Hemant Sahai, the founding partner of HSA Advocates, which is one of India’s leading and most active law firms in the renewable energy space. In this conversation, Mr. Sahai provides insight into how the energy landscape is evolving from a legal standpoint, and how the courts have responded to instances where discoms have renegaded from contract commitments.
Hope you enjoy my conversation with Mr. Sahai! Topics covered in this podcast:
[0:09] Mr. Sahai introduces himself and his involvement in the energy sector in India
[5:35] The context around DISCOMs and their delay of payments to renewable generators
[13:21] What is happening with subsidies and will there be a switch to direct transfers from the State to the consumer instead of payments through a DISCOM?
[18:00] Will renewable energy be a great vehicle for India to improve is leadership position in the world and are Indian solar companies competitive on a global scale?
00:06 Karan Takhar
Hello everyone. This is Karan Takhar, and welcome to the Energy podcast. Over the past decade, India has done an impressive job of integrating renewable energy into its energy mix. For this Fullbrights podcast series, I sought to investigate the enabling factors and potential of India's global leadership in renewable energy, with the focus on solar. This Fulbright series is broken down into Four Seasons. In this season, through conversations with leaders who have been instrumental in developing the Indian renewable energy sector, we will highlight how India has managed to integrate 35 gigawatts of solar in just a span of 10 years. We will also explore what? These leaders believe the key challenge is to be as this sector further develops.
In this episode, I'll be speaking with Hemant Sahai, the founding partner of HS advocates, which is one of India's leading law firms in most active law firms in the renewable energy space. Mr. Sahai represents many of India's leading renewable energy development companies and recently was a leading representative in India important Andhra Pradesh case, where the government tried to alter the terms of the power purchase agreement. In this episode, we'll explore Mr. Sahai views on the present challenges of the India renewable energy sector and also hear his perspective on the way forward. Hope you enjoy my conversation with Mr. Sahai. Thank you so much, Mr. Sahai, for joining us. I really appreciate you taking the time, and I want to ask you just briefly to introduce yourself so that listeners can get a little bit of understanding of what you do and your involvement in the renewable energy sector in India. Can you provide a brief introduction?
02:17 Hemant Sahai
Firstly, thanks very much for this interview Hemant Sahai. I'm a lawyer. I run a law firm. We have a very strong focus on the infrastructure space and doing the infrastructure space, a very strong focus on renewable energy. My personal involvement in the renewable energy space goes back to 2010 when Gujarat start with the first major solar program, 963 megawatts of projects, almost 1000 megawatts considering that the total installed capacity in India at that point of time was 50 megawatts, the one state coming over the massive program, 1000 megawatts was clearly, you know, path-breaking. In parallel, I also worked with the Clinton Foundation to set up the first solar parks in India, who in Gujarat and one in Rajasthan 2010; of course, were pioneering days in many ways, the size and scale of the solar projects was very small in comparison to what we have today. The tariffs were very high, and therefore it was seen at that point of time It's still an emerging sector emerging technology, but interestingly over the years, as the number of projects that got bid out increased and the number of investors that came to join the sector also proved both domestic and foreign investors. The prices in our solar generation started falling, and I think today, you know, 2020 prices which are there are lower than conventional energy, conventional thermal energy, even on a pooled basis. You know, maybe solar power specifically is compatible, at least in terms of, you know, every generation or generation costs. My journey over the years has primarily been assisting the developers and investors, both debt and equity; of course have done a little amount of work with utilities to the government-owned utilities at this, and therefore I think I have a fairly broad idea and picture of, you know what is involved now coming specifically to sanctity of contracts. Yes, I mean that has been an issue that we've talked about, you know, several times in terms of the discounts, especially the government. State government owns distribution utilities they're running on the contract, and of course, man has the most recent example. Some of it is, I think, unjustified and perhaps, you know, some amount of disputes per say by inherent in any contract, but the blatant disregard to the contract and a blatant, you know, withdrawal from PPA, I think that has happened for the first time in Andhra Pradesh, and certainly the scale at which it happened is unique. So there been instances in the past, you know, and I think they've been kind of sporadic and isolated, but the code interestingly in each of the instances of courts have always stepped in and upheld the contracts and preserve the sanctity of contract. I think, as far Andhra is concerned. I almost called You know what happened in the Andhra Pradesh and the Andhra government is a relegated state because the central government came very strongly in support of the PTA's, very strongly in favour of the sector, and actually put in their whole might to make sure that, you know, at least the government state government relents and fain line. It did, to a certain next step, of course. It required a huge amount of, you know, effort, including in court. But the court in Andhra Pradesh, the High Court, and of course, regulatory commissions they stepped up and made sure that you know the PTA’s not ever be the problems entirely over. It is still pending in courts, but more recently, I think there have been some very strong positive push by the central government to try and make sure that there is not a repeat of the kind that we witnessed in Andhra Pradesh. So overall, I've done still very, I would say, confident and bullish in the Indian legal system no one does, you know, get to encounter some. You know, maverick decision makers at the state level, and I think Andhra Pradesh, the one looks at the history, they just scratch the surface one will realize that the whole exercise or just some tiny politically motivated not to say that there's a justification, but certainly it's something which the courts and the government recognized and stepped in.
06:34 Karan Takhar
06:41 Hemant Sahai
And have taken steps to remedy.
06:44 Karan Takhar
OK. Thank you for clarifying, and yeah, so I was reading at the forum of regulators meeting limit and just going to your point of how the central government is really helping generators receive. Their agreed to terms in the contracts. The Secretary of the MNIE stated that CIRC may not allow any discount to modify the PPA after it has been signed in implementation has started. However, also through my Fulbright research, I've come across different reports which talk about how discoms often delay payment 2 generators, and one particular report I recently read stated how generators often renewable generators receive payments, often 10 months after when they are supposed to, whereas more conventional plans. The average delay is only five months. So can you talk? Now a little bit about this situation and provide more context around this. Thank you.
07:56 Hemant Sahai
So this is actually quite an interesting question, but one needs to analyze. You know the data A little bit more indeed, there have been certain places in certain states where delays are inordinate, and indeed there have been kind of focused, I would say, delays for build. When you talk about the new book, specifically have been more delays in but so, let's look at the overall context. Firstly come of these issues are state specific. So Maharastra, for example, had for a very long time on, you know, the invoices of the wind generators. I'm not turning justification because any delay is unjustified. By the way, it carries interest as lender pay, but the point is that it's not as a pandemic as one would probably, you know, tend to believe at first blush. There are only, you know, one or two states which have been culprits in the past and for very specific reasons. Firstly, Maharashtra actually ended up with a lot more wind than they could manage them or the grid could manage. So it was a bit of bad planning, and also they had a lot of state-owned thermal generators that they needed to keep alive and patronize, and therefore that extend over that inherent, I would say bias against the wind generator later I was obviously advising a lot of the wind generators, but for various reasons, most of the wind generators did not want to escalate the matter to a formal dispute and take it to court because if the matter had indeed gone to court, I think the matter that got resolved much earlier. In the end, the Maharashtra did manage to raise certain bet. The distribution companies, they raised debt, and they did clear out large chunk of these scenes, so that is one part. The second thing is one has to understand the motivation, if at all, through provantage on the new book payment specifically now while, say 567 years ago, that perhaps would have been more, the chance would have been much higher because we retail the tariffs, the generation barrels of solar was significantly higher. You know, in 2010 that there is a 16-17 rupees per unit compared to Philippine a full fees for thermal generation. So there was a strong policy push certain amount of, you know, state support to actually get, you know, at the discounts to start buying solar power. But today, solar tariffs are cheaper than thermal, so, therefore, it won't have to compare if I want discount shoes with a certain amount of cash. You know, pressures on the cash flows, they would want to prioritize the chief of power, which today happens to be solar power. So, therefore, there are today no instances of delayed payments or default on solar. Which are kind of specific or targeted to solar? There are delays, then there are overall delays, and I don't think there is any specific priority that is given to thermal over and above renewable. I think there are delays now, kind of more or less same kinds of delays, and that is that's an inherent problem in the current structure in the distribution like the licensees, the discount. They're not able to manage their cash flow, so of course, as an aside. The central government is doing, you know, several things now. They're bringing in massive liquidity into the distribution companies hands through PFC Power Finance Corporation and which are intended or designed to be used only to clear out it, and also steps are being taken to advertise, you know, distribution businesses or it is? Introduced by the capital in the distribution businesses. So those steps that take some time to mature and unfold, and you know, I have known to play in this because I'm helping the, you know, Government of India, the Ministry of Power Draw the amendment to the legislation. In the context of, you know, privatization of this form, I'm likely to be involved in some of the privatizations that, but that's, like I said, a solution to a problem which is a longer-term solution on an immediate basis. The ministry power has also introduced certain rules which mandate that it discount the need to open letters of credit or at least start paying in advance every month preceded by the power. Yeah, so these are the kinds of things which are being.
12:17 Karan Takhar
I saw that.
12:21 Hemant Sahai
Done is a bit of carrot and stick, some amount of incentivization to improve efficiency, reduce losses and therefore improve the cash flows for the discounts and therefore try and alleviate the overall problem of payment to generate. It is but the long-standing issue of, you know, balancing the books. You know has not been sorted out, unfortunately, because the power sector reform in India, which they expect to be, you know, Lake City Act 2000, and over a period of time, we focus on bringing private investment, private efficiency, private sector capital has succeeded exceedingly well in the generation or the transmission sector, but on the distribution sector, the political economy the way it is in the country, unfortunately, has continued to remain in the hands of, you know, state and while there's been significant improvements in the operations of the discount, but the cash flow management still continues to be a big issue, and that's primarily because the cost of power delivered to the consumer is not resulting in recovery or full cost and therefore the discounts are always working. You know, and in terms of a cash flow lag. So there's actually putting out more power and paying out more to the generators and transportation companies than what they're ready to collect from consumers. The part of it is inefficiency, part of it is the bosses, but a large part of it, it's got to do with rationalization of Paris, which the, you know, the political economy has not permitted. So that will look for by the next phase of, so to say, reform in the power sector, which is now started, the central government is quite, you know, committed to bringing that change by, like I said, amending the law and almost, you know, forcing through a certain amount of privatization. But just to answer your original question, yes, indeed, over the last ten years, there's been some targeted delays, primarily for wind and not so much for solar in the recent years because the price of solar power is actually people toward less than the cost of, you know, thermal power. And therefore, there is an incentive for the discounts to continue to buy solar power.
14:32 Karan Takhar
OK. Thank you. Thank you so much. That actually mostly answered my next question. However, I would like to hear some more insight around this issue of the tariff structure in terms of how it doesn't appropriately compensate discounts fully, and I know one large issue of this stems from the agricultural tariff, which is supposed to be subsidized by the state and often what happens in practice? According to some conversations I had, I could be wrong about this, but the state often has a delay in payments to the discom when they're supposed to be subsidizing these consumer groups, and I would like to hear your thoughts around this and also was meaning that the Ministry of Power is potentially thinking about direct transfers from the state to the consumer, as opposed to so some discount to consumer and then state to this come, is this being talked?
15:34 Hemant Sahai
About sadly. So, you know, we talk about subsidies. There are two kinds of subsidies. One is a subsidy to be given by the state government, of course, to targeted consumers. That is agricultural or, you know, below the poverty line, the poorer consumers. The second is the cross-subsidies between different consumer classes, though traditionally in India, and you know, I don't think that's the most efficient way to do it, unfortunately. That's what we are doing is the industry and commercial is subsidized domestic and agriculture, and so to say, the other four are sections of society, the poor, consumers. As a result, what happens is the industry is landed up with the most expensive tariff industry and commercial, and again, this has a cascading effect because this actually, on a global stage, puts on manufacturing at a disadvantage because it ends up becoming much more expensive than you know other competing nation. At some stage, that has to be reversed. The second subsidy is what you've talked about in terms of the state government saying I will give so much of subsidy in absolute numbers, which is intended for certain section of the society, the Chorus section or agriculture for that matter. Now, this figure is the balancing figure. So when the regulator fixes tariff for a distribution utility at this discom, it is required to ensure that it's annual revenue requirement. Which is to be scrutinized, or the regulation of proof, which includes cost of procurement of power and, of course, the operating cost plus the return on equity to the discom is balanced by the revenues and which is the tariff structure that it determines and the balancing figure or not the balanced figure or the figure that is the regulator reduces it by is the subsidy that is committed by the state, and you're absolutely right, most of the states have announced subsidies and the regulators have taken those subsidies in consideration while determining the tariffs and the annual revenue requirements or the discounts, but typically, those subsidies have either been delayed or not disbursed by the state, which means that in cash terms that means a huge black hole under-covered for the discom. Now, this is a cascading effect which over the past several years, has been carried forward. So, therefore, the regulator, what it does is for the next one year, it says, OK, the unrecovered revenue of last seven carrying forward. This cascading effect is called regulatory asset, which ultimately is today is becoming a huge thinking time bomb. So what the government is doing now, the central government is doing now, is saying that, listen, hang on the subsidy that the state government commits. They will either disburse it in advance or they will provide a direct benefit transfer at DBT, which means the person you want to give this subsidy to you will transfer the money to their account as far as it discounts the concern, they will get full tariff, and they will raise the electricity bills directly on the consumers on full tab, which they regulator fixed pixels and if there is any subsidy that the state wants to give, they will transfer the money to the consumer directly to their bank accounts if that happens. Then at least, the discoms are insulated from this whole risk of under-recovery. So I think these things are being implemented. We should help the discoms improve the cash flows in the collection.
19:19 Karan Takhar
I see. I want to end this interview on because I know you represent a diverse array of clients both within India but also clients to participate in renewable energy abroad. I would like to ask you, do you think renewable energy will be a great vehicle for India to improve its leadership position in the world? And our companies who operate within India, are they competitive with international companies within? Solar specifically, it's great to hear your thoughts on this.
19:59 Hemant Sahai
Oh, certainly. So, you know, there are multiple dimensions to this question, sort of geopolitical level and a geostrategic level. India certainly has a massive role to play. India is on the member of the International Solar Alliance India is currently running the world's largest renewable energy program. No caveats, no full stops, no qualification. So we're going to be targeting a found of 50 GW or the next, you know, eight years, next ten years, which is larger than anything else that's happening anywhere else in the world, including in China. In fact, in China, the solar and the renewable program is now on a declining trend. That is one aspect so; therefore, there is massive amounts of capital, foreign capital, private equity capital, long term annuity capital from pension funds that is available to invest in India, the market by itself is significant enough for us to be able to absorb all of this investment and the generation that is going to be put in place at an international level. I think India's role will, of course, you know, depend on different considerations, not on what it does within the country, but what it is able to do to influence the renewable space and renewable sector in other jury restrictions, which means equipment. On wind, India is, of course, a net exporter, so India manufacturers more turbines than anywhere else. Perhaps, maybe China and India are, you know, up there. But in manufacturing, India is self-sufficient on turbines. It is exporting turbines with exporting blades. It has a lot of technologies that it has developed, including now moving to the next phase of the larger size turbines. So 2 and 1/2 to 3 MW is the next phase. We only have the 3 and 1/2 MW turbine, which will be experimented. So each of the blades is about 70 to 80 meters long. Now, this requires different technology, different scales, different manufacturing capability. So, in addition to the domestic wind market in India and as a net exporter of wind turbines. So we've got the big guys, geez, and the Siemens and Gomez for all manufacturing in India, plus of course, they are domestic manufacturers. So, therefore, there is one area where India can dominate. However, when it comes to solar, China continues to be the powerhouse. It is the largest manufacturer of solar modules and solar cells in India, I think, as a result of the last six months of, you know, the crisis, the health crisis, which started in China. I think India is sensing an opportunity and increasingly seeing, you know, not just discussion but also serious talk about, you know, investments in India. In the solar cell manufacturing space now in these solar modules in the solar sector, the most critical technology which is capital intensive and technology-intensive is solar cells. The solar cells are then aggregated into these modules, and then, of course, there a balance of systems which are, you know, inverters, etc. Here, of course, you know the technology freely available, but the technology on solar cells is controlled by a handful of companies globally, so to be able to get those companies to come and invest in it there, we need to create an entire ecosystem.
23:19 Karan Takhar
23:20 Hemant Sahai
Which I think, you know, there is an opportunity at this point of time if India is able to crack that code, and I think all the elements are in place. All the right ingredients seem to be in place right now because not only is there a massive domestic demand, but India could end up becoming a serious competitor to the traditional manufacturers of to the South, which is China, and I want, and you know, those lesser extent Malaysia and Japan and India could actually create an ecosystem to be able to compete in quality and price. If that happens, then I think India is going to become a dominant player, a dominant global player in the entire renewable energy space.
23:58 Karan Takhar
Thank you so much, Mr. Sahai, for your time and your great insights. Really appreciate this. I hope you enjoyed that episode, and do check out the show notes for more information on my guest. See you next time.