J. Sagar Associates (“JSA”) represented Sasan Power Ltd (“SPL”), an ultra- mega power project in a petition filed before Central Electricity Regulatory Commission (“CERC”) seeking in principle approval for additional capital cost and operational expenditure for installing and operating emission control systems.
SPL was required to install the emission control systems or FGD systems to meet the revised emission norms for thermal power plants in compliance with the Ministry of Environment, Forest and Climate Change Notification dated 07.12.2015 which would entail additional capital expenditure of approximately Rs 2434 Crores.
CERC, vide Order dated 08.10.2018 in Petition 133/MP/2018, allowed the MoEF Notification as change in law and held that SPL would be entitled to increase in tariff after the implementation of the FGD System.
Banks were reluctant to finance additional capital expenditure of around 15% for no change in generation capacity and hence uncertain revenue stream to finance the same, compounded by delays in payments of other change in law claims. Seeking clarity on the regulatory treatment and modality of compensation, SPL approached CERC for in-principle approval of additional capital expenditure for installation of the FGD Systems.
CERC by way of order dated 23.04.2020 has accorded in-principle approval for the proposed capital expenditure of Rs 1663 Crore (based on CEA approved estimates) while accepting that SPL may also seek prudent actual expenditure incurred on (i) interest during construction, (ii) taxes and duties, (iii) foreign exchange rate variation, (iv) project management and engineering services after the commissioning of the FGD Systems at the Project, (v) opportunity cost qua number of days of the Project being shut down for installation, and (vi) annual Operation and maintenance expenditure.
The order is path-breaking for competitive bid-out PPAs since these PPAs do not have any provision for in principle approval for change in law costs. CERC Order is a progressive step granting in-principle approval taking into account difficulties in arranging financing for the FGD System and assurances sought by the lenders, noting Ministry of Power’s directions to put in place a system for grant of provisional tariff.
CERC has lent considerable clarity on the issue of compensation and regulatory treatment vis-à-vis FGD. This decision should serve as a precedent for other similarly placed projects which are yet to implement FGD and require in principle approval for tying up financing.
JSA Team comprised of Joint Managing Partner – Amit Kapur, Partner – Vishrov Mukerjee, Principal Associate – Janmali Manikala and Senior Associate – Yashaswi Kant.