Written in collaboration with by Aditya Periwal and Upasana Soni from AZB & Partners
Related Author: Joe Allen, Trainee Solicitor
Smart meters are a new generation of energy meters which allow consumers to better understand their consumption patterns, as well as helping distribution companies (Discoms) to conduct system monitoring and customer billing without manual intervention1. The smart metering landscape in India is a rapidly-developing space. In 2021, the Indian Government's Ministry of Power announced an estimated outlay of INR 3037.58 billion (approximately £29bn) over five years under the Revamped Distribution Sector Scheme (RDSS) to implement prepaid smart meter projects across India in a phased manner. However, with rapid developments come challenges. This article will look at the key talking points in this area, including regulation, financing and legal concerns, as well as considering some points of comparison with the roll-out of the smart metering system in the UK, a process which began in 2011.
The driving force behind India's developing smart metering landscape
India has set a target to achieve net zero emissions by 2070. Pursuant to this objective, the government of India approved the RDSS, a reforms-based and results-linked roll-out scheme which aims to bring about improvement in the operational efficiency and financial sustainability of all state-owned Discoms by providing them with financial assistance for strengthening supply infrastructure2. REC Limited (REC) and Power Corporate Finance Limited (PCF) have been appointed as the nodal agencies for the operation and facilitation of the RDSS. The RDSS facilitates installation of prepaid smart meters for consumers along with associated advance metering infrastructure (AMI) through public-private partnerships.
In terms of motivation for developing their smart metering landscapes, India and the UK are very much aligned – they are both prompted by their net zero targets and the recognition that providing consumers with real time information regarding their electricity consumption (and the cost thereof) can impact behaviour in terms of energy usage, aid energy efficiency measures and also help grid operators better manage generation and the grid. Note, however, that the UK's target is more immediate: to reach net zero by 2050 (compared with 2070 in India).
The Indian regulatory landscape
While the regulatory regime for implementation of smart metering is still at a nascent stage in India, pursuant to RDSS, REC has issued a model standard bidding document (Model Bid Document) for the appointment of advance metering infrastructure service providers (AMISP) for smart system metering in India on a design, build, finance, own, operate and transfer (DBFOOT) basis3. Several Indian state Discoms have invited proposals for appointment of AMISP on DBFOOT and such proposals are to a great extent in line with the Model Bid Document, with some exceptions on a case-to-case basis. The Model Bid Document contemplates various eligibility and qualification criteria for a bidder, which should be complied with to set up a smart meter project in India.
Key features of the Model Bid Document include:
- a bidder could be a sole bidder as an individual entity or a consortium of firms/companies who are eligible to participate as per the laws of India;
- at the time of bid submission, a bidder is required to hold a valid pre-qualification and technical empanelment certificate for the required communication technology (Empanelment Certificate). The Empanelment Certificate is issued by REC pursuant to a request for empanelment tender from time to time. Once the Empanelment Certificate is issued by REC, the holding and subsidiary companies of the certificate awardee are automatically empanelled, meaning the holding company and subsidiaries of the Empanelment Certificate holder are eligible to submit bids for the appointment of AMISP;
- the model draft of an AMISP contract is required to be executed by the selected bidder, Discom and AMISP. The term of the AMISP contract will continue to be in force until the earlier of (i) 10 years from the date of execution of the contract; or (ii) as soon as the meter months4 exceeds the total meter months5; and
- the bidder/lead bidder needs to have a registered office in India at the time of submission of bid.
The UK Regulatory approach
The UK has adopted a somewhat different regulatory approach. A key feature of the UK's smart meter scheme is the need for interoperability and interchangeability of smart meters. All smart meter technology needs to demonstrate that it is interoperable and interchangeable with other smart meter technologies and suppliers' networks. The reason behind this is largely a result of the installation of smart meters being an obligation imposed on electricity suppliers.
A key feature of the UK energy market is the right on the part of consumers to select and change their electricity and/or gas suppliers, the thinking being that this ability to switch promotes competition and drives down prices for consumers. The fact that a particular supplier has installed a smart meter in a customer's home should not, and indeed must not, act as a barrier to that customer subsequently switching supplier. Any new suppliers' systems must be capable of working with the previously installed smart meter. A new supplier must be readily able to take over the operation or indeed install a replacement meter if necessary.
Whilst electricity suppliers have an obligation to install smart meters, there is another key player in the UK market in terms of smart meters – Smart DCC Limited. This entity has a Smart Meter Communication Licence and is responsible for linking smart meters in homes with energy suppliers' systems. As mentioned above, the obligation is on energy suppliers to install smart meters and this obligation is set out in the supply licence conditions. Each electricity supplier has to have a supply licence which is issued by Ofgem, the UK energy regulator. Smart meters must be installed at no upfront cost to consumers.
Indian regulatory requirements as to lock in and share transfer restrictions
The smart metering tenders proposed by REC and issued by various state Discoms contain certain share transfer restrictions as the AMISP project is being implemented by a special purpose vehicle (SPV) (i.e., AMISP). The Model Bid Document prescribes that in case the bid has been awarded to a consortium, the members of the consortium are required to hold the entire equity capital of the SPV/AMISP for a period of two years after the Installation Milestone (i.e., installation and operationalization of all the smart meters envisaged for the AMISP project).
However, throughout such a period, the lead member of the consortium is required to hold 51% of the equity capital of the SPV/AMISP. Two years after the Installation Milestone, the members of the consortium can dilute their equity stake in the SPV/AMISP to 51% for the remaining duration of the project. However, throughout the term of the project, the lead member is required to hold 26% of the equity capital of the SPV/AMISP.
The AMISP contract also prescribes that any direct or indirect change in the shareholding of the SPV would also require prior approval of the Discom. Further, while the Model Bid Document permits the sole bidder to submit the bid, the share transfer restrictions applicable to a sole bidder are ambiguous.
Moreover, in accordance with Press Note 36 issued by the Indian Government, in the event that a Discom grants its prior approval for any direct or indirect change in the shareholding of an SPV/ AMISP and the proposed transferee of the selected bidder's share in the AMISP is an entity of a country which shares a land border with India or the beneficial owner of such entity is situated in/is a citizen of any such country, prior approval of the Indian Government will be required.
UK transfer restrictions
India's share transfer restrictions have similarities with the share transfer restrictions applied to successful bidders in the UK offshore wind sector. There again, offshore wind projects are awarded as part of a competitive tender process and the projects themselves are complex and involve significant capex. They are also an important part of the energy transition and the achievement of net zero goals. Projects are awarded not only based on price bid but also on demonstrated skills and expertise and essentially the ability to deliver the project.
The UK regulator is keen to ensure that the ability to deliver the project is not eroded through share transfers, particularly during construction phase and early years of operation when technical issues are more likely to manifest themselves and need to be addressed.
Financing of the SPV – considerations under Indian regulations
Typically, in infrastructure projects in India, the SPV can be funded by the selected bidder/consortium members or through its affiliates, parent and/or ultimate parent company. As part of the bid submission, the Model Bid Document requires every investing entity (including the affiliate, parent and ultimate parent company) to provide a board resolution in Form 19. Under the Model Bid Document, the format of Form 19 is drafted such that it is an undertaking to invest in the 'equity capital' of the SPV/AMISP. Further, Form 19 contains a note requiring that 'the equity investment obligations by the sole bidder/each member of the bidding consortium/investing affiliate or parent or ultimate parent should add up to 100%'. Therefore, it seems the intent of the Model Bid Document is that investments by way of shareholder loans, subscription of preference shares and debentures (whether convertible or not) are not permitted and all investments in the SPV/AMISP can only be made through subscription to equity. However, it should be noted that such a restriction has the potential to result in an unsustainable capital structure and a non-commercial business approach. In reality, bidders are planning to submit bids by making edits to Form 19 and including clarificatory language which would allow the SPV to be funded through shareholder loans, preference shares and debentures. Nonetheless, clarification in respect of the same should be obtained from REC.
Currently, the harmonized list of infrastructure sectors7 issued by the Ministry of Finance does not include smart meter projects.
Contractual considerations and requirements under the Indian Regulations
(a) Sub-contracting under the Model Bid Document
Usually, in infrastructure projects in India, an EPC contract is executed between the project SPV and a single contractor. Such contractor then, if required, enters into sub-contracting arrangements with its sub-contractors and the project SPV is not party to such sub-contracting arrangements. Further, unless the bidder is itself the EPC contractor, the bidder of the project is also typically not a party to any of the contracting/sub-contracting arrangements.
However, as per the Model Bid Document, the bidder is required to enter into contracts (in Form 23) with all sub-contractors at the time of bid submission. Since the term 'sub-contractor' has been defined to include all indirect sub-contractors, the bidder would need to enter into such a contract with not only the primary contractor(s) engaged by it to carry out the project, but also the sub-contractors to whom such primary contractor(s) would delegate a part of the work.
While it is understandable that this requirement exists at the pre-bidding stage, since the SPV/AMISP has not yet been incorporated, it is peculiar that an identical obligation has also been placed on the selected bidder post the issuance of the letter of award as well. Section 3, Clause 29 of the Model Bid Document provides that within 14 days of receipt of a letter of award, the successful bidder is required to submit a copy of the agreement between each of the sub-contractors and the bidder, guaranteeing back-to-back service and support for the duration of the project, if the sub-contractor is not the bidder.
This proposed structure under the Model Bid Document results in the sole bidder acquiring the rights, title, interest, warranty rights, etc. in respect of the smart meter project instead of the AMISP. This aspect requires clarification from the Discom to ensure that the SPV ultimately owns and operates the smart meter project and should therefore have all the rights and remedies against the contractor. It is also pertinent to note that the model AMISP contract permits the appointment of a sub-contractor with an intimation to the Discom.
(b) Payment security mechanism under the AMISP contract
A key feature of the model AMISP contract is that, prior to the awarding of the AMISP contract to a bidder, the Discom is required to establish a direct debit facility. Such direct debit facility includes a bucket filing approach whereby all consumer recharges and bill payments from the eleventh working day of every month up to the tenth working day of the next month will be routed directly to the SPV's/AMISP's bank account until such time that the undisputed amount of the payment due, including amount due towards supplementary invoices issued by the AMISP, is recovered in its entirety. Once the entire undisputed amount of the payment due, including amount due towards supplementary invoices, is recovered, the direct debit facility will no longer transfer any money to the SPV. In the event the overall monthly amount due to the SPV as the sum of the consumer payments is not reached until the tenth working day of the next month, the shortfall/deficit amount will be paid along with the undisputed amount due to be paid, including any amount to be paid towards supplementary invoices issued by the SPV, for the immediately succeeding month.
In case the Discom fails to clear any payment (including disputed amount) of the SPV within 45 days of receipt of invoices, interest would have to be paid by the Discom at the rate equal to the marginal cost of the funds-based lending rate (MCLR) for one year of the State Bank of India plus 400 bps (MCLR shall be as applicable on the 1st of April of the relevant financial year in which the date of release of delayed payment lies). Additionally, in the format of the AMISP contract, the total contract price as well as the various charges to be paid by the Discom (such as service charges payable to the SPV/AMISP, the lumpsum meter charges, etc.) are populated based on the bid documents submitted by the selected bidder. The payment is made by the Discom on a monthly basis.
(c) Events of default and termination payments
The termination of an AMISP contract can occur on account of certain events of default attributable to the AMISP or Discom. Some of the AMISP events of default include: (a) failure to procure and arrange requisite finances for the implementation of the project; (b) failure to furnish performance security; (c) failure to maintain shareholding of the AMISP in accordance with the provisions of the AMISP contract; and (d) failure or inordinate delay on the part of the AMISP to provide solutions under the AMISP contract.
Similarly, some of the events of default of the Discom include: (a) failure to establish a direct debit facility through online consumer payments; and (b) breach of its obligations which has an adverse effect on the performance of the AMISP obligations under the AMISP contract. In a circumstance where the AMISP contract is terminated on account of the AMISP event of default: (i) after the Installation Milestone, the AMISP is entitled to a termination payment equivalent to 60% of the value of the termination payment determined in accordance with the terms of the AMISP contract; or (ii) prior to the Installation Milestone, the AMISP will be entitled to 60% of the value of assets proposed to be handed over to the Discom as certified by the independent valuer.
In a circumstance where the contract is terminated on account of the Discom's event of default: (i) after the Installation Milestone, the AMISP will be entitled to receive 100% of the value of the termination payment as determined in accordance with the AMISP contract; or (ii) prior to the Installation Milestone, the AMISP will be entitled to 100% of the asset value as determined under the AMISP contract.
Recent smart meter projects in India
Recent smart metering projects have been successfully undertaken by GMR Group's SMR Smart Electricity Distribution Limited, which won a tender to install 7.57 million smart meters across different regions of Uttar Pradesh for a contract price of USD 927 million8. Singapore sovereign wealth fund, GIC and Genus Power Infrastructure Limited have also set up a USD 2 billion smart meter platform.9 GIC will invest in projects through its affiliate Gem View Investment Pte Ltd. Reportedly, GIC will hold a 74% stake while Genus Power Infrastructure Limited will hold a 26% stake in the joint venture.10 The project will be implemented under RDSS for deployment of smart meters across India.11
The smart metering landscape in India is certainly an area attracting a high level of interest and investment and presents numerous opportunities for investors. As flagged above, it is also facing a range of challenges. It can be seen that although the motivation behind the Indian scheme is similar to the motivations underpinning the UK approach, the planning, roll-out and regulation in India have some key necessary differences.
It is interesting to note that even with careful planning being undertaken, the UK experience illustrates the complexity of a smart meter roll-out – originally the deadline in the UK was for each home to have a smart meter by the end of 2020. This has been delayed and there is now a new target of 85% of UK households to have a smart meter by the end of 2024.
If nothing else, the UK has proven that for a smart metering scheme to be successful, it must be meticulously planned, carefully regulated and not rushed. India seems to be ticking these boxes, but as detailed above, it still has some way to go.
4 Under the Model Bid Document, 'meter months' means at any point in time, meter months of the AMI system calculated as the sum of the number of months from operationalization of the meter or operation go-live, whichever is later, for all meters installed and commissioned by AMISP.
5 Under the Model Bid Document, the total meter months of the AMI system is calculated as the product of: (i) total number of smart meters installed, integrated and operationalized in project, and (ii) ninety three months commencing from operational go-live.