Govt plans to compensate developers and power trader NVVNL for losses incurred on account of default in payment for renewable power

The government plans to compensate developers and power trader NTPC Vidyut Vyapar Nigam Ltd (NVVNL) for the losses incurred on account of default in payment for renewable power. The finance ministry has agreed on a budgetary support to compensate for such losses as part of a risk mitigation mechanism.

A proposal for including the compensation mechanism in the National Solar Mission would now be placed before the Cabinet. The government had so far not provisioned for any budgetary support to the mission, that aimed to ramp up the capacity of grid-connected solar power generation to 1,000 Mw by 2013.With the Central Electricity Regulatory Commission (CERC) making it obligatory for state utilities to buy renewable power, the government wants to prevent a situation where there is a payment default affecting the health of the nascent industry. "The mechanism would make the debt raising easier for the industry," said James Abraham, managing director and chief executive officer, Sunborne Energy. Creating the fund would help in financial closure of projects under the mission.

The mechanism would also help address the issue of shortfall arising out of sale of bundled power in the short-term open market and consequent losses of the NVVNL and power producers. Abraham said though the mechanism would not help in bringing down the cost of solar power, it would ensure NVVNL continued to pay the power producer if there was a break in payment chain. Under the mission, NVVNL would be bundling the more expensive solar power with the conventional power made available in the central pool and sell it to the state utilities and distribution companies. According to a government official, the money from the proposed Solar Payment Security Fund would be released if there was continuous default by the state utilities for three months.

Once the Cabinet clears setting up the fund, India would probably be the first country to have a payment security mechanism for solar power. In countries like Spain and Italy, there is a feed-in-tariff mechanism, which ensures solar power is bought at a particular rate and helps the industry recover the cost. India already has a mechanism in place but industry is of the view that considering the nature of the power sector in the country and the tendency to make losses, it was essential to have a payment security mechanism in place.

Abraham explained that unlike coal power, where capital cost constitutes about 40 per cent of the total cost, capital accounted for 94 per cent of the cost for solar power. "The current levelised solar tariff announced by CERC is Rs 15.31 a unit, which is just enough to cover the capital cost. If NVVNL defaults, the economics of power producer is disturbed," he said.The government would be working out an accounting mechanism to take care of payments it made to solar power producers and NVVNL.