The need for high-quality infrastructure in India remains robust. The government is actively implementing measures to enhance the credit market and address risks faced by project developers and financiers. The combination of these initiatives and the persistently high demand unequivocally signals a promising future for the Indian infrastructure sector.
The year of India's G20 presidency marked a significant milestone, solidifying the country's global influence. The G20 summit introduced sustainability initiatives aligned with the theme "One Earth, One Family, One Future." These initiatives encompassed financing Indian cities for futuristic development, reforms to facilitate green financing in multilateral development banks, and the establishment of standards for green hydrogen and energy transition.
In the legislative realm of 2023:
- The Electricity (Promoting Renewable Energy Through Green
Energy Open Access) Amendment Rules, 2023 (Amendment Rules 2023),
notified by the Ministry of Power (MOP) on January 27, 2023, amend
the provisions of the Electricity (Promoting Renewable Energy
Through Green Energy Open Access) Rules, 2022. The Amendment
further facilitates any consumer who may purchase green energy
either up to a certain percentage of the consumption or its entire
consumption and they may place a requisition for this with their
Distribution Licensee, which shall procure such quantity of green
energy and supply it and the consumer shall have the flexibility to
give separate requisition for solar and non-solar. The Amendment
have implications for various stakeholders in the power sector,
such as generators, distributors, consumers, regulators and
policymakers. Stakeholders should be aware of the following aspects
of the Amendment Rules 2023:
- The eligibility criteria and procedure for applying for green open access
- The tariff determination and payment mechanism for green energy
- The renewable purchase obligation (RPO) and green certificates for green energy consumers
- The dispute resolution and penalty provisions for non-compliance with the rules
- The impact of the Amendment Rules 2023 on the existing contracts and agreements between the parties involved in green energy transactions
- On April 26, 2023, the Ministry of Power (MoP) released an order urging states to repeal any directives imposing taxes on power generation under the guise of water usage or water cess. This directive is in response to certain states like Himachal Pradesh and Uttarakhand imposing water cess on hydro projects, leading to disputes with neighboring states and concerns about potential increases in power rates. Under the new Order, the HP State Government will cover the expenses accrued by the State power generation companies, whereas other entities like Sutlaj Jal Vidyut Nigam Limited, National Thermal Power Corporation, among others, including small hydro power projects will be obligated to pay the cess.
- On February 28, 2023, the Rajasthan Electricity Regulatory Commission notified the RERC (Terms and Conditions for Determination of Tariff) (Second Amendment) Regulations, 2023. According to these regulations, all new intra-state transmission projects costing INR 250 crore or more must undergo development through Tariff-Based Competitive Bidding, following guidelines set by the Central Government. In addition to the Regulations made by RERC, power procurement by any Distribution Licensee shall be in accordance with the National Tariff Policy issued by Central government. The Regulation will affect the intended distribution licensee in power procurement procedure.
- The Central Electricity Regulatory Commission (CERC), through a notification dated May 29, 2023, issued the CERC (Indian Electricity Grid Code) Regulations, 2023 (IEGC Regulations 2023). These regulations outline the roles, functions, and responsibilities of relevant statutory bodies, generating companies, and other entities related to power system operations. They cover a comprehensive range of components, including reliability and adequacy of resources, technical and design criteria for grid connectivity, protection systems, operational requirements, unit commitment, scheduling and dispatch criteria, integration of renewables, ancillary services, reserves, cyber security, and more. The Code streamlines the working and functions of the statutory bodies in power generation sector.
- Guidelines have been established for the Tariff-Based Competitive Bidding Process for Procuring Power from Grid-Connected Wind Power Projects. This initiative aims to facilitate the growth of renewable energy capacity and create a transparent, fair, and standardized framework for procuring power generated from wind energy sources. These Guidelines are issued for procurement of electricity by the Procurer(s), from grid-connected Wind Power Projects (WPP) having:
- bid capacity of 10 MW and above for projects connected to intra-state transmission system; and
- bid capacity of 50 MW and above for projects connected to inter-state transmission system
- In June 2023, the government issued a notification outlining a draft framework for the Indian carbon market under the Carbon Credit Trading Scheme 2023 (the "Carbon Credit Scheme"). Initially, the draft scheme proposed the formation of the India Carbon Market Governing Board (ICMGB) as the central entity overseeing and regulating the carbon credit market. The finalized Carbon Credit Scheme now includes a National Steering Committee, with the Bureau of Energy Efficiency tasked with administering the carbon market. The CERC will serve as the regulator for trading activities in the Indian carbon market, and the Grid Controller of India will act as the registry. One can think of carbon credits as a temporary "licence" for an organisation to emit a specific quantity of CO2 that year. As the country moves steadily towards a net-zero world, decarbonising industrial activity will be critical. It is here that industry leaders in carbon management solutions and clean energy transition can play a pivotal role in facilitating the transition towards a net-zero future by helping the nation switch from fossil fuel or legacy technologies to clean energy systems.
- Gujarat Urja Vikas Nigam Ltd & Ors v. Renew Wind Energy (Rajkot) Pvt Ltd[1]
In this case, the Supreme Court (SC) emphasized that there was no provision requiring prior approval by the State Commission for Power Purchase Agreements (PPAs) related to renewable energy. The Court held that the findings of the Appellate Tribunal for Electricity (APTEL), not grounded in stipulated obligations of State regulations mandating State Commission approval, could not be sustained. This decision holds significant implications for the energy sector, highlighting the importance of procedural fairness, the rule of law in quasi-judicial proceedings, and the necessity for decisions to be evidence-based rather than relying on assumptions.
- GMR Warora Energy Ltd v. Central Electricity Regulatory Commission & Ors[2]
In this case, eleven cross-appeals were filed before the SC by various generators and Distribution Companies (DISCOMs) against APTEL's judgment. The generators sought compensatory benefits denied under the Change in Law, related to the government's New Coal Distribution Policy (NCDP), 2013. DISCOMs contested APTEL's decision accepting the generators' claims on certain issues as Change in Law. The SC, delving into the definition of 'Law' in Power Purchase Agreements, concluded that additional charges stemming from state instrumentalities' orders after a cut-off date should be considered Change in Law events. This establishes a crucial precedent for Change in Law circumstances arising from PPAs, emphasizing compensation for changes initiated by State Instrumentalities and emphasizing non-interference in cases with concurrent findings from CERC and APTEL.
- Paschimanchal Vidyut Vitran Nigam Ltd v. Raman Ispat Pvt Ltd & Ors[3]
This case centers on the priority of claims in insolvency proceedings, particularly whether dues to secured creditors should take precedence over government dues under the Electricity Act, 2003. The judgment affirmed the Insolvency and Bankruptcy Code's (IBC) overriding effect over the Electricity Act, 2003, emphasizing Section 238 of the IBC. Despite the Electricity Act's non-obstante clauses, the Court upheld the IBC's supremacy, underscoring its central role in insolvency proceedings, even when conflicting with other statutory provisions. This decision reinforces the dominance of the IBC in insolvency matters, maintaining consistency with previous rulings.
Through the Business lens:
- Financing Flows: India traditionally witnesses substantial financing inflows from multilateral development institutions such as the International Finance Corporation, Asian Development Bank, sovereign wealth funds, and development finance institutions worldwide. This includes the New Development Bank (formerly known as the BRICS Development Bank) and the Asian Infrastructure Investment Bank (AIIB).
- National Bank for Financing Infrastructure and Development (NaBFID): The recently established NaBFID, an Indian Development Financial Institution (DFI), successfully raised INR 2.3 trillion in its inaugural Indian rupee-denominated domestic corporate bond issuance. This capital aims to fund long-term infrastructure development in India.
- National Infrastructure Investment Fund (NIIF) Collaboration: NIIF, India's sovereign wealth fund, collaborated with the Japan Bank for International Cooperation (JBIC) to launch a USD 600 million India-Japan fund. JBIC and the Government of India act as anchor investors in this initiative.
- Infrastructure Debt Funds (IDFs) Regulatory Relaxation: The Reserve Bank of India (RBI) has recently eased the regulatory framework for Infrastructure Debt Funds (IDFs). The changes include the removal of the sponsor requirement, enabling access to external commercial borrowings, and direct financing of toll-operate-transfer (TOT) projects.
- National Green Hydrogen Mission: The government approved the National Green Hydrogen Mission in January 2023 with the goal of creating a comprehensive green hydrogen ecosystem. The mission targets a production of five million tonnes of green hydrogen by 2030, with a fiscal outlay of INR 197 billion.
- Budgetary Allocations: The government has sanctioned a budgetary outlay of INR 200 billion for various initiatives, including the development of charging stations/infrastructure, electrification of public and shared transportation, a production-linked incentive (PLI) scheme for the automotive sector, and a reduction in taxes on Electric Vehicles (EVs) and EV chargers under the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME) scheme – Phase II.
- Optic-Fibre Cable (OFC) Infrastructure Development: The National Highways Authority of India (NHAI) aims to develop around 10,000 km of optic-fibre cable (OFC) infrastructure across the country by the financial year 2024–25. The plan involves creating utility corridors along highway stretches, leasing out the OFC network as a fixed-price allotment mechanism on an "open for all" basis, and implementing telecommunications technologies like 5G and 6G for digital transformation.
- Project Financings: Several project financings have been secured, including a pumped storage project by Greenko, a 300 MW project in Karnataka by Vena Energy, and a USD 1 billion high-voltage direct current link project by Adani Energy Solutions. These projects aim to inject additional renewable power into the Mumbai grid.
- Renewable Energy Projects: Vibrant Energy has secured project financing for 300 MW in wind-solar hybrid projects. Additionally, Power Finance Corporation (PFC) has sanctioned project financing for a greenfield airport project in Andhra Pradesh.
- Infrastructure Loans: India Infrastructure Finance Corporation Limited (IIFC) has sanctioned loans to six major airports in India, including Delhi, Mumbai, Hyderabad, Navi Mumbai, Noida (Jewar), and the newly developed Manohar International Airport at Mopa, Goa. GMR Airports has enlisted the National Investment and Infrastructure Fund (NIIF) to invest INR 6.3 billion for the Mopa airport in Goa.
- Advanced Chemistry Cell (ACC) Batteries: Ola Cell Technologies Private Limited has achieved financial closure for its manufacturing facility focusing on Advanced Chemistry Cell (ACC) batteries for electric vehicles.
- Regulatory Developments: Given the evolving regulatory landscape in green hydrogen, captive power projects, and carbon credit trading, further financing for infrastructure projects in these sectors is anticipated.
- Green Loan for Renewable Project: A notable deal involves a $1.35 billion green loan to project companies promoted by Adani Green Energy Limited. This financing supports the construction of a 1.69 gigawatt hybrid wind and solar project, marking the largest renewable syndicated project financing in India.
- USD Bonds and Global Medium-Term Notes Programme: High-yield US-dollar bonds continue to be significant, with JSW Hydro Energy Limited issuing $707 million green bonds for the refinancing of the Karcham-Wangtoo Project. Additionally, Adani Electricity Mumbai (AEML) has established a $2-billion global medium-term notes programme (GMTN), including a sustainability-linked bond issuance, as part of its capital management plan.
Challenges to overcome:
Interestingly, there is a nexus between energy and other sectors, making a compelling case for all energy-related legislative, executive and judicial (including quasi-judicial) actions to be tested against multidimensional parameters. For instance, if we look at energy and water nexus, The National Policy of Biofuels-2018 has been recently modified by the Government to accelerate the target of blending 20% ethanol in petrol, moving it from 2030 to the EST 2025-26.
Water plays a crucial role in biofuel production, particularly in obtaining basic feedstocks for biofuel derivation. For instance, according to NITI Aayog estimates, sugarcane and paddy cultivation utilize 70% of the country's irrigation water, diminishing water resources for other crops. Even if water-efficient crops like maize are employed, water is still necessary for the processing and conversion of raw feedstock and the production of ethanol from second-generation biofuels. It is imperative to ensure that the shift towards clean and sustainable energy does not compromise water availability and accessibility for human consumption and other uses. So the most overlooked challenge the government must look into is to not frame energy regulation in silos, rather, the regulations should be framed in consensus and after evaluating the impact of the regulation on other connected resources.
Secondly, The Government of India acknowledges the significance of renewable energy (RE) in reaching the country's net-zero emission goals and has implemented various measures to encourage the generation of electricity from RE sources. Despite these efforts, the actual outcome reveals a failure to reach the targeted installed RE capacity of 175 GW by 2022 awaiting information for 2023.
The government is actively considering regulatory reforms crucial for the growth of the RE sector and has initiated certain measures. However, what is currently essential is the introduction of well-thought-out and carefully crafted policy changes. It is hoped that such changes will effectively address the challenges faced by developers, investors, manufacturers, technology providers, financiers, and all other stakeholders. This, in turn, should attract substantial investments, both foreign and domestic, necessary to meet our ambitious targets.
Lastly, India's renewable energy sector presents attractive investment opportunities, yet it faces specific challenges. The participation of state governments in overseeing land laws and electricity rates has the potential to create delays in projects. While some regions have simplified the property acquisition process, obstacles persist related to land distribution, fragmented ownership, and disputed titles.
Moreover, attempts by state governments and public utility corporations to renegotiate Power Purchase Agreements (PPAs) to reduce tariffs elevate contract and non-payment risks. Political changes may trigger such renegotiations, underscoring the significance of state-level political uncertainties. The COVID-19 pandemic has resulted in payment delays and government budget constraints, leading to the application of force majeure provisions and instances of bankruptcies.
A notable concern involving social and environmental aspects in large-scale solar projects is the absence of comprehensive environmental assessments and public outreach. Ignoring local environments and livelihoods during site selection can give rise to operational and reputational challenges, community unrest, and legal complications.
Concluding remarks
Participating in renewable energy ventures in India demands a comprehensive understanding of the legislative framework, political initiatives, and regulatory landscape. Despite the considerable potential in the industry, investors should be ready to face challenges and uncertainties. This involves conducting thorough due diligence and obtaining the requisite legal documentation. Investors must engage in extensive research, encompassing legal and regulatory analyses, to navigate the intricate landscape and minimize potential risks in India's renewable energy sector. Changes in policies and delays in approvals can significantly affect the project's timeline and financial viability.
Overall, the demand for infrastructure projects in India remains high, and the complex landscape of project finance necessitates a thorough understanding of market trends, diverse business models, and associated risks for market participants, including legal professionals. While anticipating market reactions remains challenging, especially amid uncertainties related to political events and the persistent influence of COVID-19 on the global economy, the demand for infrastructure projects remains robust. The trajectory suggests a sustained growth in major project financing activities.
Notably, the complexity of structuring project finance, involving multiple funding sources, is escalating annually. Therefore, it is crucial for market participants, including legal professionals, to possess a comprehensive understanding of evolving market trends and a diverse range of businesses. This awareness should extend to recognizing and mitigating risks associated with various projects.
Footnotes
1. Supreme Court of India | Judgment dated April 13, 2023 | Civil Appeal No(s). 3480-3481 of 2020
2. Supreme Court of India | Judgment dated April 13, 2023 | Civil Appeal No(s). 3480-3481 of 2020
3. Supreme Court of India | Judgment dated July 17, 2023 | Civil Appeal No. 7976 of 2019
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