Columbia Law School’s Clean Energy Investment US-India Project aims to enable U.S. investors and solar and other renewable energy equipment manufacturers to access the Indian market. So far, investment in this expanding market has been limited by high transaction costs. Funded by a generous grant by the Sujana Group and with the assistance of experienced lawyers, bankers and industrial corporations in both the U.S. and India, the Project will draft contract templates to be used for the Project in order to better manage those transaction costs. As described below, comments and feedback are invited.
Investment in Indian clean energy projects can potentially earn high returns for U.S. investors, lower greenhouse gas emissions and decrease production costs for Indian companies. The burgeoning Indian energy market is estimated at $1.1 trillion by McKinsey, with an estimated potential of reducing 2.8-3.6 billion tonnes of GHG, if it can access the needed finance. Of the $1.1 trillion, it is believed that $333 billion are financially attractive projects, with “positive IRR ratings” (in banker parlance).
Investment Structure Proposed
- Quasi-Project Finance Model: The proposed model follows non-recourse finance, along the lines of standard project finance. Lenders will work with an Indian Corporate Sponsor and form a Project Special Purpose Vehicle (“Project SPV”), for financing the captive or independent power project.
- The Project SPV: The Lenders will finance the power project through the Project SPV. The Loan Agreement between the lenders and the Project SPV will govern the terms of the loan. This Project SPV will be owned by equity investors, including the Lenders, Corporate Sponsor and/or other private investors.
- Corporate Power Purchase Agreement (“Corporate PPA”): The Project SPV will rely on one or more Power Purchase Agreements between the Project SPV and the Corporate Sponsor in order to provide contractual assurances that the power produced by the project will be purchased by the Corporate Sponsor, thereby generating cash flow to repay the loan.
- Government Power Purchase Agreement (“Government PPA”): Some Corporate Sponsors may have already negotiated orders to supply power to the government. Some state governments have started executing agreements to buy certain amount of power from renewable energy sources at higher prices than applicable for purchase from coal sources. Such existing supply agreements with governments and demonstrable earnings may assist the financial viability of the project, subject to reviewing the legal terms in these Government PPAs.
- In addition to the Corporate PPA, it will be important for the Corporate Sponsor to demonstrate that the arrangements for a reliable engineering, procurement, construction contractor (to build the plant), operation and maintenance, grid connection (to the state electricity grids) etc. are in place. The grid connection will allow for a Plan B – the ability to sell to someone other than the Corporate Sponsor in case of excess supply or for any other reason and is hence, quite important from a lender’s risk perspective.
New Income Streams
- In addition to the income stream from the Corporate PPA, the Clean Energy Investment US-India Partnership Project will also enable the Lenders to include earnings from green income streams and tax allowances.
- Green Credits – Renewable and energy efficient plants in India can potentially register for and earn carbon credits under the United Nation Clean Development Mechanism (“UNCDM”) (created under the Kyoto Protocol). If for any reason the power project is not eligible to receive credits (by the UNCDM and related bodies), the project should still potentially earn credits under voluntary offset mechanisms or national regimes that the Indian Government has proposed. The Indian Government has proposed a Perform, Achieve, Trade (“PAT”) Scheme for installing more energy efficient technology, or Renewable Energy Certificates (“REC”) for renewable power plants.
- Moreover, the Indian Government also provides tax benefits for energy efficient and other green power plants, which could be utilized to finance the power project.
- Including multiple income streams and assets will reduce the lender’s risk and in turn, the Corporate Sponsor could benefit from better loan terms. Presently, we propose including these incomes as “Mandatory Prepayments”, whereby it is agreed that whenever income is realized from these sources, that income will automatically be paid to the Project SPV and applied against the loans made by the lenders (and not retained by the Corporate Sponsor).
Thus, the Project will draft and make available for free download the suite of documents needed for a corporation to put up the power plant and obtain the loan necessary. This suite will include:
- Primary Loan or Credit Agreement
- Power Purchase Agreement
- EPC Agreement, O&M Agreement and Grid Connection Agreement
- Therefore, it may be possible to sell energy on the local grid to entities other than the Corporate Sponsor. A third source of potential revenue is through the sale of green energy credits in European markets under the United Nations’ Certified Emission Reductions, or the purchase of voluntary carbon offsets by corporations in the U.S., Japan, Europe, or Australia. Additional credits may be available under Indian regulations such as RECs (renewable energy credits) or PATs (perform, achieve, trade).
Questions That Arise
This results in many questions:
- Proposed SPV Location: Project SPVs are typically located in Mauritius, Cayman Islands, Cyprus to name just a few. In which jurisdiction, should the proposed SPV be located and why?
- Governing law: Parties prefer different choice of law to govern the agreement. In this case, should it be New York (which most US lenders prefer), India (where the Corporate Sponsor is located) or England (where the carbon credit market is most active and perhaps a viable compromise between New York and Indian law)? Note that some agreements (e.g., security agreements) will necessarly be governed by Indian law.
Our proposed investment structure is available at the Project Documents page.
Readers’ Comments & Feedback Will Make A Difference
- Recommendations from readers will be very helpful and contribute to the drafting of the final agreements that will be provided for download in connection with specific projects at no cost to the lenders, the Project SPV or the Corporate Sponsor.
- By reducing the impediment posed by high transaction costs, the Project aspires to facilitate the investment into one of the world’s largest green-house gas abatement opportunities. We welcome input and feedback from bankers, power project experts and government leaders familiar with this finance project.
- Please email any comments and suggestions to the Project Director, Aarthi Anand