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Energy Law Developments in India - Investor Challenges

Contributed by: Samvad Partners

Earl Warren had famously said, “Ben Franklin may have discovered electricity - but it is the man who invented the meter who made the money”. This may not be true today in the Indian context. The energy sector in India is reeling under gross tariff revenue mismatch and is disproportionately leveraged. If India has to ‘roar’ as the fabled Asian tiger by the 2030s, it has to fix its energy distresses. The Finance Minister Nirmala Sitharaman presented the Union Budget 2020-21 in Parliament with a focus on three main points: Aspiration India, Economic Development for all, and Building a Caring Society. The finance minister announced that for the year 2020-21, ₹220 billion (~$3.08 billion) has been allocated for the power and renewable sectors. The National Infrastructure Pipeline, announced last year with an outlay of ₹103 trillion (~$1.44 trillion), consists of more than 6,500 projects across sectors including clean and affordable energy.

While India has one of the most diversified power sectors in the world, the legislature has also played an active role in bringing in new policies and regulations and revising the existing ones in order to cater to the needs of the growing energy sector. Though the Government has been trying to address these issues, there are certain things that an investor should bear in mind while investing in India.


The Power Purchase Agreements (PPAs”) are not drafted in a sophisticated manner. Some of the issues that may affect the returns on the project include: (a) equity lock in period of at least 6-12 months for developers post commercial operations; (b) lack of generation compensation due to off take constraints; and (c) no provisions for termination payments on account of procurer event of default. The DISCOMS rarely agree for any changes in these PPAs whether during the construction phase or the operation phase.

In recent past the PPAs are being ordered to be terminated unilaterally by the governments of many states. Recent examples are orders of the Andhra Pradesh and Maharashtra governments to cancel and to not honor the PPAs on the basis of review of certain parameters. Such unilateral decisions on the part of government are worrisome for investors and erodes investor’s confidence as it portrays the political and policies uncertainty in the country. After developers filed a case challenging the July 1, 2019 decision of the state government, the High Court in September, 2019 quashed the decision to form a panel to renegotiate PPAs and told Andhra Pradesh Electricity Regulatory Commission (“APERC”) to decide on a fair tariff. However, the developers subsequently went back to the court saying even APREC does not have the authority to change its own ruling as per the observation of the Appellate Tribunal of Electricity (APTEL).

While the central government in India has maintained that PPAs are sacrosanct and no price renegotiation is possible, it has also agreed with the Ministry of New and Renewable Energy (“MNRE”) acknowledging that revisiting PPAs shakes the confidence of investors in the sector and adversely affects the future bids and investment in the State and the country. It is unfair to put pressure on independent producers to reduce prices or alter other contractual conditions. It sends out a wrong signal to investors, who expect all deals to be honoured. The Union ministry of power has consistently persuaded states not to resort to such tactics. An Electricity Contract Enforcement Authority (“ECEA”) has been proposed draft Electricity Amendment Bill of 2020 (the “2020 Electricity Bill”) to check renegotiation efforts.

The Finance Minister, Smt. Nirmala Sitharaman, in an attempt to pacify investors at the India Energy Forum of CERAWeek said, “I also want to broadly highlight the justifiable concerns about honouring contractual commitments....We as a nation (are) concerned. We will make sure that commitments are honoured. That should not worry those investors or those who already invested in building capacities in India for energy and energy security.


In India, the 2 (two) broad methods of tariff determination are - (a) Under Section 62 of the Electricity Act, 2003 (the “ElectricityAct”) tariff orders are passed by “appropriate commission” under the Electricity Act; and (b) Under Section 63 of the Electricity Act by way of a transparent competitive bidding process which is later ‘adopted’ by the appropriate commission. The existing framework of tariff determination and tariff amendment are laced with anomalies as it does not take into account factors like increased cost of fuel and wheeling charges.

The 2020 Electricity Bill may, if the same is passed and brought into effect, make an important change in law to make it more consumer friendly. As per the 2020 Electricity Bill, it will be mandatory for the appropriate commission to stick to the tariff policy notified under Section 3 of the Electricity Act, which is by and large a liberal and business friendly document. One other important change will be made to Section 63 pursuant to which the appropriate commission will be required to adopt the tariff determined as per the provision of Section 63 of the Electricity Act within 60 (sixty) days from the date of application and if action is not taken by the appropriate commission within the said period, the tariff will be deemed to have been adopted by the appropriate commission. However, it remains to be seen that how much of these finally make it to the final cut.

Further, the 2020 Electricity Bill provides that the tariff for the retail sale of electricity should progressively reflect the cost of supply. The Bill amends this to and has added various new factors to be considered during tariff determination such as “recovery of the cost of electricity, service cost, wheeling charges and any other cost to ensure the reasonable return on the capital employed”, “capital cost as well as other incidental costs”, “safeguarding of consumers” interest and at the same time, recovery of the cost of electricity without any revenue deficit in the revenue requirements”. This is an important step in the right direction, as it will make the pricing more in consonance with the actual pricing which will reduce the financial stress on the DISCOMS.

In terms of the renewable energy push, the 2020 Electricity Bill empowers the 2020 Electricity Bill (“SERCs”) to mandate a percentage of electricity purchase from renewable sources known as Renewable Purchase Obligation (RPO). It adds that SERCs will specify RPO as may be prescribed by the central government. The Draft Bill also provides for certain penalties for non-compliance by licensees in meeting RPO.


There are many cases where the power off-takers, mostly state owned distribution companies, have defaulted in making payments towards the power purchased by them from the power generating companies, leaving the power generating companies in financial difficulty and cash crunch.

State owned DISCOMS lack financial stability and credit worthiness which has led to a lot of projects facing an issue with delay in payments over the years. The solar park schemes to an extent reduce this risk on account of companies such as National Thermal Power Corporation Limited (“NTPC”) providing a backstop. However, the PPAs do not provide for adequate payment security, which generally ranges from 1-3 months, for any defaults in payments by the DISCOMs. With no other payment securities, the power generating companies can either proceed towards terminating the PPAs or stop supplying power to such off-takers and start supplying power to other companies/ entities who can maintain the payment cycle. Considering the commercial interest of the power producers, termination of PPAs is generally not a feasible option. To save the power generating companies from such a deadlock, the central government has asked state lenders Power Finance Corporation Limited, REC Limited and IREDA(Indian Renewable Energy Development Agency Limited) to extend short-term securitised loans to the distribution firms at preferential rates so that the dues payable to green energy producing companies can be cleared. Delayed payments along with the burden of debt financing in projects create a challenge for investors to yield sufficient returns.

As these power generating companies are highly leveraged, many instances of defaults have dragged the power generating companies to National Company Law Tribunal (“NCLT”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”). It is to be noted here that once an insolvency application/ petition is admitted by NCLT under IBC, moratorium is imposed under section 14 of IBC with respect to such company (corporate debtor). Until recent past, the impact of imposition of moratorium on continuity and validity of the PPAs was not clear. As a result of this and presence of an enabling clause in the PPAs to terminate the PPAs in the event of insolvency of either of the parties, there have been a few instances where such corporate debtors have witnessed termination of PPAs by their counterparts. The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (the “IBC 2020 Amendment”) has provided certain revisions to the scope of the moratorium period under Section 14 of the IBC that are intended to facilitate the corporate debtor’s operations as a going concern during the corporate insolvency resolution process, clarifying the situation with respect to status of PPAs. Section 5 of the IBC 2020 Amendment amends Section 14 of the IBC to provide that imposition of moratorium shall not affect continuity of any concession granted by central government, state government, sectoral regulator or any other authority e.g. the PPAs.

One more reason for the deteriorating health of the DISCOMS is the incidence of various subsidies. The 2020 Electricity Bill stipulates that subsidies if any to be provided to the consumers by the appropriate state governments have now been stipulated to be excluded while fixing the tariff for retail sale of electricity. The 2020 Electricity Bill provides that any such subsidy to be provided by the State Government shall be directly provided to the consumers so as to ensure that the tariff shall at all times be reflective of the cost of the supply of electricity. Further, currently, SERCs are required to specify regulations to progressively reduce cross-subsidy. The 2020 Electricity Bill requires them to adhere to the National Electricity Tariff Policy while determining the cross-subsidy.


A contract is as good as its enforceability including the swiftness thereof. The Government of India in the recent past has been trying to overhaul the dispute resolution mechanism in general.

The renewable energy industry has been demanding setting up of a mechanism by MNRE to resolve expeditiously unforeseen disputes that may arise in PPAs. MNRE, on June 18, 2019, issued an order for setting up a dispute resolution mechanism to consider unforeseen disputes between solar or wind power developers and SECI and state-run power giant NTPC beyond contractual agreements. Subsequently, MNRE on September 20, 2019 issued procedural guidelines in order to provide an implementation framework for the said Dispute Resolution Mechanism (“DRM”) and for the functioning of Dispute Resolution Committee (“DRC”).

The procedural guideline provides that SECI and NTPC, both shall provide a Secretariat for the DRC, with its head being designated as Secretary. All the applications under the DRM, whether for appeal against the decisions given by SECI/NTPC based on the terms of contract or the requests not covering under the terms of contract, shall be addressed to the Secretary of the DRC, which shall be placed by the Secretary before the DRC as soon as possible in the following week. Once the application is placed before DRC, it shall hold hearings on the subject and submit its recommendations to MNRE not later than 21 (twenty one) days of such reference, which can be extended by a further period of 14 (fourteen) days by MNRE. It is important to note here that since the procedural guidelines provide for a time period of 21(twenty one) days to appeal against the order of SECI/ NTPC, any adverse financial impact coming on the developer in pursuance of the order passed by SECI/ NTPC should be put in abeyance for 21 (twenty one) days subsequent to the issuance of such order. Further, no coercive action shall be taken on cases brought before the DRC till the final disposal of the appeal by the DRC and MNRE, where applicable.

It is clear from the above that steps are being taken for efficient and effective resolution of disputes. Establishment of such time-bound mechanism is surely going to build in investor’s confidence, especially with respect to solar/ wind power producing companies.

The government can still do more to counter potential dampeners – by improving transmission infrastructure, easing land-acquisition norms, ensuring no flip flops once contracts are concluded. It must also work to turn around India's distribution companies so that they can honour their renewable purchase obligations and pay investors on time. To conclude, the 2020 Electricity Bill is definitely as step in the right direction and addressed many of the existing investor concerns. What remains to be seen is that how it comes out in its final form.

Contributed by Samvad Partners

The above article has been authored by Mr. Pratik Patnaik(Senior Associate), and Mr. Nainesh Singh(Senior Associate).

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