India has set a target of achieving 100 GW power capacity through grid-connected solar energy, out of which 40 GW is targeted to come through rooftop solar installations by 2022. Due to several factors, including frequent power cuts, increasing prices of conventional power, high irradiation, and the falling costs of solar power, demand has been rising in the rooftop solar market.
The RESCO model is one of the methods of implementing rooftop solar installations. Under the RESCO model, a renewable energy service company ("RESCO"), (i.e., an energy service company that provides energy to consumers from renewable energy sources), develops, installs, finances, operates and owns the rooftop solar power project ("Project"), and supplies power generated from the Project to the consumer on whose premises the Project is set up ("Customer") or to the grid through net-metering.
This article sets out an overview of the application of the RESCO model in India.
2. APPLICABLE LAWS
(a) Electricity Act, 2003
The Electricity Act, 2003 ("Electricity Act") is the principal statute governing generation of electricity in India, and the Electricity Act (along with the rules and regulations made under the Electricity Act, including in rules and regulations in relation to net-metering) is applicable to RESCOs and their Projects. In addition, guidelines and orders issued by the Ministry of New and Renewable Energy ("MNRE") as well as orders of the Central Electricity Regulatory Commission, State Electricity Regulatory Commissions, and the Appellate Tribunal for Electricity (as applicable) are also applicable to RESCOs and their Projects.
(b) Transfer of Property Act, 1882
The provisions of lease contained in the Transfer of Property Act, 1882 govern the lease deeds executed between the RESCO and the entity on whose rooftop premises the Project is intended to be set up.
(c) Indian Easements Act, 1882
The license agreements executed between the RESCO and the entity on whose rooftop premises the Project is intended to be set up are governed the provisions of license entailed in the Indian Easements Act.
(d) Registration Act, 1908
The lease agreements are subject to the registration requirements under the Registration Act, 1908.
(e) Relevant Stamp Duty Acts
The power purchase agreements, the lease agreements, and the license agreements are subject to the applicable rates of stamp duty specified under the Indian Stamp Act, 1899 or applicable State specific stamp duty legislation, as applicable.
Various states government, government authorities and agencies regularly float tenders inviting proposals from developers to set up grid connected RESCO projects on rooftops of buildings owned by Central, State, or local governments, government institutions (such as Public Sector Undertakings, all buildings of societies, companies, corporations, educational and health institutions including those registered under the Societies Registration Act , 1908 and the Indian Trust Act, 1882). These tenders also provide for a mechanism for developers to obtain financial assistance from the Central Government, subject to eligibility criteria prescribed in the tender. Usually, the tenure of power purchase agreements contemplated under such tenders ranges between 10 to 25 years.
3. ATTRIBUTES OF A RESCO MODEL
(a) Contractual Framework
(i) RESCO PPAs
'Build, Own, Operate and Transfer' (BOOT) is a special kind of RESCO model in which the RESCO constructs, owns, operates, and transfers the ownership of the Project to the Customer after the expiry of a predefined period. The RESCO and the Customer enter into a long-term power purchase agreement ("PPA") for an agreed tenure, which sets out, among others, the terms at which the power generated from the Project will be sold to the Customer and the tariff at which the power will be sold. Excess power from the Project (if any) could be sold by the Customer to the distribution utility through net metering system – the net metering regulations differ from state to state.
Under the PPA, the RESCO owns the Project and is responsible for its installation as well as its operation and maintenance of the Project throughout the tenure of the Project, and at the end of the PPA term, the ownership of the Project is transferred to the Customer. Thereafter, the Customer may either choose to retain the RESCO for operation and maintenance services or engage a third-party operator.
If the entity on whose premises the Project is located does not intend to buy the power generated from the Project and does not entered into a PPA with the RESCO, that entity can either lease the rooftop premises to the RESCO by means of a lease agreement or enter into a license agreement granting the RESCO the right to use the premises for the limited purpose of setting up and operating the Project. The RESCO then operates the Project and exports the energy generated to the local distribution utility at a predetermined feed-intariff (FiT) approved by the State Electricity Regulator under relevant schemes issued by the relevant state.
(ii) RESCO PPAs
Rooftop solar projects in India typically follow either the lease model or the license model to obtain rights to the rooftop of the Customer for construction and operation the Project. The entity on whose premises the Project is set up enters into either a lease deed or a license agreement with the RESCO granting the RESCO the leasehold rights/license to use the premises to set up and operate the Project. Alternatively, the RESCO and the Customer can either choose to incorporate leasehold rights/license rights in favour of the RESCO under the PPA.
If the RESCO and the Customer enter into distinct PPAs and license/lease agreements, then: (a) the Customer will be required to pay the RESCO tariff for the electricity supplied from the Project as per the terms of the PPA; and (b) the RESCO will be required to pay the Customer lease rentals/license fees under the lease/agreements for using the rooftop premises. The PPA and the lease/license agreements will need to be stamped as separate instruments under the applicable stamp duty legislation. Additionally, a lease agreement will also need to be registered under the Registration Act, 1908. License agreements, on the other hand, are not compulsorily registrable under the Registration Act, 1908.
If the RESCO and the Customer do not enter into separate PPAs and license/lease agreements but choose to incorporate lease/license to the rooftop premises within the PPA, there would be no difference to the rights and obligations of the parties. The Customer would be required to pay the RESCO, the tariff for the electricity generated from the Project under the terms of the PPA, and the RESCO will be required to pay the Customer lease rentals/license fees under the PPA (which can be commercially adjusted in the tariff structure). However, providing for separate lease rental/license fee in the PPA may result in stamp duty authorities raising questions on the calculation of stamp duty applicable to the PPA and may require the lease rental/license fee to be factored while calculating the stamp duty. Therefore, if the PPA includes lease provisions, it recommended to capture the lease rental/license fee in the tariff.
(b) Benefits of RESCO
The advantages of adopting the RESCO model include the following:
- The RESCO model is different from the CAPEX model in that the Project is owned by the RESCO, and not by the Customer. The capital expenditure associated with development of the Project is entirely borne by the RESCO. The Customer consumes the electricity generated from the Project and pays the RESCO a pre-decided tariff as per the terms of the PPA. From a Customer's perspective, the RESCO model is a low-cost intensive option compared to the CAPEX model where the rooftop owner owns the project. The Customer need not incur any upfront costs in the RESCO model and needs to only pay for the electricity generated.
- RESCO installations enjoy the benefit of Central and State governmental support in the form of various subsidies/financial support.
- Under the RESCO model, the responsibility of operating, maintaining, and repairing the Project is entirely on the RESCO for the entire tenure of the Project under the PPA.
- RESCOs also undertake monitoring of the load and consumption of electricity generated from the Project along with energy data analytics.
- The RESCO has the option to sell excess power generated by the Project to the grid at attractive feed-in tariff rates, subject to state regulations. Therefore, the RESCO receives revenue not only from the Customer for the electricity consumed by the Customer, but also from the utility for the excess electricity injected into the grid by the RESCO.
- Commercial banks are also reluctant to lend to rooftop solar projects because of high risk perceptions. As a result, Customers prefer opting for the RESCO model since the RESCO bears the risk of obtaining financing for the Project.
(c) Risks associated with RESCO
Some of the key risks associated with adopting the RESCO model are discussed below:
- The net metering regulations of some states, such as Gujarat, do not approve of the RESCO model. The regulations do not allow private developers to install Projects under the RESCO model.
- Some states have a cap on net metering, which proves to be a risk for RESCOs.
- There is a risk of disputes arising between the customer and the RESCO operator. Customers may be tempted to renegotiate the PPA or renege on the PPA to buy power from cheaper open access sources. Since the enforcement of the PPAs is difficult, the risk of payment default by the customer increases over time. Therefore, the RESCO model provides limited legal recourse to the RESCO.
- RESCOs are not inclined to implement Projects with Customers that do not have a good track record. Accordingly, the RESCO model is typically adopted by Customers who are larger corporate houses with high credit ratings, and not smaller enterprises. Therefore, due to the limited credibility of medium and small enterprises, they cannot be serviced by RESCOs
- Since the Customer will not own the Project, it would not be able to claim accelerated depreciation under Indian tax laws.
In light of the various benefits associated with the RESCO model, it is an attractive option for Customers that want to use rooftop solar power but do not want to incur heavy capital expenditure. Further, it is also becoming an attractive opportunity for corporate houses, institutions, and government buildings to earn revenue from lease rentals/license fees. However, the Customer should keep in mind that the RESCO model does not provide for hassle free changing of the service provider or the RESCO during the pendency of the contract, therefore, in the event of unsatisfactory performance of the service provider, the Customer may have to undertake elaborate procedural steps as set out in the underlying agreement, for the purpose of changing the RESCO and obtaining the same services from a different entity.
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.