BROCHURE – ENERGY SECTOR: CONTRACTUAL, FINANCIAL & REGULATORY GOVERNANCE IN INDIA
The growth of the Power Sector in India is unprecedented. The dominance by the erstwhile central and state government enterprises has seen a decline and there is an increasing upscale of private participation in the various tenets of activities, especially in the Generation Companies and Distribution Companies. Due credit for such growth of privatisation is to the regulatory frame work that has made it convenient as they are not merely diversified, but are also evolved overtime. However, the practices of contracting and acquiring interests in the power sector, requires deliberation and discussion.
Sailing through, what we now call, as the Energy Transition phase, the mode and source of generating electricity is changing rapidly, from largely conventional, to mostly renewable. The Economic Survey of 2017-18 reiterates that the renewable sector requires investment of over USD 350 billion over the period of the next decade, in order to achieve the target of the Indian economy becoming a USD 5 trillion economy.
The renewable energy sector received a staggering $20 billion USD investment in the year 2018 alone and this sets the hopes and aspirations for the growth of this sector on a much higher ground. However, a number of challenges and hurdles remain in the development and growth of this sector, which make the question of achieving energy security, a very recurring one. For example, the risk to the Indian Renewable Energy Sector is the risk associated with State-owned utilities defaulting on their contractual liabilities to pay the power producing private companies. Numerous cases have occurred in the recent past, where the Public Discoms who are one of the largest off-takers for the renewable energy sector have sought to repudiate or renegotiate Power Purchase Agreements (PPAs) at pre-decided tariffs with independent power producers. Recently in July 2019, the Andhra Pradesh Government has issued a Circular to unilaterally renegotiate the terms and conditions of the contracts relating to revising the tariffs and the private wind energy producers have filed a writ in the High Court opposing the same. The issue has led to the government towards closing down of over twenty wind energy projects, citing extensive costs to the exchequer.
While there has been diverse deliberations on policy matters, comparatively little or no significant efforts have been directed towards strengthening of the legal, regulatory and institutional framework. While we would like to reiterate on reformulating and revisiting the critical clauses in the PPAs as signed in the Renewable sector and make them contemporary enough to include and protect rights of investors and regulate the tariffs to the extent that it doesn’t mar the future investments in this sector, but makes the participation in this area of power generation and distribution more harmonious. The Press Information Bureau report of 2015 discussed the Ujwal Discom Assurance Yojana (UDAY) programme, a programme that envisaged a financial turnaround, operational improvements and the reduction in power generation costs which looks like a positive step. The initiative now, is to take legal measures in promoting this policy directive. The gap in between the policy making and the legal regime must be filled, in order to achieve an overall progress. One area within clean energy sector which has seen the most turbulence and the least growth in the past decade has been the hydropower industry. Numerous projects have been left abandoned and stalled, due to insufficient funds and gross cost overruns. There are defunct contractual obligations here as well, which are not highlighted in the everyday news segment. However, with NHPC recently being granted the Subansiri project worth hundreds of megawatts, once more the attention is drawn to the contracts which arise here and importantly, the security for investment protection. Another important issue which arises but as the effects of the same are not quite visible now, it manages to escape the eye is that of the piling up of Environmental Costs of the renewable energy projects. . Contracts in the electricity sector are generally long term agreements that may have rummaging impact on its various stakeholders including the Producer of Electricity, Distributors including State-run Discoms and the end consumer, a common man. While there are advantages thereto, there may be several challenges and issues that crop up during the operation stage of such long-term contracts. In India and across the world, we have come across inter alia, issues such as Change in Law, Shortage of Fuel Supply or raw materials as a plea for non-performance of the contracts, and on numerous occasions the judicial interpretation on the same has caused business hardship to private participants, and an international embarrassment in a particular instance.
While the policy makers have already started with the journey of increasing solar panel production by removing the import duty on products required to make solar panels1 so that the domestic producers are aided, the solar energy industry is steadily increasing in quantum every year. What goes unnoticed is that under the E-Waste Management Rules of 2016, the Extended Producer’s Responsibility mandates the producers of hazardous E-waste to take back their waste at a cost. This cost, shall be borne sooner or later, by the consumer of this energy as the producer shall have to undertake expenditure to reuse and/or dispose of this solar panel e-waste, which would then affect the production cost. The tariffs now capped by the Government of India, for solar energy, this whole situation proves to be no less than a ticking time bomb, waiting to re-transition the economy from renewable energy back to majorly carbon-oriented. Such issues, need be addressed on a legal note through rephrasing and redrafting the contracts which are signed by various stakeholders and it must be ensured that the law evolves at a relatively faster pace than the policy.