A regulatory effort to keep the national power grid stable and make green power more reliable may wreck the revenues of producers and potentially lead to tariff hikes, industry executives warned. The regulator has proposed steep penalties for companies which are under- or over-producing power, rattling solar and wind power firms dependent on the vagaries of weather.
In the power sector, a deviation settlement mechanism (DSM) penalizes producers when what they deliver to discoms differs from what they promised. The Central Electricity Regulatory Commission (CERC) has set a tolerance band of 10% for wind power and 5% for solar. Essentially, this means a company producing above or below these thresholds is liable to pay steep penalties. Earlier, these bands were more relaxed—15% for wind and 10% for solar. On 1 March, the CERC also introduced a new formula to make the regime progressively stricter over the next five years, alarming the industry struggling to sign power purchase agreements (PPAs), even as they face generation cuts and distress sales on exchanges.
According to developers, the new deviation rules are hard to follow, since unlike coal or hydro, wind and solar are unstable sources of power. According to the National Solar Energy Federation of India, the penalties may cause revenue losses of up to 48% in the case of wind power and 11.1% in the case of solar power, compared to 1-3% losses under the old mechanism.
Revenue losses
On 27 April, the Karnataka High Court stayed the plan till 10 June, after the National Solar Energy Federation of India challenged the CERC order. However, worries remain.
The chief financial officer at one of India’s largest companies said, “A survey of about 52GW of capacity shows that the revenue losses would be about ₹1,000 crore on an annual basis. This is a massive impact. The operating cost will increase and may lead to higher tariffs.”
India’s renewable energy capacity stood at 274.68GW as of 31 March, with an addition of 51GW in FY26 alone.
The DSM norms also propose a so-called “X-factor” to make the system stricter over time, which may have a significant impact in the long term.
Queries mailed to the ministry of new and renewable energy remained unanswered; however, a ministry official said on the condition of anonymity that MNRE had received some inputs from industry bodies on the impact of DSM penalty as a percentage of revenue for various values of ‘X’ under the new regulation. “The exact impact of this change will vary from project to project depending on location, forecasting tool being used, data quality etc. As per feedback from industry, the impact of new regulation is more on wind projects as the uncertainty in wind generation is higher,” the official said.
On the impact on tariffs, the MNRE official said that any immediate impact on tariffs is not foreseen. “The ministry will continue to work with all the stakeholders on all the possible solutions to manage the deviation,” the official said on condition of anonymity.
Forecast fumble
The new DSM rules may shrink the net revenue of wind power projects over a five-year period by 48%, said MP Ramesh, former executive director of the National Wind Energy Institute under the new and renewable energy ministry. However, he noted that the projection is based on the assumption that the weather and generation forecasts do not improve from the current levels.
While solar and firms follow forecasts from the Indian Meteorological Department (IMD) to plan their production schedules, these do not have the accuracy required to conform to the narrow tolerance band set by the CERC. IMD’s Vision 2047 plan aims to reach near-perfect forecasts for up to 3 days, 90% accuracy up to five days, 80% accuracy up to seven days and 70% accuracy up to 10 days in terms of each and every severe weather at the block and panchayat level by 2047.
“We have not been doing enough to improve forecasting by collecting more and more weather-related data from across the country. The IMD does have ambitious plans, but that’s more a longer-term plan aimed at 2047. The new norms require a perfect system within five years, by 2031,” Ramesh added.
The MNRE official cited earlier said IMD is working with both the ministries of new and renewable energy and power to enhance the accuracy of weather forecasts, which would eventually help in projection.
Thin margin
Neshwin Rodrigues, a senior energy analyst for Asia at Ember, a global think tank focussed on renewable energy and energy transition, said: “The new rules reduce the margin within which renewable generators can vary from their planned output without being penalized, while becoming progressively stricter until FY2032. This may improve discipline, but it will impact revenue realization for renewable plants, particularly existing projects where such risks were not fully priced in, affecting expected returns.”
According to Sanjeev Aggarwal, founder & chairman of Hexa Climate, a renewable energy company, depending on the scale and geographic spread of a developer’s portfolio, the revenue impact from increased penalties could shave off 2% to 5% of Ebitda margins. He noted that the major impact would be on legacy assets, as projects commissioned under the old DSM regime may not have visualized or priced in the stringent changes.
Suggesting a respite for these older projects, Aggarwal said: “Applying these new rules retroactively has a significant, un-modelled impact on their revenue. There is a strong, logical case for the ‘grandfathering’ of these older projects. Developers and investors should not be financially punished for regulatory changes that occur long after the capital has been deployed and tariffs have been locked in.”
Akshay Hiranandani, CEO of Serentica Renewables said the new rules have resulted in penalty exposure rising by over 70% in just the first week of April, which he described as a “significant financial shock for developers that directly impacts project economics and investor confidence”.
However, industry players also noted that in the long run, this would help bring grid balance and make renewable power more acceptable.
Vinay Rustagi, chief business officer at Premier Energies said: “While there are issues around commercial and technical viability in the short run, the regulations are potentially a blessing in the long run as they restore grid balance and make renewable power more acceptable.”