DISPUTE SETTLEMENT OF POWER PURCHASE AGREEMENT- A CRITICAL

STUDY

Power Purchase Agreement (PPA)

Power purchase agreement is both a legal and a commercial document between a power
producer as seller and the wholesale energy purchaser, as buyer/ off-taker. 1 The PPA is at
heart of any power generation project. The PPA defines all of the commercial terms for the
sale of electricity between two parties, including when the project will begin commercial
operation, schedule for delivery of electricity, penalties for under delivery, payment terms,
and termination.

For renewable energy projects, the PPA will contain additional clauses regarding
environmental attributes of the project, particular risks of such projects, and depending on
jurisdictions, provisions relating to renewable energy credits (RECs).

In countries having RECs, like the USA, it is critical to estimate the total revenue stream
available over the life of the project. RECs or tax credits for power plants entail limitations
on disposal and/or buyouts so that control does not change, for the project to still avail itself
of the tax credits or the energy credits, where applicable.

Although the direct parties to the PPA are the power producer and the off-taker, this
document is equally relevant to lenders and equity investors of the energy project. They
would want the project to be creditworthy and may further want to restrict the ability to
assign or transfer the PPA.

The PPA allows the power producer to secure a revenue stream from the electric generating
facility, which is necessary to finance and/or to repay for the project. Securing predictable
cash flows is in fact one of the most important factors in obtaining finance for the project. As
such, the economics of the project would revolve around the terms and conditions of the
PPA, which go way beyond the mere purchase and sale of energy. 2

Negotiating a financeable PPA therefore remains necessary notwithstanding the availability

of other credit enhancement mechanisms like a corporate parent guarantee, performance
bonds or insurance covers.

1
Arvin Halkore, “key issues in negotiating a power purchase agreement”,MONDAQ, june 13, 2020
2
https://www.rcreee.org/sites/default/files/users_guide_ppa_reegf.pdf
Types of PPA

To understand various types of PPA, one should be aware of open access and tariff structure.
Open access is securing your power flow from one point to another in the Indian national
grid. Open access is important to know because one can sign a PPA but this power has to
flow from one place to another.

PPAs are generally structured into four types, one is defined as long term PPA. It is kind of
practice in the market that any PPA more than 5 years is termed as long term PPA. Any PPA
more than 3 years also can be termed as long term. It is up to your understanding how to treat
the nature of the PPA. Generally, PPA of one year or less is termed as short term PPA. Any
PPA between 1 year and 5 years is termed as medium term PPA3.

Major components of a PPA

Major components of PPA are definitions, signing parties, duration, tariff, measurement of
energy i.e. metering, payment security mechanism, billing and payment, representative and
warranties, force majeure, default events and terminations, indemnity, notices, governing law
and dispute resolution and misclleneous.

The first part is definition where you define major terms of PPA like tariff, agencies involved
etc. Signing parties means “who is the seller” and “who is the buyer”. If a seller is a private
company or it’s a state utility and a consumer is a state utility discom or it’s a private ltd.
Company which is off-taker. In this part you have define clearly who are the signing parties
of the PPA.4

The third major important thing which you have to define in the PPA is the duration i.e. term
of the PPA for e.g. 1year PPA, 3 years PPA,10 years PPA, 15 years PPA or 25 years PPA.
Also locking period on which the consumer has no means of exiting the PPA irrespective of
any change in law or any force majeure condition, typical locking period size. So, what we
have seen in a last few months is that renewable projects of PPA pf 25 years size that locking
period typically varies between 10 years to 15 years. 5

3
https://sari-energy.org/wp-content/uploads/2018/07/Model-PPA-for-SA-CBET_.pdf
4
http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/191_2014_LS_En.pdf
5
Hanno wollmann, long term power purchase agreements and market liberalization, LEXXION
VERLAGEGESELLSCHAFT MBH, vol. 14, no. 2.
The fourth important component is the tariff which the seller is selling and the buyer is
buying. Tariff also involves few conditions and terms like change in law. Suppose, if the
discom price changes what will be the new tariff or if there is any change in regulation which
makes your tariff cheaper.

The next is measurement of energy i.e. metering in the PPA. In this you have to define what
is the delivery point of power. When you are going for interstate power purchase agreement
where suppose seller is in tamil nadu and the consumer is in Uttar Pradesh, you have to
define in an interstate transaction where the delivery point is, is it at the state periphery or is
at the regional periphery.

The sixth point is the payment security mechanism which typically says how much amount
you have to keep as a security to the developer. What developer charges is a six months or
one year letter of credit or bank guarantee or post dated cheques which you have to submit to
the off-taker as a security against the power which you are buying from the developer.

You have to define billing and payment also in power purchase agreement. The due date of
the bills, period of the bill like monthly, weekly or fortnightly. Also, you may include the
delay payment charges and the sub charges the consumer has to pay to the supplier in case of
any defaulting and delaying payment.

Representation and warranties are more into the legal part like you have to define who are in
any cases of bankruptcy or any cases of irregularity and how one is keeping oneself safe from
the other’s party limitation of liabilities.

Force majeure conditions have to mentioned in PPA like any act of god or anything due to
which the power supply could not take place. In case the supplier could not supply power for
more than one year and the off-taker could not pay for power for more than one year. In these
cases, how are you going to terminate the PPA .

Indemnity clause protects you from any kind of wrongdoings. The last is the governing law
and dispute resolution which is the main part of our research. In this component you define
under which jurisdiction this PPA has been signed.

Nodal agencies involved in PPA

 Discom -
  STU/CTU
 SLDC
 RLDC
 NLDC
 SERC
 SERC
 CERC

Governing laws and dispute resolution

Dispute resolution generally refers to one of several different processes used to resolve
disputes between parties, including negotiation, mediation, arbitration, collaborative law,
and litigation. This clause in the PPA states that the agreement shall be governed by and
construed in accordance with the Laws of India. Any legal proceedings in respect of any
matters, claims or disputes under this Agreement shall be under the jurisdiction of appropriate
courts in. Dispute can be resolved by amicable settlement or by appropriate commission or
through arbitration.6

AMICABLE SETTLEMENT
Either Party is entitled to raise any claim, dispute or difference of whatever nature arising
under, out of or in connection with this Agreement (“Dispute”) by giving a written notice
(Dispute Notice) to the other Party, which shall contain a description of the Dispute, the
grounds for such Dispute and all written material in support of its claim.
The other Party shall, within thirty (30) days of issue of Dispute Notice issued, furnish
counter-claim and defences, if any, regarding the Dispute and all written material in support
of its defences and counter-claim. Within thirty (30) days of issue of Dispute Notice by any
Party, if the other Party does not furnish any counter claim or defence under or thirty (30)
days from the date of furnishing counter claims or defence by the other Party, both the Parties
to the Dispute shall meet to settle such Dispute amicably. if the parties fail to resolve the
dispute amicably within thirty days from the letter of the dates mentioned. The dispute shall
be referred for dispute resolution.

DISPUTE RESOLUTION BY APPROPRIATE COMMISSION

6
https://natgrp.files.wordpress.com/2013/12/mp_solar_ppa.pdf
Where any Dispute arises from a claim made by any Party for any change in or determination
of the Tariff or any matter related to Tariff or claims made by any Party which partly or
wholly relate to any change in the Tariff or determination of any of such claims could result
in change in the Tariff, or relates to any matter agreed to be referred to the Appropriate
Commission, such Dispute shall be submitted to adjudication by the Central Commission.
NDMC shall be entitled to co-opt the Buying Utilities and/or the lenders (if any) as a
supporting party in such proceedings before the Central Commission.7

DISPUTE RESOLUTION THROUGH ARBITRATION

If the dispute is not amicably resolved and such dispute is not covered by appropriate
commission, such dispute shall be resolved by arbitration under the provisions of the
Electricity act, 2003. Proceedings as well as the appointment of the arbitrator shall be carried
out by the appropriate commissions under the electricity act, 2003 as amended from time to
time.

As stipulated by the said electricity act, 2003, the said arbitration will take place as per the
provisions of the arbitration and conciliation act, 1996 as amended from time to time. The
place of the arbitration shall be the city where headquarters of discom is located.

The language of the arbitration shall be in English. The Arbitration Tribunal’s award shall be
substantiated in writing. The Arbitration Tribunal shall also decide on the costs of the
arbitration proceedings and the allocation thereof. The provisions of this Article shall survive
the termination of this PPA for any reason whatsoever. The award shall be of majority
decision.

Notwithstanding the existence of any Dispute and difference referred to the Appropriate
Commission and save as the Appropriate Commission may otherwise direct by a final or
interim order, the Parties hereto shall continue to perform their respective obligations (which
are not in dispute) under this Agreement.

7
https://energy.rajasthan.gov.in/content/dam/raj/energy/rrecl/pdf/Home%20Page/Draft-PA-%26-Model-Lease-
Agreement-%26-Power-Attorney.pdf
The importance of dispute resolution clause in a power purchase agreement by
analysing the Delhi High Court judgement on coastal Andhra Power Ltd. Vs. Andhra
Pradesh Central Power

the recent judgment of the Delhi High Court where Reliance Power Limited failed to get any
relief pursuant to the change in prices of coal in Indonesia. The present judgments under
examination have surfaced in the dispute of Coastal Andhra Power Limited (the “CAPL”)
against Andhra Pradesh Central Power Distribution Co. Ltd and Power Finance
Corporation (the “PFC”) and has provided for some major learnings when it comes to the
understanding, drafting and interpretation of certain essential elements of any power purchase
agreement.

To understand the core issues of dispute with regards to the understanding of what
constitutes force majeure in light of power purchase agreements while also understanding the
maintainability of application under Section 9 of the Arbitration and Conciliation Act, 1996
(the “Arbitration Act”) in view of other legislation governing a power purchase agreement. In
the end, we shall have a look at the various ways in which the courts and tribunals have dealt
with power purchase agreements in the past while evaluating a way out.8

In the 2012 judgment of the Single Judge of the Delhi High Court, it was noted that the
change in the price of coal could not be kept away from affecting the tariff at all. It is to
understand that although the contention of CAPL that the change in the price of coal in the
Indonesian market lead to its claim under the force majeure clause of the PPA , the essence of
the very argument was the change in price of coal in Indonesia which could not be treated in
isolation from its effect on the tariff.

It was possible that the determination of the current dispute could lead to determination or
change in the tariff bringing the scope of the current question which is not in the ambit of
PPA. Thus, the submission of the CAPL that it was not looking forward to any relief with
regards to the determination of tariff stood negated. Considering the fact that specific subject
matter jurisdiction rested with the Central Electricity Regulatory Commission (the “CERC”),
the matter could have only been referred to arbitration only upon the satisfaction of Section
79 (1) (f) of the EA.
8
https://firstgreenconsulting.wordpress.com/2013/05/01/power-purchase-agreement-in-indian-
context/#:~:text=Power%20Purchase%20Agreement%20in%20Indian%20Context%3A,purchase%20electricity
%20(the%20buyer).
The recent judgment of the Delhi High Court pronounced on January 15, 2019, settled the
question, with regards to if the change in the laws of Indonesia would give way to force
majeure as claimed by the CAPL. In order to decide the same, the Delhi High Court placed
complete reliance on the Supreme Court’s judgment in Energy Watchdog vs. Central
Electricity Commission. The Supreme Court had concluded that in the general conduct of
business it is very common to come across a certain unexpected turn of events. Such an
occurrence cannot give way to invoking force majeure. Only in certain circumstances where
the parties did not wish to be bound in any manner at a fundamental level as per the terms of
the contract, then the contract may cease to bind. In additions to this, the PPA did not
specifically push upon CAPL to purchase coal from Indonesia only.

The judges, if not the court, could probably spot the intent of the CAPL [wholly owned by
RPL] willing to conduct business with a sister company only. It has often been reiterated that
commercial contracts should be viewed from a business perspective which draws the fact that
when such bids were submitted it was a risk taken by the bidder with the full knowledge of
the fact that a change in the price of the coal could take place. It is a further settled principle
by way of the Supreme Court’s judgment in the Energy Watchdog case that a change in
Indonesian law will not amount to a change in law or to force majeure within the meaning of
the PPA. The Delhi High Court thus very rightly concluded that the CAPL did not have
a prima faciecase in the present matter.9

While in the eyes of the law the above interpretation of the honourable courts is well within
set limits, the courts need to realize that when the commercial viability element is removed
from a commercial contract then it shall no more be of interests to the private parties. Three
projects, namely Mundra-Adani Power, CGPL-TATA Power, and EPGL became completely
economically unviable after the changes in the price of the coal imported from Indonesia,
discussed above.

While CERC and the Appellate Tribunal for Electricity had granted relief to the three projects
under the force majeure clause of their respective PPAs, the Supreme Court’s judgment in the
Energy Watchdog case overruled the same. Reports suggest that the three power plants have
suffered losses to the tune of more than INR 210 billion. In October 2018, the Supreme

9
https://blog.ipleaders.in/importance-dispute-resolution-clause-power-purchase-agreement-analysis-coastal-
andhra-power-limited-vs-andhra-pradesh-central-power/
Court’s step of allowing amendments to the existing PPAs of the three projects before the
CERC was much welcomed and gave a ray of hope.

Such amendments are expected to push the target prices by 30 percent however the same can
again be challenged in the court of law of competent jurisdiction. Keeping in mind the
decision of the Supreme Court to allow amendments to the PPAs, could be a new trend,
including the present matter, wherein the entities shall approach the CERC to approve
amendments to their PPAs.

Dispute Resolution for cross border electricity trade

While each country is sovereign by itself, governed by its own policies and laws, there is a
need to harmonise the laws/ rules/ regulations governing trade in electricity in order to
facilitate the cross-border trade. It is therefore necessary to frame guidelines on cross border
trade in electricity across and with the neighbouring countries by India10.

The guidelines have been framed with this objective in view and aligned with the existing
laws and requirement of the physical infrastructure development, system operation with
reliability and stability, economic and commercial aspects, system demand, settlements and
reconciliation of the obligations.

Notwithstanding anything done or any action taken or purported to have been done or taken
for cross border trade of electricity with neighbouring countries shall be deemed to have been
done or taken under provisions of these guidelines and shall continue to be in place till the
expiry of the existing contract. Keeping the above background in view, Ministry of Power in
consultation with Ministry of External Affairs hereby issues the "Guidelines on Cross Border
Trade of Electricity" .

The disputes within Indian territory shall be settled as per the provisions of Electricity Act,
2003. 10.2 The disputes involving entities of separate countries may be settled through
Singapore International Arbitration Centre or as may be mutually agreed by the participating
entities.

Notwithstanding the existence of any dispute and difference referred for arbitration and save
as the arbitration tribunal may otherwise direct by a final or interim order, the Parties hereto

10
https://powermin.nic.in/sites/default/files/uploads/Guidelines_for_Cross_Boarder_Trade_of_Electricity_2016.
pdf
shall continue to perform their respective obligations (which are not in dispute) under this
Agreement.

Conclusion

In countries having RECs, like the USA, it is critical to estimate the total revenue stream
available over the life of the project. To understand various types of PPA, one should be
aware of open access and tariff structure. Dispute resolution generally refers to one of several
different processes used to resolve disputes between parties, including negotiation, mediation,
arbitration, collaborative law, and litigation.

This clause in the PPA states that the agreement shall be governed by and construed in
accordance with the Laws of India. Any legal proceedings in respect of any matters, claims or
disputes under this Agreement shall be under the jurisdiction of appropriate courts in. Dispute
can be resolved by amicable settlement or by appropriate commission or through arbitration.

While each country is sovereign by itself, governed by its own policies and laws, there is a
need to harmonise the laws/ rules/ regulations governing trade in electricity in order to
facilitate the cross-border trade. It is therefore necessary to frame guidelines on cross border
trade in electricity across and with the neighbouring countries by India.