MNRE Mulls Alternatives for EMD & PBG to Ease Liquidity in the Solar Sector

EMDs and PBGs stranded with SECI and NTPC are affecting the liquidity in the solar industry preventing developers from bidding in multiple projects


MNRE is considering alternative arrangements for earnest money deposits (EMDs) and performance guarantees (PBGs) submitted by developers to Solar Energy Corporation of India (SECI) and the National Thermal Power Corporation (NTPC) for solar, wind and hybrid power projects in response to developer requests to ease liquidity in the sector.

SECI and NTPC are directed to give their comments on this proposal by March 12, 2020.

Currently, EMDs ranging between ₹400,000 (~$5,500)/MW to ₹1 million ($14,000)/MW plus 18% Goods and Services Tax (GST) are being collected from the developers along with their bid. This is generally in the form of bank guarantee valid up to 9 months from the date of bid submission

MNRE is now proposing two alternatives to the prevailing EMD practice. The first alternative is giving a letter of comfort from the Indian Renewable Energy Development Agency (IREDA) or a similar agency. The second alternative is providing EMD in the form of a corporate guarantee. This will be with the condition that if the corporate guarantee is not honored, the agency implementing the bid process can blacklist the defaulting bidder for three years from the date of bidding. In essence, this would mean expelling such a bidder from participating in any tender issued by the agency during the three years that it is blacklisted. This blacklisting or expelling would include its subsidiaries, affiliates, group companies, parent company and any other company which has on its board directors common to the defaulting company.

When it comes to PBGs, they are to be deposited once the project is allocated, and PPAs are signed.  PBGs are an irrevocable unconditional bank guarantee deposited by solar power developers to SECI/NTPC after 30 days from the date of issuance of the letter of intent. These are mandated to be valid for around six months beyond the commercial operation date (COD) of the project.

MNRE again has proposed two alternatives to replace the current practice of PBGs. One is a letter of comfort from the Indian Renewable Energy Development Agency (IREDA) or a similar agency.

The second is a renewable energy developer pledging promoter’s equity in the special purpose vehicle (SPV) for the operating project to the procurer or the intermediary procurer, as relevant. The book value of the unpledged portion of the equity value, which is duly certified by its statutory auditor, should be 1.2 times the amount considered for PBG. Additionally, the developer should also pledge the unencumbered revenue stream concerning the free cash available based on certified numbers from the past two years. Such revenue must be from his already commissioned projects where the power is bought by the same procurer.

For the pledging as described above, the renewable energy developer has to get the obligatory no-objection certificate (NOC) from the secured lender so that the procurer can create a second charge on the assets of the related renewable energy project.

Speaking to Mercom, Gaurav Sood, CEO of Sprng Energy, said, “Corporate guarantee in place of EMD could attract non-serious players interested only in securing a PPA only to later sell in the market. While the alternatives suggested by MNRE for the PBG might result in lowering of the tariff, there could be some push back from existing lenders of projects. Both SECI and NTPC have considerably reduced the amount of EMD and PBG prescribed for projects already.”

Mercom had previously written about the stranded EMDs, and PBGs have been adding to the liquidity problems for developers. The developers who interacted with Mercom agreed that the cost of participating in large-scale solar tenders had reduced their ability to bid for other projects actively. These costs, coupled with delays and extensions of tenders, have tied up millions in the form of bank guarantees.

More often than not, PBGs are not returned immediately after the successful commissioning of a project. In September 2019, the Ministry of New and Renewable Energy (MNRE), tried addressing this issue by directing SECI and NTPC to release PBGs for solar and wind power projects that have been commissioned. According to the letter, PBGs should be released within 45 days from COD, subject to the submission of all required documents.

Since September 2018, infrastructure financing has been a major challenge in India. Mercom has been urging government agencies to focus on creating a conducive and inclusive environment for the tendering and bidding process of renewable projects in India by providing flexibility to developers to participate in more tenders by returning EMDs and PBGs. Now, this alternative plan proposed by MNRE should provide a huge relief to the industry.

The National Solar Energy Federation of India (NSEFI), while welcoming the suggestion of MNRE opines that the alternatives should also be extended to the existing contracts as well the projects that are yet to be commissioned. The federation has estimated that bank guarantees to the tune of ₹70 billion ($943.4 million) are with various government procurers. Releasing such a huge amount would enhance the capabilities of the execution of the project and would also help in resolving the working capital issues of the developers.