POWER PURCHASE AGREEMENT IN INDIAN ELECTRICITY

SECTOR: A CRITICAL ANALYSIS

Subject: BAL9.4 Infrastructure Laws

Academic Year: 2023-2024

Semester: 5th Year - 9th Semester

Submitted by:

Kartik Solanki

UID: UG2019-56

Under the Supervision of:

Prof. (Dr.) Sumit Bamhore

(Assistant Professor of Law)

November – 2023

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

 TABLE OF CONTENTS
List of Abbreviations.................................................................................................................ii

List of Cases...............................................................................................................................ii

List of Statutes..........................................................................................................................iii

1. Introduction.........................................................................................................................1

1.1. Research Methodology................................................................................................2

1.2. Research Objectives....................................................................................................2

1.3. Research Questions.....................................................................................................2

1.4. Research Hypothesis...................................................................................................3

1.5. Review of Literature....................................................................................................3

1.6. Statement of Problem..................................................................................................5

1.7. Scope & Limitation.....................................................................................................5

2. Key features of a Power Purchase Agreement....................................................................5

3. Legal and Regulatory Regime of Power Purchase Agreements.........................................8

4. Modes to Enter into a Power Purchase Agreements.........................................................10

5. Sanctity of Power Purchase Agreements..........................................................................12

5.1. Compensatory Tariff Issues and The “Escalability” Clause.....................................13

5.2. Sustainability of a Business or Sanctity of Contract?...............................................17

6. Revisiting Long-Term Power Purchase Agreements – A DISCOM Perspective.............18

7. Critical Analysis...............................................................................................................19

8. Conclusion and Suggestions.............................................................................................20

Bibliography...............................................................................................................................v

i
 LIST OF ABBREVIATIONS

ABBREVIATION EXPANSION
AIR All India Reporter
APTEL Appellate Tribunal of Electricity
BOT Build-Operate-Transfer
CERC Central Electricity Regulatory Commission
DISCOM Distribution Company
Ed. Edition
GENCOM Generating Company
IPP Independent Power Producers
Ltd. Limited
MoU Memorandum of Understanding
p. Page
PPA Power Purchase Agreement
PPP Public Private Partnerships
SERC State Electricity Regulatory Commissions
SC Supreme Court
SCC Supreme Court Cases
UDAY Scheme Ujjwal DISCOM Assurance Yojana
Scheme
UMPP Ultra Mega Power Projects
UOI Union of India

LIST OF CASES

NAME OF THE CASE PG. NO.

BSES Rajdhani Power Ltd. v. DERC 9
Coastal Gujarat Power Ltd. v. Gujarat Urja Vikas Nigam Ltd. 13
Essar Power Ltd. v. UPERC 12
Indiabulls CSEB Bhaiyathan Power Limited v. Chhattisgarh State Electricity 13
Regulatory Commission
UPERC v. C Noida Power Company Limited 11
Uttar Haryana Bijli Vitran Nigam Limited v. CERC 9

ii
 LIST OF STATUTES

Electricity Act 2003

National Tariff Policy 2006

iii
1. Introduction

The year 2003 marked a significant turning point for the electricity sector in India, as it saw
the introduction of comprehensive reforms through the enactment of the Electricity Act, 2003
(“Act”).1 This legislation replaced the existing legal framework, aiming to distance the
government from both regulatory and commercial activities within the electricity sector. The
primary objectives of the Electricity Act, 2003 were to eliminate bottlenecks in all segments
of the sector, including generation, transmission, and distribution, and to foster an
environment conducive to competition, private sector involvement, and consumer interests.2

In response to the escalating demand for electricity, the Act allowed any person to operate,
establish, and maintain a generating station without the necessity of obtaining a license. 3 This
move towards delicensed generation and increased private participation led to a boost in
electricity generation by Independent Power Producers (“IPPs”). Central to the electricity
business in India, Power Purchase Agreements (“PPAs”) serve as a crucial link between
electricity demand and supply. A PPA is a contractual arrangement between two parties: the
electricity generator4 (seller) and the entity seeking to purchase electricity (buyer), which can
be a distribution licensee5 or an electricity trader.6 While PPAs are governed by contract law,
the intricacies of the electricity business and the regulatory framework make them subjects of
legal discussion.

This research delves into the nuances of Power Purchase Agreements in the Indian electricity
sector, aiming to provide a comprehensive and critical analysis of their legal, regulatory, and
practical dimensions. The study navigates through the legislative landscape, exploring the
intricate web of regulations and statutes governing the purchase and procurement of power.
The analysis extends to the sanctity of PPAs, unravelling recent challenges and controversies

1
See generally, Ajay Pandey and Sebastian Morris, “Electricity Reforms and Regulations - A Critical Review
of Last 10 Years Experience”, NATIONAL POWER TRAINING INSTITUTE, available at:
http://www.npti.in/Download/Distribution/Electricity%20Reforms%20and%20Regulations%20-%20 A
%20Critical%20Review%20of%20Last%2010%20 Years%20Experience%20-%20by%20IIM-A.pdf, (last
visited on November 12, 2023).
2
Deeptha Mathavan, “From Dabhol to Ratnagiri: The Electricity Act of 2003 and Reform of India’s Power
Sector”, 47 Columbia Journal of Transnational Law 2008-2009, p. 387.
3
Section 7 of the Electricity Act 2003.
4
Section 2(29) of the Electricity Act 2003 defines “generate” to produce electricity from a generating station for
the purpose of giving supply to any premises or enabling a supply to be so given.
5
Section 2(17) of the Electricity Act 2003 defines Distribution licensee as “a licensee authorised to operate and
maintain a distribution system for supplying electricity to the consumers in his area of supply”.
6
Section 2(71) of the Electricity Act 2003 defines Trading as “purchase of electricity for resale thereof and the
expression “trade” shall be construed accordingly”. Section 2(26) of the Electricity Act 2003 defines Electricity
Trader “as a person who has been granted a licence to undertake trading in electricity under section 12”.

1
that have cast shadows over their efficacy. Subsequently, the paper suggests certain changes
to the regulatory mechanism to ensure the holistic development of the electricity sector.

As the electricity sector undergoes transformative changes, understanding the implications of

regulatory frameworks on contractual agreements becomes paramount. This research
endeavours to contribute valuable insights into the functioning of PPAs in the Indian context,
aiming to inform policymakers, industry stakeholders, and researchers alike. Through an in-
depth analysis, the study seeks to unravel the complexities surrounding Power Purchase
Agreements and offer nuanced perspectives on their role in shaping the trajectory of the
Indian electricity sector.

1.1. Research Methodology

This research employs a multi-faceted approach to critically analyse the Power Purchase
Agreement in the Indian Electricity Sector. F 0r this paper, d0ctrinal research was f0ll0wed.
B00ks relating t0 the t0pic were referred. F0r this paper, a number 0f primary s0urces,
including the Electricity Act, 2002, case-laws have been referred. Internet research is an 0ther
imp0rtant s0urce 0f inf0rmati0n. F0r this paper, articles relating t0 the t0pic which were
available 0n the internet were also taken int0 c0nsiderati0n.

1.2. Research Objectives

The research objectives are as follows:

- Assess the overall effectiveness of PPAs in facilitating power procurement, ensuring

transparency, and promoting competition.

- Investigate the impact of regulatory interventions on the sanctity of PPAs, with a focus
on competitive bidding processes and contractual obligations.

- Explore the challenges faced by Distribution Companies in meeting obligations under

long-term PPAs and evaluate the viability of existing contractual frameworks.

1.3. Research Questions

1. What are the key features of a PPA?

2. How has the legal and regulatory framework evolved for PPAs in the Indian electricity
sector, and what impact has it had on the negotiation and execution of PPAs?

2
3. What are the challenges and successes associated with the implementation of competitive
bidding in power procurement, as encouraged by the Electricity Act and National Tariff
Policy?

4. What controversies and challenges have arisen regarding the sanctity of PPAs entered
through competitive bidding, and how have regulatory bodies intervened in such cases?

5. How have compensatory tariff issues, particularly related to the “Change in Law” and
“force majeure” clauses, been addressed by regulatory authorities, and what implications
do these decisions have on the sanctity of PPAs?

6. What challenges do Distribution Companies face in meeting their contractual obligations

under long-term PPAs?

1.4. Research Hypothesis

- Hypothesis 1: Regulatory Interventions Impact the Sanctity of PPAs:

Null Hypothesis (H0): Regulatory interventions, including changes in bidding guidelines

and tariff determinations, do not significantly affect the sanctity and contractual
obligations of PPAs in the Indian electricity sector.

Alternative Hypothesis (H1): Regulatory interventions have a significant impact on the

sanctity and contractual obligations of PPAs in the Indian electricity sector.

- Hypothesis 2: The Rigidity of Long-Term PPAs Poses Challenges to DISCOM Viability:

Null Hypothesis (H0): The inflexibility of long-term PPAs does not substantially impede
the commercial viability of Distribution Companies in meeting their contractual
obligations.

Alternative Hypothesis (H1): The inflexibility of long-term PPAs substantially impedes

the commercial viability of DISCOMs, hindering the overall growth of the electricity
sector in India.

1.5. Review of Literature

- Ajay Pandey and Sebastian Morris - Electricity Reforms and Regulations: The authors
critically review the experience of electricity reforms over the last decade. The document
sheds light on the challenges faced and the evolving landscape of regulations in the
power sector.

3
- Deeptha Mathavan - “From Dabhol to Ratnagiri: The Electricity Act of 2003”: Mathavan
explores the impact of the Electricity Act of 2003 on India’s power sector reforms,
providing insights into the legal framework and its implications for power generation and
distribution.

- Glenn P. Jenkins and Henry B.F. Lim – “An Integrated Analysis of a Power Purchase
Agreement”: This paper, from Harvard Institute for International Development, offers an
integrated analysis of a Power Purchase Agreement, providing insights into the economic
and financial aspects of such agreements.

- World Bank – “Power Purchase Agreements (PPAs) and Energy Purchase Agreements
(EPAs)”: The World Bank's perspective on Power Purchase Agreements offers a global
context, helping in understanding best practices and potential pitfalls in such agreements.

- Ministry of Power – “Power Sector at a Glance”: This official publication provides a

comprehensive overview of the power sector in India, offering statistical data that could
be crucial for contextualizing research on Power Purchase Agreements.

- CRISIL – “Impact Analysis: National Tariff Policy”: Analysing the impact of the
National Tariff Policy, this document from CRISIL could provide insights into the
regulatory landscape and its influence on Power Purchase Agreements.

- Rajat Misra – “Competitive Bidding in Power Sector: Experience and Development”:

This document from SBI Capital Markets Limited could contribute insights into the
evolution and impact of competitive bidding in the power sector.

- Delhi Electricity Regulatory Commission – “Staff Paper on Power Purchase Cost/Fuel

Cost Adjustment Mechanism”: This staff paper could provide valuable information on
the mechanisms involved in adjusting power purchase costs, offering regulatory
perspectives.

- Janmali Manikala – “Time to Revisit Long-Term Power Purchase Agreements”: This

opinion piece discusses the need to revisit long-term power purchase agreements,
providing a contemporary perspective on the challenges and potential solutions.

- Harsha V Rao – “How can the Sanctity of Power Purchase Agreements be Maintained?”:
Rao’s article delves into maintaining the sanctity of Power Purchase Agreements,
offering insights into the contractual and ethical dimensions of such agreements.

4
1.6. Statement of Problem

The Indian Electricity Sector’s reliance on Power Purchase Agreements for procurement and
supply has witnessed evolving challenges, impacting both stakeholders and the sector’s
commercial viability. The study addresses the critical issues stemming from the legal,
regulatory, and contractual dimensions of PPAs, exploring their implications on Distribution
Companies, power-generating entities, and the overall sustainability of the electricity sector.
Amidst increasing financial burdens on DISCOMs and instances of contractual disputes,
there is a pressing need to comprehensively examine the existing PPAs, their adaptability to
market dynamics, and their contribution to the broader goals of the power sector.

1.7. Scope & Limitation

This research delves into the legal, regulatory, and practical dimensions of PPAs in the
Indian Electricity Sector. It analyses the legislative framework, regulatory roles, recent
challenges, and the impact of PPAs on Distribution Companies (“DISCOMs”), aiming to
provide insights for policymakers, stakeholders, and researchers.

However, the study is limited by the dynamic nature of the electricity sector, potential
constraints in accessing real-time data, and its focused exploration on legal and regulatory
aspects, omitting broader economic and environmental considerations. Despite these
limitations, the research aims to offer valuable insights into the evolving landscape of PPAs
in India. The research is also limited to educational purposes only. Only that information
could be furnished which was available and whose availability could be authenticated.

2. Key features of a Power Purchase Agreement

A PPA is a contractual arrangement between a power generator (seller) and a purchaser

(buyer), often a public sector entity, in the Indian electricity sector. PPAs play a crucial role
in Public Private Partnerships (“PPPs”), particularly in conjunction with Build-Operate-
Transfer (“BOT”) or concession agreements.7 PPAs mirror conventional bilateral contracts,
regulated by the jurisdiction of Contracts. Typically, this pact transpires amid a public sector
procurer, often an “off-taker” (commonly a state-affiliated electricity utility, in jurisdictions
like India where the power sector predominantly falls under state purview), and a privately
held power progenitor. Primarily, it furnishes the fundamental revenue current supporting the
7
Glenn P. Jenkins and Henry B.F. Lim, “An Integrated Analysis of a Power Purchase Agreement”,
Development Discussion Paper No. 691 April 1999, Harvard Institute for International Development, Harvard
University, available at: https://cri-world.com/publications/qed_dp_138.pdf, (last visited on November 12,
2023).

5
PPP endeavour. Ergo, the formulation and allocation of risks within the PPA are pivotal to
the private sector participant’s capacity to secure financing, recoup capital expenditures, and
yield profit.

Enumerated below are the salient attributes of a PPA within the Indian Electricity Sector: 8

- Public Private Partnership: In the Indian context, the PPA frequently coexists with BOT
or concession agreements, mandating the generating company (“GENCOM”) not only to
facilitate power exchange but also to conceive, construct, manage, and uphold the power
plant per agreed-upon specifications.

- Duration and Term: PPAs typically embrace a defined temporal span during which the
power generator commits to supplying electricity, and the purchaser pledges to procure it.
In India, these agreements often span extensive durations, typically oscillating between
10 to 25 years.

- Capacity and Quantity: The pact stipulates the power plant’s capacity and the quantum of
electricity the generator is obligated to furnish, articulated in megawatts (MW) of
installed capacity and megawatt-hours (MWh) of generated electricity.

- Tariff Structure: A pivotal facet of a PPA lies in its tariff structure, specifying the rate at
which the purchaser will acquire electricity. In India, tariffs may adopt fixed, escalating,
or alternative structures contingent upon negotiations. The Central Electricity Regulatory
Commission (“CERC”) and State Electricity Regulatory Commissions (“SERCs”)
regulate tariffs.

- Payment Mechanism: The PPA delineates the payment modality, encompassing payment
frequency and method. Payments commonly align with actual electricity generation, with
penalties for deviations from the agreed-upon schedule.

- Performance Standards: PPAs encompass benchmarks mandating the power generator’s

compliance. These benchmarks span power plant availability, efficiency levels, and
adherence to environmental and safety norms.

- Force Majeure and Change in Law Provisions : Typically, the project company is
exempted from fulfilling contractual obligations in instances of force majeure and

8
Anonymous, “Power Purchase Agreements (PPAs) and Energy Purchase Agreements (EPAs)”, THE WORLD
BANK, available at: https://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-
agreements/power-purchase-agreements, (last visited on November 12, 2023).

6
 legislative alterations. However, the extent of this exemption often serves as a pivotal
negotiation point, constituting a fundamental contractual mechanism for risk allocation
between the public and private sectors.

- Grid Connectivity and Transmission: The PPA elucidates responsibilities and

arrangements for grid integration and electricity transmission from the power plant to the
purchaser. This assumes particular significance in countries like India, where power grid
infrastructure is integral to the electricity supply chain.

- Default and Termination: The PPA stipulates conditions triggering a default declaration
by either party and the repercussions thereof. Termination clauses expound the process
and consequences of prematurely concluding the agreement.

- Dispute Resolution Mechanism: In the event of disputes, the PPA outlines resolution
mechanisms, spanning negotiation, mediation, or arbitration. Regulatory bodies may also
play a role in dispute resolution.

- Risk allocation: As a foundational principle, risks are assigned to parties best equipped to
manage them. Project risks, therefore, are delegated to the private sector, fostering
innovation and operational efficiencies. Construction, operation, and maintenance-related
commercial and technical risks fall on the Concessionaire, while political risks, direct and
indirect, rest with the Utility.

- Environmental and Regulatory Compliance: PPAs incorporate clauses ensuring the

power generator’s compliance with environmental and statutory regulations. Violations
may incur penalties or termination of the agreement.

- Insurance and Liability: The agreement defines insurance prerequisites for the power
plant and outlines liability assignments in the event of accidents, damages, or unforeseen
incidents.

Grasping and negotiating these intrinsic features assumes paramount importance for both
power generators and purchasers, establishing a resilient and mutually advantageous long-
term relationship in the Indian electricity sector. The specific terms may diverge based on the
power project type, the regulatory framework, and the dynamic shifts in the Indian energy
market.

7
3. Legal and Regulatory Regime of Power Purchase Agreements

In the expansive landscape of India’s electricity generation, the mantle is shouldered by

Central, State, and Private entities, vending power to distribution Utilities, Trading licensees,
and Consumers alike.9 An exponential surge in power production endeavours to satiate the
burgeoning demand for Electricity. This surge, in turn, necessitates the establishment of a
PPA. Before delving into the core facets of the PPA, it becomes imperative to scrutinize the
legislative and regulatory framework dictating the acquisition and procurement of power.

The nascent regulatory mechanism embraces overarching objectives, including ensuring

assured electricity to consumers at equitable and competitive rates, fostering the financial
viability of the sector, championing transparency, consistency, and predictability in
regulatory paradigms across jurisdictions, and nurturing a climate of healthy competition. 10
These objectives stand as guiding beacons for both the Central and State Commissions in the
discharge of their duties.

As previously elucidated, the Electricity Act, 2003 ushered in an era of license-free

electricity generation, encompassing captive generation.11 The Act delineates the obligations
of generating companies,12 empowering them to supply electricity to any licensee—be it a
distribution licensee, trading licensee, or even directly to a consumer. The advent of open
access in transmission further empowers licensees to procure power from generating stations
nationwide, fostering a climate of competition within the Electricity Sector. 13

Crucially, Section 49 of the Act extends freedom to consumers, allowing them to enter into
PPAs with generating companies on mutually agreed terms, including tariff specifications.
Given the regulated nature of the electricity business, the terms and conditions of such
agreements and electricity tariffs fall within the purview of the SERC or the CERC, as
dictated by the circumstances. These regulatory bodies, instituted under the erstwhile
Electricity Regulatory Commission Act of 1998 and retained by the Electricity Act of 2003,
wield extensive powers, including the framing and notification of regulations.14

9
Power Sector at a glance, Ministry of Power, November 10, 2016, available at:
http://powermin.nic.in/en/content/power-sectorglance-all-india, (last visited on November 12, 2023).
10
Anonymous, “Impact Analysis: National Tariff Policy”, CRISIL, November 13, 2016, available at:
http://www.crisil.com/Ratings/ Brochureware/News/tariff-policy0106.pdf, (last visited on November 12, 2023).
11
Raj Singh Niranjan, GUIDE OF ELECTRICITY LAWS IN INDIA, 2013, p. 32.
12
Section 10 of the Electricity Act 2003.
13
Section 2(47) of the Electricity Act 2003.
14
See generally Sections 79, 86, 178, and 181 of the Electricity Act 2003.

8
The SERC, among other responsibilities, regulates the process of electricity purchase and
procurement by distribution licensees, including determining the price at which electricity
shall be procured, within the state.15 On the other hand, the CERC oversees the tariff of
generating companies operating across multiple states.16 The determination of tariff rests with
the Appropriate Commission in accordance with the provisions of the Act, and these bodies
have the authority to demand detailed information from generating companies or other
licensees for tariff determination.17

However, Section 63 of the Act introduces an exception, 18 stipulating that if the tariff is
determined through a transparent bidding process following guidelines issued by the Central
Government, the Appropriate Commission shall adopt the tariff without conducting a
separate determination exercise. In line with this, the Central Government issued guidelines
under Section 63, termed “Determination of Tariff by Bidding Process for Procurement of
Power by Distribution Licensees”.19 These guidelines offer two mechanisms for power
procurement—Case 1 and Case 2 bidding, each tailored to specific project requirements.

These guidelines are binding on procurers, with Standard Bidding Documents issued by the
Central Government applicable solely to PPAs entered through competitive bidding. 20
Deviation from these standard documents requires prior approval from the Appropriate
Regulatory Commission.21 Power procurement by distribution licensees can span long-term
(over seven years) or medium-term (up to seven years but exceeding one year). Distinct
Standard Bid Documents cater to each duration.22

In a bid to augment electricity generation and meet the demands of various States and
distribution companies,23 the Central Government, in 2005, issued a notification for the
development of Ultra Mega Power Projects (“UMPPs”). These colossal projects, each
approximately 4000 MW, involve significant investments. 24 Project developers were

15
Section 86(1)(b) of the Electricity Act 2003.
16
Section 79(1)(b) of the Electricity Act 2003. See also Uttar Haryana Bijli Vitran Nigam Limited v. CERC
2016 SCC OnLine APTEL 94.
17
Section 62 of the Electricity Act 2003.
18
See BSES Rajdhani Power Ltd. v. DERC 2010 ELR (APTEL) 404.
19
Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution
Licensees, Ministry of Power, Gazette of India, Extra Ordinary Resolution No. 23/11/2004-R&R (Vol. II),
available at: http:// cserc.gov.in/pdf/Bidding_Guidelines.pdf, (last visited on November 12, 2023).
20
Id. clause 2.2(i) & (ii).
21
Id. clause 5.16.
22
Id. clause 2.1(a) & (b).
23
Ultra Mega Power Projects, Ministry of Power, Government of India, available at:
http://powermin.nic.in/upload/pdf/ultra_mega_ project.pdf, (last visited on November 12, 2023).
24
Ibid.

9
identified through tariff-based competitive bidding, further underscoring the role of
legislative and regulatory frameworks in shaping, and overseeing PPAs.

In summation, the Electricity Act of 2003, coupled with the regulatory mechanisms it
introduced, governs the landscape of PPAs and their execution. The legislative and
regulatory framework delineated above lays the foundation for subsequent discussions in
forthcoming chapters.

4. Modes to Enter into a Power Purchase Agreements

The Electricity Act empowers licensees to procure power from any source, yet the mode of
power procurement lacks explicit specification in the Electricity Act of 2003. Two primary
avenues for power procurement emerge: the Memorandum of Understanding (“MoU”) route,
facilitated through negotiated bilateral contracts between the generator and the licensee, and
Competitive Bidding. When a PPA25 is entered through the MoU route, both the PPA and the
tariff for the procured power necessitate approval and determination by the respective
Commission, as per Section 62 of the Electricity Act, 2003. Conversely, for a PPA formed
through Competitive Bidding, the Commission adopts the tariff under Section 63 and also
approves the Competitive Bidding-based PPA.26

The National Tariff Policy of 2006 and the National Electricity Policy of 2005, notified
under Section 3 of the Electricity Act, 2003, advocate power procurement through
competitive bidding.27 The rationale is grounded in the belief that competitive bidding yields
the most competitive and reasonable prices, ensuring transparency, fairness, and
safeguarding consumer interests in the procurement of electricity.

A significant debate emerged surrounding whether, in light of the National Tariff Policy
provisions, distribution licensees are obligated to procure power exclusively through
competitive bidding. This query surfaced initially in the BSES Rajdhani Power Ltd. v. DERC
case,28 where the Delhi Electricity Regulatory Commission refused to determine tariff and
approve the MoU route based PPA, asserting that distribution licensees must exclusively use
competitive bidding.

25
Section 86(1)(b) of the Electricity Act provides that the Power procurement of Distribution licensee is
regulated by the Commission.
26
Sakshi Parashar, “Procuring Power Through Competitive Bidding: Contemplating the Regulatory Aspects of
Such Power Purchase Agreements (PPAS)”, INDIAN LAW INSTITUTE, available at
https://amity.edu/UserFiles/aibs/a78cArticle-X%20(Page%2071-82).pdf, (last visited on November 12, 2023).
27
Clause 5 of the National Tariff Policy 2006.
28
BSES Rajdhani Power Ltd. v. DERC 2010 ELR (APTEL) 404.

10
The Appellate Tribunal of Electricity (“APTEL” or “Tribunal”) clarified this issue,
asserting that the Electricity Act of 2003, through sections 62 and 63, provides two
alternatives for power procurement with the Commission’s approval. Section 62(1)(a) of the
Act empowers the Commission to determine the tariff for electricity supply, while Section 63
of the Act allows the Commission to adopt the tariff resulting from Competitive Bidding.
The tribunal emphasized that Section 63 of the Act is not a non-obstante clause, but an
exception carved out from Section 62 of the Act. Therefore, Section 62 of the Act remains a
substantive provision, and Section 63 of the Act functions as an exception. The tribunal held
that Section 62 of the Act provides the Commission with the substantive power to determine
tariff, except for price discovery through Competitive Bidding under Section 63 of the Act. 29
Though a Special Leave Petition challenging this judgment is pending before the Supreme
Court of India, the APTEL’s ruling remains effective until the matter is resolved.

Consequently, many State Commissions hesitate to permit distribution companies to procure

power through the MoU route without prior permission. 30 A similar issue arose in the
UPERC v. C Noida Power Company Limited case,31 where the State Commission denied
approval for a PPA executed through negotiation. The tribunal contended that the State
Commission has discretion to grant approval under either Section 62(1)(a) or Section 63, but
this discretion should not be exercised arbitrarily. The case was remitted to the State
Commission for a thorough examination of the PPA based on merit and relevant
considerations.

Evidently, Commissions lean towards the competitive bidding method for PPA approval,
driven by the factors of transparency and minimal interference. The subsequent chapter will
delve into the legal and regulatory issues surrounding PPAs established through Competitive
Bidding.

5. Sanctity of Power Purchase Agreements

The Electricity Act and the National Tariff Policy advocate the procurement of power
through Competitive Bidding, a mechanism designed to instil competition among developers

29
Ibid.
30
The Punjab State Electricity Regulatory Commission formally announced the Punjab State Electricity
Regulatory Commission (Power Purchase and Procurement Process of Licensee) Regulations, 2012. Notably,
Clause 12(i) and (ii) within these regulations stipulate that the procurement of long-term power must follow a
competitive bidding process unless expressly sanctioned by the Commission.
31
UPERC v. C Noida Power Company Limited Appeal No. 88 of 2015.

11
and secure dependable power at the most economical rates. 32 The primary objective is to
foster transparency and equity in procurement processes, with the overarching goal of
benefiting the general populace. Given that the power purchase cost constitutes around 80%
of the Annual Revenue Requirement for distribution licensees, 33 Competitive Bidding
emerges as a pivotal instrument in determining a competitive power price, directly impacting
consumer welfare.

However, recent challenges surrounding Power Purchase Agreements formed through

Competitive Bidding have cast doubts on the effectiveness of the bidding process and the
sanctity of such agreements. State Commissions have, on several occasions, diluted the
integrity of PPAs established through competitive bidding. An unusual scenario unfolded
when the Uttar Pradesh Regulatory Commission permitted Noida Power Company Limited, a
distribution licensee, to procure power from a different generating company, not part of the
bidding process, even after the selection of Essar Power as the successful bidder. This
decision was based on the quoted tariff, which was 10% lower. Essar Power contested this
decision before the Tribunal, leading to the Appellate Tribunal overturning the State
Commission’s order affirming the sanctity of contractual obligations.34

The Tribunal strongly criticized the State Commission’s action, emphasizing that they cannot
introduce unconventional procedures when the process is explicitly excluded under Section
63 of the Act. The Tribunal asserted that the power of the State Commission under Section
63 of the Act is limited. It clearly distinguished the power procurement processes under
Sections 63 and 62 of the Act. Under Section 63, the Commission can either reject the PPA if
it deviates from the statutory framework or adopt the tariff and PPA. The Tribunal
underscored that the competitive bidding process is meant to discover tariffs in line with
market conditions, and the Commission is obligated to adopt the same. Despite the absence
of a formal PPA between Noida Power Company and Essar Power, the Tribunal affirmed the
validity of the agreement with the acceptance of Essar Power’s bid, preventing Noida Power
from rejecting the bid at its discretion. The judgment prioritized preserving the sanctity of the

32
Rajat Misra, “Competitive Bidding in Power Sector: Experience and Development”, SBI Capital Markets
Limited, available at: http://www.iitk.ac.in/ime/anoops/for_nov15/PPTs/Day%20-%202%20-%20IITK/Mr.
%20Rajat%20Misra%20-%204%20-%20Competitive%20Bidding%20-%20 2015.pdf, (last visited on
November 12, 2023).
33
Staff paper on power purchase cost / fuel cost adjustment mechanism, DELHI ELECTRICITY REGULATORY
COMMISSION, available at: http://www.derc.gov.in/Main%20Page%20Matter/ StaffpaperPPPA.pdf, (last visited
on November 12, 2023).
34
Essar Power Ltd. v. UPERC MANU/ ET/0177/2011.

12
PPA over any potential commercial gain, thwarting the State Commission’s attempt to
sidestep contractual obligations through regulatory measures.35

The Tribunal similarly nullified the regulatory interference of the Commission in the case of
Indiabulls CSEB Bhaiyathan Power Limited v. Chhattisgarh State Electricity Regulatory
Commission.36 The Tribunal rejected the Chhattisgarh State Commission’s directive to parties
to renegotiate the terms of a PPA established through Competitive Bidding, reiterating that
the role of the State Commission under Section 63 is to ensure the legality of the competitive
bidding process and adopt the tariff derived from it. The State Commission is not empowered
to instruct parties to renegotiate PPA terms. The Tribunal stated as follows,

“The State Commission under Section 63 of the Act has to only ensure that the
process followed in the competitive bidding is as per law. The State Commission has
to adopt the tariff discovered in the competitive bidding process. The State
Commission could not give directions to the parties to renegotiate the terms of the
PPA”.

5.1. Compensatory Tariff Issues and The “Escalability” Clause

The issue gained widespread attention through a series of disputes involving Ultra Mega
Power Plants such as Coastal Gujarat Power Ltd. (Tata Power Ltd.) and Sasan Power Ltd.
(Reliance Power Ltd.), as well as other generating stations. These entities approached the
CERC, seeking higher tariffs for electricity generated from their projects due to changes in
Indonesian fuel pricing regulations, rendering their projects financially unviable at the
existing tariff rates specified in the PPAs established through competitive bidding.37

The generating companies invoked the “Change in Law” and “force majeure” clauses of the
PPAs, seeking financial relief from distribution companies. 38 The CERC, in its orders dated
April 15, 2013,39 ruled against the relief under “Change in Law”, stating that it only applied
to changes in Indian laws. Additionally, the CERC held that the increase in international coal
prices, driven by Indonesian regulations, did not constitute a force majeure event, as it was

35
Ibid.
36
Appeal No. 64 of 2004.
37
Anonymous, “CERC admits Sasan Power’s petition seeking tariff revision”, NDTV, available at: http://
profit.ndtv.com/news/corporates/article-cerc-admits-sasan-powers-petition-seeking-tariff-revision317074, (last
visited on November 12, 2023).
38
Anil Sasi, “Tata’s Mundra plea: Contract Act interpretation key to verdict”, INDIAN EXPRESS, March 26, 2013,
available at: http://archive.indianexpress.com/news/tatas-mundra-pleacontract-act-interpretation-key-to-
verdict/1093301/, (last visited on November 12, 2023).
39
Coastal Gujarat Power Ltd. v. Gujarat Urja Vikas Nigam Ltd. CERC Petition No. 159/MP/2012.

13
not a consequence of such an event. The CERC emphasized the importance of adhering to
the PPA conditions and maintaining the sanctity of agreements.

However, contradicting its stance, the CERC decided to utilize regulatory powers and grant
compensatory tariffs beyond the agreed PPA tariffs, provisions of Electricity Act and the
principle of Pacta Sund Servanda.40 The decision sparked criticism from state distribution
utilities and other stakeholders, as it led to an increase in electricity tariffs. Critics argued that
the CERC, by merging regulatory and adjudicatory powers, deviated from the Electricity Act
and the principle of Pacta Sund Servanda. The Commission observed as follows:

“Financial viability of the generating stations is an important consideration to enable

them to continue to supply power to the consumers. The present case is one of the
first of its kind where the tariff was determined through competitive bidding under
Section 63 of the Act. The petitioner had quoted the bids on certain assumptions and
those assumptions have been negated on account of the unexpected rise in coal price
in international market coupled with the promulgation of Indonesian Regulations,
required all long term contracts to be adjusted to the international benchmark price.
In our view, under the peculiarity of the facts of the present case and also keeping in
view the interest of both project developer and consumers, we consider it appropriate
to direct the parties to set down to a consultative process to find out an acceptable
solution in the form of compensatory tariff.”41

The parties involved, including generating companies, state distribution licensees, and
some NGOs, challenged the CERC’s order before the APTEL. State distribution utilities
contended that the CERC lacked the authority to decide compensatory tariffs once agreed
upon through competitive bidding.42 The Appellate Tribunal, in its much-awaited
judgment in April 2016, clarified the issues surrounding compensatory tariffs and the
sanctity of PPAs.

The Tribunal asserted that the CERC had no regulatory powers under Section 79(1)(b) of
the Electricity Act to modify tariffs or grant compensatory tariffs for PPAs determined
through competitive bidding i.e., Section 63 of the Act. The Tribunal maintained that the

40
Sandeep Verma, “Making Peter, Tom, Dick And Harry Pay For Pauls Follies’, National Law School of India
Review, Volume 27 Issue 1 2015, p. 89.
41
Id. at para 86.
42
Himangshu Watts, “States Oppose Regulatory Order on Tata, Adani Power Plants”, THE ECONOMIC TIMES,
April 7, 2014, available at: http://articles.economictimes.indiatimes.com/201404-07/news/48939521_1_adani-
power-centralelectricity-regulatory-commission-tata-power, (last visited on November 12, 2023).

14
CERC could only exercise adjudicatory powers in cases of Force Majeure and Change in
Law. While recognizing Force Majeure in light of Indonesian regulations affecting coal
prices, the Tribunal rejected the use of the Change in Law clause, emphasizing that it
should be limited to Indian laws. The matter was remanded back to the CERC to exercise
its adjudicatory powers and provide relief under the Force Majeure clause. The Supreme
Court declined to stay the Appellate Tribunal’s order, leaving the door open for further
scrutiny.43

The Tribunal’s decision was seen as limiting the regulatory role of the CERC in PPAs
established through competitive bidding. While applauded by some for potentially
resolving issues with stranded PPAs affected by coal supply shortages and price
changes,44 the impact of Force Majeure on PPAs remains subject to assessment by the
CERC, with potential challenges in higher courts.

Several issues warrant consideration when analysing the Tribunal’s judgment. One key
point of deliberation is whether the change in Indonesian regulations leading to an
increase in the price of imported coal and a shortage of domestic coal can be classified as
a force majeure event. The Tribunal viewed the unexpected promulgation of Indonesian
regulations as beyond the control of the affected parties, constituting a force majeure
event. Emphasizing the commercial viability of the project, the Tribunal noted that the
Force Majeure clause intends to shield the affected party from the consequences of events
beyond their control.

The broader interpretation of force majeure, according to the Tribunal, ensures that the
generator’s assets are not stranded, allowing them to fulfil debt service obligations and
providing consumers with uninterrupted power supply. The Tribunal acknowledged the
challenges faced by generators in envisaging all possible risks over the lengthy duration
of PPAs, emphasizing the practical difficulty of foreseeing all potential risks.

However, there are concerns about the Tribunal’s attempt to include the aforementioned
event as a force majeure event within the broader framework of ensuring the overall
commercial viability of the sector. The force majeure clause, as outlined in the Standard

43
Apurva Vishvanath, “SC Refuses to Stay CERC Proceedings on Compensatory Tariff for Power Firms”, LIVE
MINT, April 8, 2016, available at: http://www.livemint.com/Industry/hOHKSMVGOv2lmKCev1VVFK/SC-
refuses-to-stay-CERCproceedings-on-compensatory-tariff-f.html, (last visited on November 12, 2023).
44
Gireesh Chandra Prasad, “APTEL gives some relief to Adani Power, Tata Power”, LIVE MINT, April 8, 2015,
available at: http://www.livemint.com/Industry/bIAuYplnYLIOaEEv5V363N/Aptel-says-no-to-compensatory-
tariff-Adani-PowerTata-Powe.html, (last visited on November 12, 2023).

15
Bid documents and PPAs,45 typically requires circumstances or events that prevent or
unavoidably delay the performance of the party. In this dispute, the generating stations
were not prevented or delayed from procuring coal. The force majeure argument
presented appears akin to economic force majeure, which is generally not protected under
PPAs and has been rejected by the Supreme Court in some judgments. Despite clear
exclusion clauses in the PPA for cost rises and insufficiency of funds, the generating
stations claimed that the increase in coal prices hindered contract performance.

The judgment’s failure to articulate how the event qualifies as force majeure in light of
the PPA clauses raises questions. By giving a broader interpretation to the force majeure
clause and deeming the event a force majeure event, the Tribunal seems to make a feeble
attempt to provide relief within the PPA’s framework, justifying or preserving contractual
sanctity even when the event may not satisfy force majeure conditions.

Another ancillary issue that requires deliberation is the quoting of non-escalable energy
charges by generating companies. Standard bid documents allow companies to quote
escalable, non-escalable, and partly escalable energy charges. Some generating
companies, with the intention to win bids, quoted non-escalable or partly escalable
charges, making it challenging for them to accommodate rising fuel costs. 46 The Tribunal,
however, took the stance that merely quoting non-escalable energy charges does not
preclude generators from seeking relief.

This deliberate action by generating companies has not been considered by the Tribunal,
which, in turn, raises questions about the fairness of the judgment. By including the event
as force majeure, the Tribunal has potentially opened the door for most generators to

45
Definition of Force Majeure as per Standard Bid Documents:
“Force Majeure
9.3.1 A ‘Force Majeure’ means any event or circumstance or combination of events and circumstances
including those stated below that wholly or partly prevents or unavoidably delays an Affected Party in
the performance of its obligations under this Agreement, but only if and to the extent that such events or
circumstances are not within the reasonable control, directly or indirectly, of the Affected Party and
could not have been avoided if the Affected Party had taken reasonable care or complied with Prudent
Utility Practices: .............
9.4 Force Majeure Exclusions Force Majeure shall not include (i) any event or circumstance which is
within the reasonable control of the Parties and (ii) the following conditions, except to the extent that
they are consequences of an event of Force Majeure:
a. Unavailability, late delivery, or changes in cost of the plant, machinery, equipment, materials, spare
parts, Fuel or consumables for the Power Station....................
e. Insufficiency of finances or funds or the agreement becoming onerous to perform; and...............”
46
The generators had the option to submit bids with escalable energy charges, a move that could have
synchronized the bids with market prices. However, CGPL made the decision to propose fixed fuel charges at a
rate of 55%. In contrast, Adani Power presented a bid with an unwavering commitment, quoting 100% non-
escalable fuel charges.

16
insist on passing costs to consumers. The tariff increase due to force majeure could even
surpass the compensatory tariff granted by the CERC earlier. While recognizing the
importance of maintaining the commercial viability of generating stations for the sector’s
overall growth, the Tribunal attempted to absolve generators from liability, asserting that
the entire situation could not have been foreseen by them.

In conclusion, the Tribunal’s decision aimed to limit regulatory powers, protect

contractual sanctity, and address unforeseen events affecting the commercial viability of
power projects. However, the broader interpretation of force majeure and potential
implications on tariff increases within the PPA framework raised concerns about the
long-term viability of such agreements, especially in volatile markets. A balanced
approach to interpreting PPAs, considering both commercial interests and contract
sanctity, is essential to avoid detrimental consequences.

5.2. Sustainability of a Business or Sanctity of Contract?

The dual perspectives on preferences in the context of the power sector, particularly in the
GENCOMs, reflect the convergence of end goals toward the development of national
infrastructure.47 The sustainability of GENCOMs’ business operations is intricately linked to
the availability of raw materials. Any potential disruptions in the import or mining of coals
could severely handicap the entire industry. The privatization of the power sector has
introduced a new dimension, emphasizing the need to secure private players’ investments in
GENCOMs. Ensuring the security of these private entities becomes a crucial consideration
when interpreting the clauses of PPAs. In this context, it’s essential to recognize that private
companies, driven by profit, revenue, and income motives, should not be equated with public
sector companies.48 The dynamics and considerations for these two categories of entities
differ significantly.

On the other side of the coin, when contemplating the sanctity of a contract, there is a mutual
responsibility in understanding the clauses. The voluntary nature of clauses related to price
fixation, such as price-variation or price escalation, could be imprudent if not carefully
considered. Frequent amendments to PPAs could potentially confer undue advantages to the
parties involved. It’s crucial to balance the interests of stakeholders, particularly end

47
See Dr. Sai Ram Bhatt & Rohith R Kamnath, “Power Sector Contracts in India”, ENERGY LAW & POLICY IN
INDIA, 2016, p. 82.
48
Ibid.

17
consumers, ensuring that appeals for compensatory tariffs align with the ultimate benefit of
the consumers.

The reference to the Ujjwal DISCOM Assurance Yojana Scheme (“UDAY Scheme”) as the
basis for framing initial tariff rates underscores the broader motive of holistic development of
Indian infrastructure.49 The scheme’s core ideology, centred around the accessibility of
electricity, takes into account various parameters such as efficiency in different sectors,
environmental considerations, and the ease of doing business. The overarching vision is to
provide 24x7 power access, and regulatory commissions play a pivotal role in devising
supply trajectories to achieve this goal. The electricity sector must align with this principle,
striving for maximum efficiency in delivering power to consumers.

6. Revisiting Long-Term Power Purchase Agreements – A DISCOM Perspective

The role of DISCOMs is pivotal in the power sector, serving as intermediaries between
power-generating entities and end-consumers. Over the past two decades, DISCOMs have
grappled with challenges in meeting their obligations under long-term PPAs. Recent
statements from the Power Minister indicate that outstanding payments by DISCOMs
amount to approximately INR 1,00,000 crore (USD 1200.71 million). 50 Moreover, ongoing
trends suggest a gradual reduction in the per-unit cost of power, further exacerbating
DISCOMs’ financial difficulties.

Several factors contribute to the volatility in the sector, including coal prices, fluctuations in
energy demand, and developments in the renewable energy sector leading to lower tariffs.
Amidst this scenario, DISCOMs face increasing pressure to renegotiate expensive long-term
PPAs. The central government has introduced performance-based incentive schemes like the
UDAY Scheme to alleviate these challenges. Successful implementation of such schemes
could enhance the credit rating of DISCOMs as power purchasers. However, meeting the
associated conditions under UDAY has proven challenging for many DISCOMs, and the full
positive impact on the sector is yet to be realized.

49
Ministry of Power, Government of India, “Ujwal Discom Assurance Yojana Scheme for Operational and
Financial Turnaround for Power Distribution Companies”, available at:
https://powermin.nic.in/pdf/Uday_Ujjawal_Scheme_for_Operational_and_financial_Turnaround_of_power
_distribution_companies.pdf, (last visited on November 12, 2023).
50
Anonymous, “Discoms’ Outstanding Dues to GENCOS Decline to Rs 91,061 crore: Minister RK Singh”,
ECONOMIC TIMES, available at: https://economictimes.indiatimes.com/industry/energy/power/discoms-
outstanding-dues-to-gencos-decline-to-rs-91061-cr-minister-rk-singh/articleshow/99301580.cms?
utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst, (last visited on November 12, 2023).

18
According to monthly data from the Economic Division of the Central Electricity Regulatory
Commission, 89.4% of power procured by DISCOMs is under long-term contracts. 51 The
fixed price component of long-term PPAs has remained unchanged since the issuance of the
first model PPA by the Ministry of Power in January 2005. While the electricity market has
evolved, with increased efficiency and cost reductions, DISCOMs are bound by 25-year
contracts with static prices and limited scope for tariff adjustments.

Attempts by DISCOMs to renege on existing contracts or renegotiate tariffs pose challenges

for power-generating companies. Instances like the Andhra Pradesh government’s unilateral
reduction of tariffs for renewable energy PPAs and the Punjab government’s move to
terminate tariff-related clauses in certain PPAs highlight the economic distress faced by
DISCOMs and their struggle to justify current procurement prices against more recent, lower
tariff discoveries.52

In navigating these challenges, it becomes evident that the inflexibility of long-term PPAs
may impede the commercial viability of DISCOMs, impacting the overall growth of the
electricity sector. While recognizing the importance of contract sanctity, a shift toward more
flexible PPAs that allow dynamic price responses to market conditions is essential for the
sustained development of the power sector.

7. Critical Analysis

The Electricity Act, 2003, ushered in a new era for power generation and distribution,
allowing for license-free generation and competitive bidding. The paper underscores the
importance of regulatory bodies such as SERC and CERC in shaping the terms and
conditions of PPAs. The emphasis on transparency, consistency, and predictability in
regulatory approaches highlights the evolving nature of the legal landscape. The paper
critically evaluates the impact of competitive bidding and the extent to which it has achieved
the envisioned objectives.

The analysis further examines the two primary modes of PPA procurement – MoU route
(negotiated) and competitive bidding. The controversial question of whether distribution
licensees are mandated to procure power exclusively through competitive bidding is explored
51
Janmali Manikala, “Time to Revisit Long-Term Power Purchase Agreements”, TRILEGAL, available at:
https://www.lexology.com/library/detail.aspx?g=c8923c03-8505-4249-aef6-e50ad73fc0e7, (last visited on
November 12, 2023).
52
Harsha V Rao, “How can the Sanctity of Power Purchase Agreements be Maintained?”, COUNCIL ON
ENERGY, ENVIRONMENT AND WATER, available at: https://www.ceew.in/blogs/why-should-india-respect-
sanctity-of-power-purchase-agreements-in-renewable-energy, (last visited on November 12, 2023).

19
through legal cases. The research critically assesses the role of regulatory bodies in
approving PPAs entered through different routes and the implications for transparency and
fairness in procurement processes.

Additionally, the sanctity of PPAs is a focal point, with recent cases illustrating challenges to
contractual agreements. The research evaluates instances where State Commissions have
diluted the sanctity of PPAs entered through competitive bidding, raising questions about the
effectiveness of the bidding process. The analysis of compensatory tariff issues and the
“escalability” clause provides insights into the delicate balance between sustaining business
interests and upholding contractual obligations.

The paper lastly sheds light on the challenges faced by Discoms in meeting long-term PPA
obligations, particularly in the context of outstanding payments and evolving market
dynamics. The discussion on the impact of performance-based incentive schemes, such as
UDAY Scheme, offers a nuanced perspective on improving the credit rating of Discoms. The
critical analysis reflects on the sustainability of inflexible long-term PPAs and their potential
hindrance to the commercial viability of Discoms.

8. Conclusion and Suggestions

In conclusion, the research paper provides a comprehensive critical analysis of the Power
Purchase Agreements in the Indian electricity sector. It underscores the evolving legal and
regulatory frameworks, challenges faced by Discoms, and the delicate balance required to
maintain the sanctity of contractual agreements. As the Indian electricity sector undergoes
transformative changes, there is a need for a more flexible approach to PPAs that
accommodates market dynamics while ensuring the sustainability of business interests.
Future research in this area should focus on the impact of emerging technologies, the role of
renewable energy, and potential amendments to the regulatory frameworks to address the
evolving needs of the sector. Additionally, case studies on successful PPA implementations
and their impact on the overall growth of the electricity sector would contribute valuable
insights for policymakers and industry stakeholders.

20
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