LoUs could be used as bank guarantees in renewable tenders

In a major relief to the renewable energy sector amid Covid times, the Centre has exempted project developers from making earnest money deposits (EMD) to bag contracts from government agencies.

Accordingly, letters of undertaking (LoUs) secured from three state-owned non-banking financial institutions – Power Finance Corporation, REC and IREDA – could be used as bank guarantees in renewable tenders. The LoUs could be secured against securities.

The Ministry of New and Renewable Energy has been thinking of an alternative to the earnest money deposits (EMDs) and performance guarantees (PBGs) submitted by developers to reduce financial pressure on them. The changed course is considered the best suit.

The ministry has given time to the implementing agencies such as SECi, NTPC, NHPC to give their views on its proposal before the new system can be implemented.

Sources said the power ministry has written to these implementing agencies suggesting that they could accept EMD either in the form of a bank guarantee or ‘payment on order’ instrument for renewable tenders.

The ‘payment on order’ instrument means an undertaking by these financial institutions (PFC, REC and IREDA) that they would pay in case of a default of a renewable power generator in fulfilling the tender terms or the power purchase agreement.

Thus, the new instrument will work on similar lines as a bank guarantee but would eliminate the need for developers to prove their credentials before banks before securing a bank guarantee.

The changes are intended to ensure ease of doing business in the renewable sector as the developers will now have one more option in fulfilling the tender requirements.