CURRENCY FLUCTUATION RISK ALLOCATION IN ENERGY PPAs

1. Meaning and Concept

Currency Fluctuation Risk, commonly called Foreign Exchange Rate Variation (FERV) risk, refers to the financial risk arising when the exchange rate between the contractual or financing currency and the local currency changes during the life of an energy project. This issue is particularly significant in Power Purchase Agreements (PPAs) because power projects frequently involve foreign-currency loans, imported equipment, imported coal or gas, and overseas EPC contracts.

For example, if an Indian power producer has USD-denominated debt while receiving electricity revenues in Indian rupees, depreciation of the rupee increases the rupee amount required to service the same dollar debt.

The central legal question is therefore: Who bears the currency fluctuation—the generator/seller, the procurer/off-taker, or ultimately the electricity consumer through tariff?

2. Allocation of Currency Risk under PPAs

Currency risk is primarily allocated according to the express terms of the PPA, bidding documents and applicable tariff regulations. Common mechanisms include:

Seller-Bears-Risk Model: The generator assumes exchange-rate fluctuations and incorporates an appropriate risk premium or hedging cost into its bid.

Pass-Through Model: Actual foreign-exchange gains and losses are reflected in tariff, transferring the economic impact to procurers and consumers.

Sharing Mechanism: Currency movements within an agreed band are borne by the generator, while extraordinary movements beyond a threshold are shared or passed through.

Indexation Mechanism: Particular tariff components are periodically adjusted by reference to an agreed currency or exchange-rate index.

Under India's competitive-bidding framework, foreign-exchange risk has historically been expressly allocated to the supplier in relevant bidding guidelines, subject to specified exceptions. This makes contractual drafting especially important.

3. Currency Fluctuation and Force Majeure

A major dispute arises when a severe currency depreciation makes project financing substantially more expensive. Ordinarily, mere economic hardship or increased cost does not automatically constitute force majeure or frustration.

Where the PPA expressly allocates foreign-exchange risk to the generator, the generator generally cannot convert an adverse currency movement into a compensable event merely because the fluctuation was unusually large.

The principle reflects sanctity of contract and contractual allocation of commercial risk. In Energy Watchdog v. CERC, the Supreme Court emphasized the importance of the competitively discovered tariff and the contractual framework governing Section 63 PPAs.

4. IMPORTANT CASE LAWS

A. Sasan Power Ltd. v. Madhya Pradesh Power Management Co. Ltd.

Case Name/Citation: Sasan Power Ltd. v. M.P. Power Management Co. Ltd., APTEL, Appeal No. 222 of 2021, decision dated 14 November 2022.

Facts: Sasan Power claimed that an exceptionally steep depreciation of the Indian Rupee against the US Dollar substantially increased the financial burden associated with its 3960 MW Sasan UMPP. It sought compensatory relief through CERC's regulatory powers.

Legal Issue: Whether unprecedented depreciation of INR against USD entitled the generator to tariff compensation despite bidding provisions allocating foreign-exchange risk to the seller.

Judgment: The dispute focused heavily on the contractual and bidding allocation of FERV. CERC had concluded that the all-inclusive tariff required bidders to account for expenditures including foreign-exchange exposure associated with imported equipment or foreign loans.

Legal Principle / Ratio Decidendi: Foreign-exchange volatility is fundamentally a commercial risk where the contractual/bidding framework places that risk upon the generator. Extraordinary magnitude alone does not automatically rewrite the contractual allocation.

Significance: The case demonstrates why PPA parties must expressly identify the party responsible for currency depreciation, foreign debt exposure and hedging costs.

B. Power Grid Corporation of India Ltd. v. TANGEDCO

Case Name/Citation: Power Grid Corporation of India Ltd. v. Tamil Nadu Generation and Distribution Co. Ltd., (2019) 7 SCC 34.

Facts: The dispute concerned treatment and capitalization of Foreign Exchange Rate Variation while determining regulated transmission tariff. FERV operated as a pass-through mechanism so that foreign-exchange gains or liabilities could ultimately be reflected in tariff.

Legal Issue: How should FERV incorporated into capital cost be treated and apportioned for tariff purposes?

Judgment: The Supreme Court examined the regulatory methodology governing capitalization and allocation of FERV and the relationship between actual foreign-currency liabilities and tariff treatment.

Legal Principle / Ratio Decidendi: Where the applicable regulatory tariff framework expressly recognizes FERV as a pass-through, currency-related gains and losses must be dealt with according to that regulatory mechanism rather than automatically being imposed entirely upon one contracting party.

Significance: The case illustrates the important distinction between regulated tariff projects, where FERV may receive pass-through treatment, and competitively bid fixed-tariff PPAs where currency risk may expressly remain with the seller.

C. Suryachakra Power Corporation Ltd. v. Electricity Department

Case Name/Citation: Suryachakra Power Corporation Ltd. v. Electricity Department, APTEL, Appeal No. 200 of 2013 & connected matters, decided 28 November 2014.

Facts: The dispute involved foreign-currency expenditure associated with imported equipment and financing. The PPA permitted particular treatment of foreign loans and foreign-exchange variation.

Legal Issue: Whether expenditure relating to imported equipment and associated costs could receive FERV adjustment while determining completed capital cost.

Judgment: APTEL held that qualifying expenditure on foreign equipment and related foreign-currency costs had to be considered according to the PPA while determining capital cost and subjected to the applicable FERV treatment.

Legal Principle / Ratio Decidendi: Express contractual provisions governing foreign-exchange adjustment must be given effect according to their terms.

Significance: The decision confirms that precise PPA drafting can determine whether currency movements become generator risk or tariff-adjustable expenditure.

5. Conclusion

Currency fluctuation is a major bankability and tariff risk in long-term energy PPAs. Effective agreements should clearly regulate the base exchange rate, adjustment formula, indexation dates, hedging obligations, permitted pass-through, currency-conversion costs, extraordinary fluctuation thresholds and treatment of foreign debt. Indian electricity jurisprudence demonstrates a strong preference for respecting the contractual and regulatory allocation of FERV risk. Consequently, where the generator expressly assumes currency risk, depreciation will ordinarily remain its commercial burden; where the PPA or tariff regulations create a pass-through mechanism, the resulting gain or loss may instead be reflected in tariff.