Delay in sourcing of modules from China may cause cost overruns, invite penalties
About Rs. 16,000 crore worth solar projects, adding up to a total capacity of 3,000 MW, could be at risk of penalties for missing their respective scheduled commercial operation date (SCOD), if the impact of the coronavirus outbreak on trade with China prolongs, according to an analysis by Crisil.

India sources about 80 per cent of its solar modules from China, where trade has been impacted by measures implemented to combat the spread of the virus.

Crisil pointed out that measures such as the restricted movement of people and shutdown of factories have disrupted module manufacturing in China and its feeder industries.

The clampdown has forced several manufacturers to run their plants at low utilisation, or to stall operations altogether. Indeed, even the modules already manufactured are facing delays in transit to project sites on account of precautionary restrictions at ports.

Costly delays

“This puts at risk around 3 GW of solar projects auctioned between July and August 2018, which need to meet their SCODs by July 2020. Given that the orders for modules are typically placed with a lead time of six months from SCOD, these projects are now in the process of either placing orders or receiving delivery of modules. Hence, any delay at this stage can prove costly,” said Manish Gupta, Senior Director, Crisil Ratings.

As per the standard terms of power purchase agreements, non-adherence to completion of timelines attracts penalties, including downward re-negotiation of tariffs.

In a bid to meet the commissioning timelines, the developers may choose to implement projects with more expensive modules sourced from locations other than China. But this could erode returns as the modules maybe 15-20 per cent costlier, shaving as much as 3 percentage points off their returns.

Also, developers can invoke the ‘force majeure’ clause in the power purchase agreement, under which they can seek relief under unforeseen and uncontrollable events.

However, this is yet to be tested and may face legal and regulatory hurdles, pointed out Ankit Hakhu, Director, Crisil Ratings.