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It is estimated that India has solar energy potential of 750 GW, and wind energy potential of over 300 GW, which makes India’s renewable energy sector an attractive destination for domestic and foreign capital. In keeping with its commitments to reduce greenhouse gas emissions under the Paris Climate Change Agreement, the Indian government has targeted establishing 220 GW of renewable energy capacity by 2022, and 450 GW of capacity by 2030. Meeting these targets will require investments in the sector and supporting grid network of USD 500-700 billion in the next decade.  

The push towards increasing renewable energy capacity has been successful and has attracted a fair amount of global capital. In March 2020, India had 34 GW of installed solar power capacity, and 25 GW of installed wind power capacity. However, independent reports suggest that the target of 220 GW by 2022 will be missed by between 25 and 40 per cent., and the sector continues to face certain significant issues. A snapshot of the key issues in this regard is set out below.  

A. State Owned Discoms – The Perennial Bugbear 

 The financial ill-health of state-owned distribution companies (Discoms) has long been an issue for India’s energy sector. As per the data available on the Ministry of Power’s website, as of November 2020, payments of INR 118.6 billion (approx. USD 1.6 billion) were outstanding from Discoms to renewable energy generators. Discoms generally face substantial technical and commercial losses, which are caused by factors such as power theft, and poor payment collection procedures. Non-payment, payment delays and a failure by Discoms to honour renewable purchase obligations (RPOs) – where the targets, obligations and penalties for non-compliance are not always clear – have been amongst the most significant risks associated with this sector and often affect the bankability of renewable projects.  

The central government has taken steps to get Discoms to clean up their balance sheets, notably through the 2015 Ujwal Discom Assurance Yojana (UDAY) and the recent 2020 Atal Distribution System Improvement Yojana (ADITYA) schemes. Under the UDAY scheme, state governments took over 75 per cent. of Discoms’ debt and issued low interest bonds to service the rest of the debt, and under the ADITYA scheme, Discoms with excessive losses will be required to privatise their operations through the PPP route or appoint distribution franchisees under franchise models. The UDAY scheme has been only partially successful in reducing the aggregate technical and commercial losses of the Discoms, and the ADITYA scheme is still at a nascent stage.  

In this regard, there has been significant discussion around the privatisation of state owned Discoms. In May 2020, it was announced that Discoms in the union territories (which are territories governed by the central government) would be privatised, and in September 2020, standard bidding documents for privatisation were issued. However, the issue of privatisation is sensitive, and the first tender for privatisation of the Discom in the city of Chandigarh, which was issued in November 2020, has already been challenged in court by a labour union and certain citizens associations.  

In order to address payment issues, from August 2019, Discoms have been required to maintain letters of credit as a payment security mechanism within their power purchase agreement (PPAs). Early indications are that this has improved the situation on the ground and has been a welcome development for private renewable energy developers.  

 B. Tariff Renegotiation – Ignoring the Sanctity of Signed PPAs  

The “sovereign” risk of state governments reneging on concluded PPAs is an issue that has undermined investor confidence in the renewable energy sector. With tariffs having come down significantly in recent years, an increasing concern has been that Discoms will look to source power from newer wind and solar projects, which will leave older projects in difficulties and potentially facing forced curtailment and payment delays.  

In 2019, over the objections of the central government (in the form of a directive of the Union Ministry of New and Renewable Energy (MNRE)), the Andhra Pradesh government constituted a high-level negotiation committee to reduce tariffs under all the clean energy PPAs signed during the term of the previous state government. The affected developers approached the courts, and the matter is currently pending before the state electricity regulatory commission. Other states in which renegotiation of tariffs has been raised as a possible issue include Uttar Pradesh, Karnataka and Punjab.  

The Andhra Pradesh matter appears to be in the process of being resolved but the alacrity and willingness with which state governments have taken steps to re-look at signed contracts has had a significant and adverse impact on existing projects (where there is now a fear of loan facilities being recalled) and more crucially on longer term investor sentiment and global perception of the India opportunity. Foreign investments in the renewable sector have included investments by “blue chip” investors such as sovereign wealth funds and pension funds, and a number of foreign governments have expressed their concerns regarding these developments.  

C. Imposition of Import Duties – “Make in India”  

Tariffs in both solar and wind projects have reduced dramatically since the original feed-in tariff regime was replaced with competitive bidding (and aggressive reverse bidding caps, which are discussed below). One factor in particular that contributed to the decline in solar energy tariffs was a decrease in photovoltaic module costs (such modules being predominantly imported from China, with which India has recently had a number of geo-political issues).  

In July 2018, in a bid to promote “Make in India” domestic manufacturing, the government imposed a safeguard duty for two years (25 per cent. for the first year, 20 per cent. for the next six months, and 15 per cent. for the final six months) on the import of solar cells from certain countries such as China for an initial period of two years. The safeguard duty regime has now been extended by another year until July 2021.  

However, domestic manufacturing capacity is well short of what is required to meet local demand, and 90 per cent. of developers’ solar panel requirements continue to be imported. This has significantly hurt developer margins. Whilst compensation for increased project costs is payable for solar projects that were awarded before the imposition of the safeguard duty, developers have been struggling to receive such payments.  

In this year’s budget, the central government has proposed a 20 per cent. customs duty (to replace the safeguard duty referred to above) on imported solar cells and modules, although the precise scope of implementation of this duty is yet to be clarified (the MNRE has invited comments from market players on the list of equipment that should be exempted from such duty). There are also reports of plans to progressively increase the duty on solar panels to 40 per cent. The government is also likely to withdraw customs duty concessions for wind-turbine components from next year.  

These proposed changes with respect to potential increases in developer costs and the uncertainty as to whether these will be recoverable have resulted in investors proceeding with caution. There is a need to balance making renewables related imports more viable, against the objective of promoting more expensive domestic manufacturing.  

D. Insufficient Infrastructure – Grid Lock  

Whilst renewable projects have technically been given a “must run” status (which means any renewable power that is generated must always be accepted by the grid), the lack of adequate infrastructure such as evacuation, transmission and inter-connectivity capacity has been a matter of concern for developers. The low participation by developers in certain recent solar and wind tenders has likely been due at least in part to the lack of such infrastructure, as this exposes developers to penalties under their PPAs.  

Where transmission infrastructure is inadequate or otherwise unavailable, developers need to create the necessary infrastructure themselves. This leads to additional costs and delays, and additional land issues, since developers will often need to obtain rights of way from landowners for construction of transmission grids. In addition, there is often a lack of clarity regarding the precise location where the evacuation and transmission infrastructure is to be established, which means that there can be a lack of visibility as to the costs that this will entail.  

The lack of inter-state connectivity infrastructure also creates issues in relation to RPOs, as states lacking renewable energy potential are reliant on inter-state purchases, which may not always be possible due to either inadequate transmission infrastructure or grid congestion.  

Accordingly, there is an urgent need to ramp up the building of infrastructure in the transmission sector as this is currently a significant bottleneck in the growth of India’s renewable energy sector. In this regard, ‘green energy corridors’ are in the process of being implemented by the renewable energy-rich states, which is expected to facilitate better grid integration. Additionally, the government has started to develop wind and solar parks to provide transmission networks from the park to the grid, thereby reducing development risk.  

E. Tariff Ceilings – Risk-Reward Considerations  

Once the renewable energy sector moved from feed-in tariffs to reverse bidding auctions, tariffs for wind and solar have dropped dramatically and have been as low as USD 34/MWh. There are concerns that such low tariffs may prove to be unsustainable going forward.  

Indian reverse bidding auctions set both caps and floors within which bids must be made. The caps are increasingly being seen as too aggressive by developers, as they have been based on price determinations made in previous auctions which are now not viewed as sustainable in a changed environment (for example, they do not take into account the import duties discussed above). Accordingly, many recent auctions have met with a tepid response (and in certain cases, with no response at all), as the limited rewards available under the tariff ceilings are not being considered as commensurate with the risks associated with these projects.  

In a welcome move in 2020, the MNRE issued a directive to central and state governments suggesting that tariff ceilings for auctions in renewable energy tenders are removed. If implemented, this should result in an increase in the number of projects for which tenders are received.  

F. Land Procurement – Another Perennial Issue  

Land issues have also consistently been a problem for infrastructure projects in India. The lack of proper land records and a centralised registry lead to title risks, and the various requirements around land ceiling limits and the need to obtain various permissions (including as to change of use) means that the process is long drawn out and difficult. These issues are exacerbated for wind and solar projects which are required to be located at sites having certain advantages such as sufficient wind and solar levels and appropriate topography. For solar projects, the land needs to be contiguous which poses additional challenges.  

Additionally, electricity and land both fall within the purview of the central government as well as the state governments. Accordingly, obtaining land from state governments for central government projects can be challenging as they would prefer that the land is used for state projects – which can put developers in a difficult position, as they are then compelled to procure land from private owners, which is significantly more expensive.  

There have been relatively successful government initiatives to develop large wind and solar parks with a view to insulating developers from land risk, but there is still considerable work to be done in this regard. For projects that are not within any such parks, it is difficult to see how these issues will be addressed without considerable legislative and administrative changes.  

 G. Indirect Tax Issues – Uncertainty about GST Rates  

 There has been some uncertainty regarding the applicable goods and services tax (GST) rate that should apply to EPC contracts for renewable projects. It was expected that the GST rate on such contracts would be a concessional rate of 5 per cent. but there have been certain rulings by the tax authorities that suggest that such contracts would be treated as ‘works contracts’ for the provision of both goods and services, thereby attracting a rate of 18 per cent.  

 A clarificatory notification was subsequently issued to the effect that where renewable energy devices are supplied with other goods and services, 70 per cent. of the contract value would attract a GST rate of 5 per cent. on the basis that the supply of goods will constitute 70 per cent. of such contracts, and 30 per cent. of the contract value would attract a GST rate of 18 per cent., effectively giving a composite tax rate of around 9 per cent., which ultimately led to an increase in final capital costs. In addition, this continues to create issues for developers of renewable projects, as the actual proportion of ‘goods’ in such projects is typically more than 70 per cent. Contracts are therefore often split in separate goods contracts and services contracts, overlaid with “wrap” agreements setting out the overall contractual arrangement.  

 H. Group Captive Structure  

 In India, where electricity is supplied to a group of consumers in a “group captive structure” (where the consumers hold a minimum of 26 per cent. of the equity share capital of the power plant and consume not less than 51 per cent. of the aggregate electricity generated annually), certain benefits become available, such as exemptions from cross subsidy charges, grid connectivity on a priority basis and certain exemptions from obtaining licenses for setting up dedicated transmission lines.  

 These structures have proved to be a popular route amongst industrial consumers (including small and medium enterprises) due to their relatively reliable and cost-effective nature.  

 However, such structures have resulted in Discoms losing out on substantial surcharge revenue (for instance, consumers of captive power plants do not pay open access surcharges). Additionally, under certain structures, whilst captive consumers might technically hold the requisite equity share capital, the significant funding of such projects is met through convertible securities issued to third parties (often the relevant power producers), which if converted would mean that the captive consumers would hold less than 26 per cent. of the equity. There has been a risk that such structures (which have been fairly commonly used) are non-compliant and therefore not entitled to the benefits available to group captive projects.  

 In recent years, regulatory amendments have been proposed to tighten the definition of ‘ownership’ for group captive structures but have not yet been implemented. In addition, in 2020, many states have increased the standard open access charges with respect to renewable energy projects and cut back on other incentives that were available to captive structures, which has meant that such structures are not as attractive as they once were for renewable captive projects.  

 I. Central – State Government Dynamics  

 As mentioned above, electricity falls within the purview of both the central government and the state governments in India’s federal system. This has led to regulatory and executive action on the part of the various governments which has often been inconsistent and uncoordinated, and at times contradictory. For instance, whilst central government agencies such as the Solar Energy Corporation of India (SECI) and the National Thermal Power Corporation (NTPC) have their own renewable energy policies, several states also have policies which contain different requirements and conditions. This has created a lack of clarity for developers who find themselves having to deal with overlapping regulations and policies.  

In addition, whilst the central government has accorded “must run” status to renewable energy projects, certain state electricity boards refuse to accept the renewable energy generated by these projects on the basis that they are not compatible with their grid, or that they could affect the grid’s safety and stability.  

As mentioned above, in 2019, wind power developers who were awarded contracts through auctions conducted by SECI and NTPC complained that a certain state government had reserved state-owned land only for state government backed projects, which forced the developers to acquire private land which was significantly more expensive.  


Indian authorities are aware of the issues outlined above and are taking steps to address them. As discussed above, measures that have already been taken include providing renewable energy projects with “must run” status and the freedom to sell to third parties and captive consumers and non-discriminatory access to transmission and distribution channels, setting up of green energy corridors to facilitate better grid integration, and introducing park schemes with a view to addressing land acquisition and transmission issues.  

Further measures are on the anvil. Proposed legislation amending the existing Electricity Act contemplates the formulation of a national renewable energy policy, which should go some way in addressing the competing requirements of central government and state government policies. The amendment bill also provides that the electricity should not be despatched without adequate security mechanisms of payment, which should alleviate concerns regarding non-payment by Discoms, and for the establishment of an “Electricity Contract Enforcement Authority”, which will have the sole authority to decide on matters related to performance of obligations under a contract related to sale, purchase, or transmission of electricity.  

All of these steps (along with the opening up of opportunities in other aspects of the sector such as energy storage, offshore wind projects, hybrid projects and rooftop solar) should serve to make the Indian renewable energy sector an even more attractive destination for global capital.  


This material is for general information only and is not intended to provide legal advice.
For further information, please contact:

Karam Daulet-Singh

Anuj Bhatia

Yashvardhan Bansal

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