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Private equity investment in P2P solar trading


India’s solar energy ecosystem is rapidly developing. A recent phenomenon is the peer-to-peer (P2P) trading of solar energy, where persons generating solar energy for their private use are selling excess power generated to other users using blockchain technology. P2P solar trading achieves two purposes: it creates access to reasonably priced solar energy and provides an additional source of income to the seller.

India’s energy deficit, and the potential to address this through P2P solar trading, has made investment in solar exchange start-ups an attractive prospect for private equity (PE) investors. This has been encouraged by some state governments recognising the value and promotion of solar energy P2P trading. The state government of Uttar Pradesh, for example, has enacted regulations for such transactions. However, the law has not kept pace with the technological developments and PE investors should be mindful of this when investing in solar trading start-ups.

Although the popularity of P2P solar trading is likely to increase, as are the revenues of technology start-ups facilitating such trading, P2P trading is fraught with regulatory uncertainty. The generation of electricity, including solar energy, is governed by the Electricity Act, 2003 (act) and its rules and regulations. Under the act, transmission, distribution, trading and supply of electricity are regulated activities, each of which requires a licence. The law, as it stands today, has not created an exception for P2P trading. On a strict reading of the act, persons engaging in P2P trading of solar energy, usually individuals, require licences. Although the government has the power to exempt entities from the licensing requirements, it has not done so for P2P traders of solar energy.

Vandana Pai, Bharucha & Partners, Private equity investment in P2P solar trading
Vandana Pai
Bharucha & Partners

P2P trading of solar energy is a new concept and was not considered by the legislature when the act was passed. The act regulated the transmission, distribution, trading and supply of energy by commercial players such as power generators and discoms. It is therefore arguable that P2P participants should not be regulated by the act. However, without a regulatory clarification to this effect, there is a risk that persons engaged in unlicensed P2P trading and persons facilitating such trading, that is the exchanges, could be penalised by fines and imprisonment.

Given that it is difficult to identify and penalise individual traders and that the act punishes abettors with fines and imprisonment, regulators may instead seek recourse against the exchanges even though they are intermediaries, not suppliers. Such regulatory action could adversely affect the business and operations of the exchanges and the PE investments they may have received.

This problem may be overcome by back-to-back indemnity arrangements. The exchange would, while onboarding suppliers to its platform, obtain necessary representations and warranties from the suppliers to the effect that they have complied with all applicable laws along with an indemnity to compensate the exchange for any loss suffered by it on account of the suppliers’ non-compliance. In turn, the exchange would provide an indemnity to the PE investors under the investment documents in respect of any loss suffered by the exchange due to the suppliers failing to obtain licences.

Further, electricity falls under list III (concurrent list) of the seventh schedule to the constitution, which empowers both the central and state governments to enact laws in this sector. Therefore, when investing in start-ups in the sector, PE investors must ensure that the companies in which they are interested comply with all local laws, rules, notifications and circulars of the states in which they operate. This may be a challenge, as local regulations may be published in local languages and may not be widely available.

Given that some state and local governments, such as the governments of Uttar Pradesh and the National Capital Territory of Delhi, are actively promoting P2P trading of solar energy, it is possible that no action will be taken against trading platforms. However, in the absence of a clear regulatory pronouncement, PE investors should seek adequate indemnities to protect their interests.

Vandana Pai is a partner and head of the investment funds practice, and Subham Chatterjee is a senior associate at Bharucha & Partners.

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