The last quarter of 2021 saw a return to a semblance of normalcy in the sector with economic activity picking up and power demand going back to normal levels. The focus on renewables sharpened again in the backdrop of COP26 and the sector also witnessed a revival in M&A as a consequence of the increased economic activity. However, legislative and regulatory developments in the renewable energy sector proved to be a mixed bag - while the state of Punjab’s proposed law allowing redetermination of tariffs under long-term power purchase agreements was concerning from an investor and lender perspective, the Ministry of Power’s rules on the must-run status of renewable power plants and change in law provided welcome clarity.
Punjab Renewable Energy Security, Reform, Termination and Redetermination of Power Tariff Bill, 2021
The Government of Punjab notified the Punjab Renewable Energy Security, Reform, Termination and Redetermination of Power Tariff Bill, 2021 (Bill) on 11 November 2021. The Bill seeks to re-determine the contractually agreed tariff under the various long-term power purchase agreements (PPAs) executed between the state power distribution company (Punjab State Power Corporation Limited) and renewable energy developers with the intent to 'make electricity available to consumers in the state at an affordable and sustained basis'.
The Bill provides that as per Section 63 (Determination of Tariff by Bidding Process) and Section 86 (Functions of the State Commission) of the Electricity Act, 2003, the Punjab State Electricity Regulatory Commission (PSERC) has the statutory authority to re-determine the tariff for power generation, in the consumer interest. For this, the Bill provides that all clauses contained in the relevant PPAs impacting the tariff, directly or indirectly, stand terminated and will be referred to the PSERC for the conclusive re-determination of tariff as well as all matters impacting tariff. As an interim measure, the PSERC is to determine a temporary tariff, applicable to the PPAs till the tariff has been re-determined. After having been passed by the Punjab legislative assembly, the Bill has been sent to the President of India for consideration and assent.
Shortly after the Bill was passed by the Punjab legislative assembly, the National Solar Energy Foundation of India asked the central government to re-examine the Bill and its implications on the grounds that the Bill was in contravention of the Constitution of India, as well as the Indian Contract Act, 1872. Renewable energy developers have strong grounds to challenge the validity of the Bill as concluded contracts cannot be unilaterally amended to the detriment of one party. Further, the position on the limitation of powers of the SERC has already been clarified by the Andhra Pradesh High Court when the Andhra Pradesh government, in a similar move in 2019, issued a government order to renegotiate tariffs under existing PPAs between the state distribution companies and renewable power generators. The order of the Andhra Pradesh government was challenged by a number of renewable power generators and was eventually quashed by the Andhra Pradesh High Court. Subsequently, a petition for transfer of all Andhra Pradesh tariff cases was filed before the Supreme Court which is pending consideration by the court.
Long-term, legally binding PPAs have been one of the factors attracting global investment in the renewable energy sector in India. Backtracking and renegotiation of validly entered PPAs undermines the credibility of the Indian renewable energy market. The judiciary, as in the Andhra Pradesh case, has often stepped up to course-correct arbitrary executive actions and given the strong legal precedents to the contrary, it is unlikely that the Bill will withstand judicial scrutiny.
Electricity (Promotion of Generation of Electricity from Must-Run Power Plant) Rules, 2021
On 22 October 2021, the Ministry of Power (MoP) issued the Electricity (Promotion of Generation of Electricity from Must-Run Power Plant) Rules, 2021 (Must-Run Rules), which define a 'must-run' power plant as a wind, solar, wind-solar hybrid, hydropower plant or a power plant generating electricity from any other source that may be notified by the 'appropriate government', which has entered into an agreement to sell electricity to any person.
If power from such plants is curtailed for any other reason, the generator is entitled to receive compensation in accordance with the rates specified in the relevant PPA.
Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021
On 22 October 2021, the MoP issued the Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021 (Change in Law Rules). Applicable to generating companies and transmission licensees, the Change in Law Rules set out the mechanism for adjustment of the generation and transmission tariff, as the case may be, on the occurrence of a change in law event. The benefit of the Change in Law Rules can be claimed by the generating companies and transmission licensees even if the PPA or transmission agreement does not provide for a change in law clause and corresponding relief. Unless specifically defined in the PPA or transmission agreement, change in law is defined as any enactment, amendment or repeal of any law made after the determination of tariff which leads to change in costs including any change in the interpretation of any law by a competent court, change in any domestic tax and/or change in any condition of approval or license required to be obtained for the purchase, supply of transmission of electricity.
Under the Change in Law Rules, the party affected by a change in law must first issue a notice to the other party informing it of the potential impact of the change in law and then, within 3 weeks of issue of this notice or 30 days from the date of occurrence of the change in law event (whichever is later), submit a detailed calculation of the relief sought (which will be verified by the relevant commission within 60 days of submission). The relief sought may be recovered in the form of a one-time payment or adjustment of the tariff. The schedule to the Change in Law Rules sets out a formula for the calculation of the impact of the change in law event (to be used in the absence of such a formula in the PPA or transmission agreements).
The Change in Law Rules are timely, given the numerous pending change in law petitions arising from imposition of safeguard duty on solar modules/cells; increase in the rate of basic customs duty on solar inverters; introduction of goods and services tax; and the impending claims from renewable energy generators in Rajasthan impacted by the Supreme Court’s decision to protect the Great Indian Bustard, which require transmission cables to move underground. The Change in Law Rules should bolster investor confidence in the renewable energy sector by enabling easier recovery of change in law costs and providing a standardised formula for calculation of change in law relief.
According to a statement by the Union Minister for Power and New and Renewable Energy, investment in the Indian renewable energy sector in 2022 is projected at over USD 15 billion – given this and India’s ambitious commitments at COP26 of achieving net zero emissions by 2070 and renewable energy generation comprising 50% of India’s total electricity generation by 2030, this year should see a major push by the Indian Government in the renewable energy sector. It is hoped that the Union Budget 2022 will focus on long-term policy changes to incentivise the adoption of green technology to accelerate India’s clean energy transition.