Understanding ‘Power Purchase Agreements’ in the Indian Context

A Power Purchase Agreement (PPA) is a type of contract that has aided in the creation and development of independent power projects all over the world. In general, PPAs specify what happens if such agreement must be terminated for whatsoever reason. On the issue of termination of this agreement, the Supreme Court of India noted that the PPA can be terminated solely on the basis of insolvency.

Power is required in practically every element of our ever developing and interconnected society, be it for the purpose of telecommunications or for transportation. As a result, every economic growth strategy must include investments in electricity infrastructure. This is true for both broad economic growth programmes in emerging markets and specific rural growth programmes in established markets.
 
What is a Power Purchase Agreement (PPA)?
 
Power projects, by their very nature, are risky. Given the importance of power projects in markets where there is a power deficit, these projects frequently represent a new level of investment and financial complexity. As a result, adopting a durable agreement that cements the predictability and durability required for any long-term commercial endeavour has become a common occurrence. The Power Purchase Agreement (PPA) is a type of contract that has aided in the creation and development of independent power projects all over the world. PPA is essentially a tool for facilitating the sale and purchase of electricity. As a result, it only exists after the prospective customer has taken a number of key decisions. The need for power, available sources of electricity, the buyer's financial ability to acquire electricity, the power generating technology wanted, and the location of the power plant are all factors to consider. PPAs can be deemed to be a key contract for any independent power generation project, particularly in emerging countries.
 
Bankability of PPAs:
 
Bankability refers to the breadth of consideration given to a project seeking project funding in the commercial lending market, and it determines whether a project will be acceptable to lenders. Other lenders than commercial banks, such as development finance institutions (DFIs) and private equity funds, can help a project get funded. As a result, bankability can also be defined as the ability to obtain funding from a variety of sources rather than just one. There is only one source of revenue for a typical power project: payments from the buyer under the PPA. If the buyer defaults, the project's ability to repay its lenders on schedule will be severely hampered.
 
The only financial return to lenders in a conventional power project financing is the repayment of the project debt and the payment of interest rates. However, because debt providers are putting huge sums of money on the line and relying on project income for repayment, they will insist that the project sponsors and papers are strong enough to get the project to commercial operations.
 
Project Finance versus Corporate Finance:
 
Project finance is the financing of a project based on:
  • the project's predicted cash flows and
  • the asset's worth.
The financing of a project is often non-access, meaning that the lenders have liability to the project's assets but no recourse to the project's owners. Lenders are reimbursed through project cash flows or, in some situations, by foreclosing on the project and purchasing the project assets. A special-purpose entity is created in conventional project financing to own the project's assets and enter into the finance and project papers, including the PPA. All of the project's assets, including the PPA and other significant project documents, will be secured by the project financing lenders. The project accounts, as well as all money on deposit in or credited to those accounts, shall be secured by the lenders.

Many electricity projects are financed on a limited recourse basis in practice. Lenders will want a variety of credit support, including sponsor guarantees to mitigate certain risks. These are not "pure" non-recourse financings because the lenders have recourse to the sponsors and other related-party guarantors in certain instances.
 
Corporate finance, on the other hand, is based on the balance sheet of the company being financed. Lenders have recourse to all of the entity's assets, but no security interest in any of them. Cash flow is usually unrestricted (or only slightly restricted). There isn't a lot of documentation.

Corporate finance may be less expensive than project financing in terms of raising capital. Corporate finance, on the other hand, is only available to borrowers that have a good credit history and can rely on a well-developed secondary market. Construction risk, in particular, is unlikely to be taken by capital markets. Although some developers have access to low-cost capital market financing, it is unrealistic to expect that this low-cost financing will be passed on to the project, as developers will demand a greater internal rate of return for their equity.
 
Termination Of Power Purchase Agreements:
 
In general, PPAs specify what happens if the agreement is terminated (whether at the end of the term or early for reasons such as default), including the power producer's obligations regarding asset handover, the calculation of buyout prices for Independent Power Projects (if this is contemplated), and what happens to the power producer's employees if the IPP is transferred to the purchaser on termination.

The Supreme Court in the case of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta had held that the National Company Law Tribunal (NCLT) would have jurisdiction to adjudicate all matters relating to the insolvency resolution and the liquidation of the corporate debtor. The proper body must be sought for adjudication of issues that do not have anything to do with the corporate debtor's insolvency. The current ruling was made while the Supreme Court was debating whether a PPA may be canceled during the subsistence of a moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC).

Brief Prcocedural History of the Case:

The facts of this case stem from a PPA between Gujarat Urja Vikas Nigam Ltd. (GUVNL) and Astonfield Solar Gujarat Pvt. (Corporate Debtor/CD), a solar power producer. The PPA was signed on April 30, 2010, and it stated that GUVNL would purchase all of the power generated by the Corporate Debtor's solar power plant (Plant) for the duration of the PPA, which was 25 years.

The CD was declared a Non-Performing Asset (NPA) by the lenders due to the Corporate Debtor's repeated failure to meet its contractual obligations originating from financial documentation. Following the NPA declaration, the CD petitioned the NCLT under Section 10 of the IBC to begin the Corporate Insolvency Resolution Procedure (CIRP). After the petition was accepted, and the NCLT designated a Resolution Professional (RP).

The PPA will be terminated if the Corporate Debtor does not correct the defaults listed in the Default Notice, according to the Default Notice. This prompted RP to submit an application before the NCLT under Section 60 (5) of the IBC, requesting an injunction preventing GUVNL from terminating the PPA. Meanwhile, GUVNL issued a termination notice after the 30-day period had passed. The NCLT delayed the termination notice in an order in which it provided the following instructions:
  • GUVNL was prevented from cancelling the PPA.
  • The PPA clauses cannot be placed above the provisions of the IBC, according to the court. The PPA is an instrument within the sense of Section 238 of the IBC, and the clauses of the PPA are in conflict with the provisions of the IBC in this situation.
On appeal, the National Company Law Appellate Tribunal (NCLAT) upheld NCLT’s decision that during the CIRP, the RP has to maintain the Corporate Debtor as a going concern and termination of the PPA would render the Corporate Debtor defunct.

Whether the NCLT/NCLAT has Jurisdiction over Contractual Disputes?

The Supreme Court noted that the PPA sought to be terminated solely on the basis of insolvency, because the event of default envisioned under Article 9.2.1(e) of the PPA was the CD's bankruptcy procedures being initiated. There would be no need to terminate the PPA if CD were not insolvent, hence the proposed termination is not based on a reason other than insolvency. The current issue is primarily based on and relates to CD's insolvency. The court noted that the decision to terminate the PPA was made by contracting parties in respect to the beginning of insolvency proceedings against CD in accordance with the provisions of the agreement, not by any governmental or statutory institution performing its public law functions. The only claim of default made against CD was that it was undergoing CIRP, triggering the NCLT's jurisdiction under Section 60(5)(c) of the IBC.

In this case, no governmental or statutory entity acting within the scope of its public law functions has made the decision to terminate the PPA. The judgement was made purely on the basis of the beginning of bankruptcy proceedings against the Corporate Debtor in accordance with an agreement between the parties. The court maintained the NCLT's position on Section 238 of the IBC, which states that the IBC will take precedence over other laws, including a document that has effect as a result of any such law. According to Section 238 of the IBC, the IBC takes precedence over all other laws, including any instrument that has effect as a result of any such legislation.
 
Conclusion:

While adopting a purposive reading of ection 60(5) and 238 of the IBC, the Supreme Court appears to have further strengthened its approach to dealing with bankruptcy issues by favouring the alternative that permits the corporate debtor to continue as a going concern.

This decision by the Supreme Court also sends a positive signal to the power industry in India. Because comparable sections of the Events of Default are present in all PPAs, and developers/lenders/investors have always been concerned that if the firm goes bankrupt, this clause will make life more difficult for the generator.

If the case had been decided by Electricity Regulatory Commissions (ERCs), they would have had no choice but to recognise the right granted under the PPA, which would have had terrible repercussions and would have defeated the IBC's goals.