Developers of solar power generation facilities in India will be able to reduce the risk of electricity off-takers not meeting their payment obligations by using letters of credit (L/Cs).

The L/Cs would be used within a new Payment Security Mechanism that features in recently introduced rules announced by the government for purchasing power from grid-linked solar power projects.

The aim of the new rules is to facilitate the fast-track development of India's solar power sector.

Risk mitigation

The Payment Security Mechanism addresses the risk of an electricity generator's revenue being stalled due to delayed payment or non-payment.

Off-takers will be required to put up L/Cs to guarantee the power producer is paid in the event of delayed payment or non-payment.

A payment security fund or a state guarantee could be used as alternative guarantees against an off-taker's failure to meet payment obligations.

Enhanced bankability

As well as helping reduce generators' risks, the new rules aim to encourage investments, enhance bankability of projects and improve profitability for investors.

The rules require power purchase agreements (PPAs) to have a minimum tenure of 25 years to help ensure lower tariffs. Unilateral termination or amendments of PPAs are not allowed.

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