India: CERC Allows NTPC To Utilize NVVN's Trading Licence

Last Updated: 7 November 2016
Article by HSA Advocates

CERC by its order dated October 14, 2016 has rejected NTPC's prayer to grant a separate trading licence, however, it has allowed NTPC to utilize the trading licence already granted to its wholly owned subsidiary – NTPC Vidyut Vyapar Nigam Limited. Set out below is a summary of the order, our analysis and observations on the same.

Brief Background

NTPC Vidyut Vyapar Nigam Limited (NVVN) was designated as the nodal agency since 2010 under the Jawaharlal Nehru National Solar Mission (JNNSM), now called as National Solar Mission (NSM), for buying power from solar power developers, bundling it with cheaper thermal power from power plants of National Thermal Power Corporation Limited (NTPC) and then selling such bundled power to various discoms. Subsequently, Solar Energy Corporation of India (SECI) was also involved as the designated agency by the Ministry of New and Renewable Energy (MNRE) for implementation of a number of its schemes including the VGF schemes for large-scale grid-connected projects under JNNSM.

Both NVVN and SECI applied for and were granted inter-state trading licence from the Central Electricity Regulatory Commission (CERC) as they were effectively involved in trading of electricity by way of purchasing power from solar power developers and selling such power to discoms.

In order to implement different phases of JNNSM, the MNRE in March 2015 issued the Guidelines for Selection of 3000 MW Grid – Connected Solar PV Projects under Batch – II, 'State Specific Bundling Scheme' (1st Tranche Guidelines) as part of the overall scheme involving three tranches for implementing 15000 MW grid connected solar PV power plants during the period 2014 – 2019.

Under the 1st Tranche Guidelines as well, NVVN was made the designated agency for implementation by way of getting involved in the activity of trading. However, in order to provide additional financial comfort to solar power developers for undertaking projects of higher capacity, MNRE, at the request of the stakeholders, decided to replace NVVN by NTPC in April 2015.

Pursuant to this, NTPC got involved in implementation of the scheme and started entering into Power Purchase Agreements (PPAs) with solar power developers and back to back Power Supply Agreements (PSAs) with discoms i.e., got effectively involved in the activity of trading as defined under the Electricity Act, 2003 (EA Act). Despite, not being a trading licensee under the EA Act, NTPC was undertaking the trading activity.

Requirement of Trading Licence by NTPC

In view of the background set out above, NTPC filed a petition before CERC (bearing Petition No. 2/TDL/2016) for granting inter-state trading licence to it in terms of the EA Act. This petition has been disposed of by CERC by way of its dated October 14, 2016 (Order). This Order assumes significance as it clarifies the position vis a vis NTPC's legal standing of entering into PPA with solar power developers and back to back PSAs with discoms, in absence of having a trading licence.

Critical Issues involved in proceedings before CERC

The biggest hurdle faced by NTPC during the proceedings before the CERC was on account of the fact that NVVN (NTPC's wholly owned subsidiary) was already holding an inter-state trading licence. In view of this, CERC inquired from NTPC as to why NVVN cannot undertake the activity of purchasing and selling power under the MNRE scheme and why NTPC should be granted a separate licence. Further, CERC also directed NTPC to suggest alternatives to ensure effective use of NVVN's existing licence.

In relation to the first issue, NTPC submitted that on account of its direct involvement in view of the policy decision of the Government of India for implementing NSM, it has become necessary for NTPC to directly get the trading licence. With respect to suggesting alternative mechanisms for ensuring effective utilization of NVVN's licence, NTPC suggested the following alternatives :

  • (i) CERC may permit and direct NVVN to be added as a party to the Agreements which have been/are required to be entered into with the solar power developers and also, with the discoms on a back to back basis.
  • (ii) The transaction of purchase of electricity from the solar power developers and re-sale thereof to discoms be directed to be covered under the inter-state trading licence of NVVN and therefore, being authorized in accordance with law, notwithstanding NTPC is a party to the transaction and does not hold any licence. The inter-state trading licence given to NVVN, when NVVN is the wholly owned subsidiary, may be permitted to be utilized for purchase and re-sale of electricity involving NTPC.
  • (iii) NTPC as a commercial arrangement, entered into such agreements as it thinks appropriate with solar power developers, notwithstanding that the purchase of electricity from a solar power developer requires a licence.

Outcome of the CERC's Order

CERC at the outset did not consider the third alternative on account of lack of clarity in the said option. In context of the first alternative which required NVVN to be added as a party to the existing PPAs, CERC observed that the said alternative requires it to issue directions to the existing contracting parties to modify their contract in order to make NVVN party to the PPA and PSA. This according to CERC could not have been done as it is a cardinal principle of contract law that the parties should enter into an agreement through their free consent. As the solar power developers and the discoms were not parties to proceedings before CERC, it held that no direction can be issued with regard to inclusion of NVVN as a party to the PPA/PSA without hearing the relevant parties. Accordingly, CERC rejected the first alternative suggested by NTPC.

In relation to the second alternative suggested by NTPC, CERC observed that since NVVN is a wholly owned subsidiary of NTPC which exercises pervasive control over the management and operation of NVVN (that has been issued a Category I inter-state trading licence), NTPC can utilize the trading licence issued to NVVN in order to fulfill its obligations under the NSM. Therefore, CERC did not grant an independent trading licence to NTPC and allowed it to use NVVN's existing licence.

CERC further clarified in its Order that the billing for purchase and sale of solar power is required to be done in the name of NVVN but settlement of tariff and other dues will have to be made by NTPC in terms of the provisions of the PPA or PSA as the case may be. CERC observed that doing so, will obviate the need for any change in the PPA or PSA that NTPC has already entered into with the solar power developers or the discoms respectively.

Conclusion

In our view, the legal principle which can be derived from the CERC's Order is that a holding company which has pervasive control over management and operation of a subsidiary company can utilize the licence granted to the subsidiary company for undertaking the licensed activity of trading, without obtaining a specific licence for itself. Having said that, it should be noted that CERC has categorically specified in its Order that NTPC has been allowed to use NVVN's licence by way of a special dispensation in order to further the objective of NSM being a programme of MNRE and the Government of India and also to provide comfort to stakeholders in form of better bankability of the solar power projects. Further, CERC has clearly stipulated that its Order in this case should not be quoted as a precedent. However, in view of the fact that CERC has proceeded on the basis of a specific legal principle as discussed above, it will be interesting to see as to how a similar case in context of private parties is dealt with by it in future.

That said, in any event, by passing this Order, CERC has ensured that the solar power developers who have already signed the PPAs with NTPC do not have to undergo any hardship, as the sanctity of such PPAs and PSAs involving NTPC, has been protected. Moreover, CERC has chiseled the way forward for implementation of NSM by way of allowing NTPC to continue with execution of PPAs and PSAs going forward.

This Order of CERC definitely can be termed as a welcome step as this will help in creating the confidence of the investors and solar power developers in the institutional framework for power sector in India and will be instrumental in the growth and development of the renewable sector specifically.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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