Solar Energy Sale to Third Party

A lot of Residential and Commercial facilities are very keen to use Solar Energy for it captive use. There is however significant capital involved in setting up the solar facilities. There are some options available in the market where a supplier or vendor gets into a power purchase agreement to sell solar power to the residential /commercial facility. The supplier brings the capital, set-up the solar plan, operates/ maintains the plant and then bills the facility for the sale of power.  It seems to be a win-win situation for both the parties. The question arises if it is legal or what the processes to made this a legal process.

Unfortunately, this power purchase agreement is not as straight forward as it sounds. So where is the complexity?

As per the electricity laws of India, electricity is a regulated commodity. There are rules for selling this commodity. There are three mechanisms available to sell the power in India:

<![if !supportLists]>·         <![endif]>An entity can generate power for its captive use

<![if !supportLists]>·         <![endif]>An entity can generate power and sell it to the state utility or a licensee (a private company may have the license to distribute power such as BSES in Mumbai and Delhi or Tata Power in Delhi). The sale of this power is regulated by the tariffs decided by the state regulatory commission or by power purchase agreements (there are complexities with respect to inter-state and intra-state scenarios – it does not change our arguments though)

<![if !supportLists]>·         <![endif]>An entity may sign a third party sale agreement. There are however scenarios such as open access regulations which govern the sale of power in such scenarios.  The open access regulations mandate the career charges, cross-subsidy charges etc.

The case of solar energy sale within by the supplier from the solar plant located in the client premises comes into third category. As the generation is at the source itself, the career charges may not be applicable. The possibility of cross-subsidy charges can however not be ruled out. Thus the sale of energy by the supplier to the client may be subjected to additional regulations (in terms of disclosure) as well as cross-subsidy charges. We are yet to see a wording in the regulation which does away with the open access clauses for such sale of power.

The regulations still need to clarify how the third party power sales can be allowed without invoking the open access clause. All the entities, which are entering into such sale agreements, need to be careful of the regulatory risk which they would be taking.

Of course there are variations of agreement possible. The agreement can be over the operation or maintenance charges or for the rent of the land use etc.

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