, and NHPC, Singh said that they could accept EMD either in the form of a bank guarantee or ‘payment on order’ instrument for renewable tenders.

The ‘payment on order’ instrument means an undertaking by these financial institutions that they would pay in case of a default of a renewable power generator in fulfilling the tender terms or the power purchase agreement.

Such letters will serve the same purpose as a bank guarantee issued by any public sector bank. The terms and conditions would also be similar to that of any bank guarantee that promises to pay the procurer on demand within a given timeline.

Renewable generators can get these letters of undertaking by offering security to the three financial institutions. The letters would be issued in line with policy, merits, and due diligence.

Singh commented on the development, saying, “MNRE’s decision will go a long way in ensuring ease of doing business in the renewable sector as the developers will now have one more option in fulfilling the tender requirements.”

The MNRE letter further states that the decision would be treated as amendments to the respective standard bidding guidelines.

Recently, the Ministry of New and Renewable Energy (MNRE) clarified that performance bank guarantees could be released to solar project developers as long as they do not have any defaults in their contractual obligations or to those who have claimed relief under the force majeure clause of their agreements. The notice was issued regarding projects stuck due to the ongoing COVID-19 situation.

Mercom had previously written about how stranded EMDs and performance bank guarantees have been adding to the liquidity problems for developers. This alternative arrangement could bring in the much-needed relief to the developers.