The Supreme Court has ruled that the generation-based incentive granted to wind power generators must be disbursed in addition to the tariff and cannot be adjusted in a manner that would defeat the program’s purpose.

The ruling came while dismissing an appeal filed by the Andhra Pradesh distribution companies against an order of the Appellate Tribunal for Electricity (APTEL).

The Supreme Court clarified that state electricity regulatory commissions (SERCs) possess plenary authority over tariff determination and may consider incentives or subsidies received by generating companies. However, this power must be aligned with the objective of the incentive program.

It rejected the argument that central government grants are insulated from regulatory consideration. It held that such incentives continue to be received by generators and are not diverted or intercepted by the regulator, which only determines the tariff payable by distribution companies (DISCOMs).

Aditya K Singh, Partner at Dentons Link Legal, appearing for the developers, commented, “The Supreme Court, while clarifying the quagmire, has provided a big relief for renewable power developers. While on the one hand it recognized that the tariff determination is the exclusive domain of the SERC, on the other hand it held that the SERC is bound to give effect to schemes as envisaged by the Central Government.”

Singh said it was submitted before the Court that the word “consider” as appearing in Regulation 20 does not mean automatic deduction and accordingly, prayed to recognize that this GBI as being “over and above” the tariff so determined by the SERC. Therefore, the contextual interpretation of Regulation 20 ought to be accorded, and the generation-based incentive program, earmarked for the benefit of developers, ought not be undermined by a restrictive interpretation of Regulation 20.

Background

The dispute concerns the Generation-Based Incentive program introduced by the Ministry of New and Renewable Energy to promote wind power generation. Under the program, wind power producers are provided an incentive of ₹0.50 (~$0.0106)/kWh of electricity fed into the grid for four to ten years, subject to a cap of ₹6.2 million (~$65,925)/MW. The program is implemented through the Indian Renewable Energy Development Agency and was designed to attract investment and increase renewable energy capacity.

The program itself provides that the incentive is over and above the tariff approved by state regulators and is not to be taken into account while setting the tariff. It was intended as a performance-linked benefit for generators to encourage higher efficiency and increased generation.

The Andhra Pradesh Electricity Regulatory Commission notified tariff regulations for wind power projects in 2015. These regulations, including Regulation 20, required the Commission to take into account any incentive or subsidy offered by the Central or State Government while determining the tariff.

Pursuant to these regulations, the Commission issued tariff orders in 2015 and 2016 without factoring in the generation-based incentive. The DISCOMs later sought amendment of these tariff orders. When no action was taken, they filed a petition in February 2017.

By its order in July 2018, the Commission allowed the petition and permitted the deduction of the incentive from payments made to generators, effectively reducing the tariff. The Commission relied on Regulation 20 and held that incentives availed by generators must be taken into account while determining the tariff.

Wind power developers challenged this decision before APTEL, which directed the DISCOMs to refund the amounts deducted, along with interest at 12% per annum.

The DISCOMs and the Commission argued before the Supreme Court that tariff determination is the exclusive domain of the regulator under the Electricity Act and that Regulation 20 required consideration of incentives, such as the generation-based incentive.

The generators contended that the incentive was intended as a benefit to them and was expressly designed to remain separate from the tariff. Adjusting it against the tariff would undermine the program and defeat its objective. They also argued that a grant approved by Parliament for a specific purpose could not be effectively converted into a consumer benefit through regulatory action.

Court’s Analysis

The Supreme Court examined the Electricity Act, 2003, and observed that tariff determination is the exclusive domain of the regulatory commissions.

It interpreted Regulation 20 as imposing an obligation on the state regulator to consider any government-provided incentive or subsidy. It held that if an incentive affects a generating company’s economic position, the regulator is obligated to consider its bearing on the tariff.

At the same time, the Supreme Court clarified that consideration of an incentive does not automatically require its deduction from the tariff or its pass-through to consumers.

It rejected the constitutional argument that factoring the incentive into the tariff would alter the destination of a parliamentary grant. It held that the incentive reaches the generators as intended and that tariff determination does not involve diverting funds but only the determination of the price payable by DISCOMs.

The apex court also noted that the generation-based incentive was introduced to promote renewable energy, attract investment, and support the transition away from fossil fuels. It referred to the statutory mandate under the Electricity Act to promote renewable energy. It highlighted the need for regulatory bodies to align with policy objectives and other stakeholders.

It emphasized that regulatory power must be exercised within a collaborative framework involving multiple institutions. While the regulator retains final authority over tariffs, it must ensure that its decisions do not undermine the purpose of policy measures introduced to develop the sector.

Applying these principles, the Supreme Court held that although the regulatory commission has the authority to consider the generation-based incentive, its approach in this case was inconsistent with the program’s objective. By allowing the deduction of the incentive from tariff payments, the regulator effectively nullified the intended benefit to generators.

The Court therefore concluded that the generation-based incentive must be given effect in accordance with its purpose as an additional benefit to generators.

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