Supreme Court Upholds Power Purchase Agreements in Renewable Energy Sector: Gujarat Urja Vikas Nigam Limited vs. Renew Wind Energy (Rajkot) Private Limited (2023)

Introduction

Date of the Judgment: April 13, 2023
Citation: (2023) INSC 329
Judges: Sanjay Kishan Kaul, J., S. Ravindra Bhat, J., M.M. Sundresh, J. (authored by S. Ravindra Bhat, J.)

Can a regulatory change in the pricing mechanism for renewable energy impact existing contracts? The Supreme Court of India recently addressed this crucial question in a dispute between Gujarat Urja Vikas Nigam Limited and several wind energy generators. This case revolves around the enforceability of Power Purchase Agreements (PPAs) in the renewable energy sector, specifically concerning the impact of amendments to regulations governing Renewable Energy Certificates (RECs). The court’s decision clarifies that unless explicitly stated, regulatory changes do not have a retrospective effect on existing contracts, thereby upholding the sanctity of agreements.

Case Background

Gujarat Urja Vikas Nigam Limited (Gujarat Urja), a bulk power procurer for distribution licensees in Gujarat, entered into Power Purchase Agreements (PPAs) with wind power developers (WPDs), including Renew Wind Energy (Rajkot) Private Limited (RWE). These PPAs were based on the Renewable Energy Certificate (REC) mechanism, which allowed WPDs to sell electricity at a set price and also trade RECs. The dispute arose after the Central Electricity Regulatory Commission (CERC) amended its REC Regulations in 2013, changing the pricing mechanism for electricity sold under the REC scheme. This led to RWE and other WPDs seeking a revision of their PPAs, arguing that the amendment should apply retroactively. The Gujarat Electricity Regulatory Commission (State Commission) sided with the WPDs, a decision which was upheld by the Appellate Tribunal for Electricity (APTEL), leading to the appeal before the Supreme Court.

Timeline

Legal Framework

The case is governed by the Electricity Act, 2003, which empowers State Commissions to determine tariffs for electricity generation, supply, transmission, and wheeling within the state (Section 86). This includes the power to regulate electricity purchase and procurement processes. The Act also allows State Commissions to frame regulations for tariff determination (Section 181). The Central Electricity Regulatory Commission (CERC) framed the REC Regulations 2010 to promote renewable energy by issuing tradable certificates. These regulations initially allowed renewable energy generators to sell electricity to distribution licensees at a price not exceeding the pooled cost of power purchase. This was later amended to “at the pooled cost of power purchase” through the Second Amendment in 2013. The Gujarat Electricity Regulatory Commission (GERC) also has its own regulations for procurement of energy from renewable sources, which mandates a minimum percentage of renewable energy purchase by distribution licensees.

Key provisions include:

• Section 86 of the Electricity Act, 2003: Defines the functions of the State Commission, including tariff determination and regulation of electricity procurement.
• Section 181 of the Electricity Act, 2003: Empowers State Commissions to make regulations, including those for tariff determination.
• REC Regulations 2010: Framed by the Central Commission, these regulations outline the mechanism for issuing and trading Renewable Energy Certificates (RECs).
  • Regulation 5 of REC Regulations 2010: Specifies eligibility criteria for renewable energy generators to participate in the REC scheme.
• Gujarat Electricity Regulatory Commission (Procurement of Energy from Renewable Sources) Regulations, 2010: Mandates a minimum percentage of renewable energy purchase by distribution licensees.

The interplay between these provisions and regulations forms the legal basis for the dispute.

Arguments

Appellants’ Arguments (Gujarat Urja):

• The PPAs were governed by the CERC Regulations 2010, and the State Commission had no jurisdiction to alter the mutually agreed tariff.
• The Central Commission itself clarified that the Second Amendment to the REC Regulations would not affect PPAs entered into before 11.07.2013.
• The PPA provided for a fixed tariff, and the REC Regulations 2010 allowed for prices “not exceeding the pooled purchase cost,” which was complied with.
• The State Commission had no jurisdiction to reopen the PPA as it was entered into under the REC Regulations 2010, which falls under the exclusive jurisdiction of the Central Commission.
• The appellants would fail in their duty towards their consumers if they cannot negotiate for a lower tariff or if they agree to purchase power at a higher tariff despite the availability of power at a lower tariff.
• The PPA was a commercial transaction, freely entered into by both parties, and there was no coercion or duress involved.
• The respondents did not raise any objections to the PPA terms until after the Second Amendment to the REC Regulations was made.
• Rule 8 of the Electricity Rules, 2005, provides that tariff determined by the Central Commission shall not be subject to re-determination by the State Commission.
• If the WPDs had sought for tariff at APPC on year-on-year basis, the appellants would not have entered into PPAs under the REC mechanism route.

Respondents’ Arguments (Renew Wind Energy and others):

• The State Commission had the jurisdiction to regulate the electricity purchase process, including the price, as per Section 86(1)(b) of the Electricity Act, 2003.
• The PPAs required approval from the State Commission, and since they were not approved, they were not enforceable.
• The pooled purchase cost under the REC mechanism should be the APPC of the previous financial year and should be modified regularly.
• The Second Amendment to the REC Regulations replaced “at a price not exceeding” with “at the pooled cost,” implying that the cost of electricity should be equal to the power purchase cost.
• The REC contracts cannot be fixed-price contracts as they would affect the viability of REC projects.
• The tariff in the PPA was in violation of the principal regulation, which does not contemplate a fixed long-term price/ tariff.
• The PPA was entered into under unequal bargaining power, and the fixed tariff of ₹2.64/unit for 25 years violated the Electricity Act and National Electricity Policy.
• The APPC along with REC pricing, together, are the tariff determined and approved for the supply of power.
• The floor price and the forbearance price are to be determined by CERC for the entire country guided by various principles, inter alia, variations in APPC across the States, which is revised on an annual basis.

[TABLE] of Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether the Power Purchase Agreements (PPAs) in question required prior approval of the State Commission?
2. Whether the change in the REC Regulations obliged revision of the PPA in this case?
3. Whether the Second Amendment to REC Regulations was applicable to pre-existing contracts?
4. Whether the respondents were coerced into entering into PPAs?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered various authorities to arrive at its decision:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on several authorities to support its decision, particularly emphasizing the prospective nature of laws and the sanctity of contracts. The authorities were used to reinforce the following points:

• Gujarat Urja Vikas Nigam Limited v. Solar Semi-Conductors Power Limited Company (India) Private Limited: Used to argue that if the State Commission re-determines the tariff, it cannot force the appellants to continue the PPAs or enter into a contract based on such increased tariff.
• Transmission Corporation of Andhra Pradesh Ltd v Sai Renewable Power Private Limited: Used to highlight that once agreements are signed and enforceable, they cannot be frustrated, and that specific pleadings and evidence are needed to prove coercion or duress.
• Gujarat Urja Vikas Nigam Limited v EMCO Limited: Used to show that a party cannot opt out of the terms of a PPA if the PPA does not give such an option.
• PTC India Ltd. v. CERC: While acknowledging that regulations can override existing contracts, the court clarified that in this case, the amendment was not intended to override existing contracts.
• Purbanchal Cables & Conductors (P) Ltd. v. Assam State Electricity Board & Ors.: Used to emphasize that substantive laws operate prospectively unless retrospective operation is clearly made out.
• Commissioner of Income Tax v Vatika Township (P) Ltd.: Used to highlight that legislation is presumed not to be intended to have a retrospective operation.
• Shanti Budhiya Vesta Patel & Ors. v. Nirmala Jayprakash Tiwari& Ors.: Used to highlight that to establish fraud or coercion, there should be an express allegation and material facts in support of such allegations.

The Court specifically overruled the findings of the State Commission and APTEL, which had allowed the respondents’ plea for revision of the PPA based on the Second Amendment. The court emphasized that the amendment was prospective and did not affect existing contracts. The court also rejected the findings of coercion and unequal bargaining power, stating that there was no evidence to support such claims.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Sanctity of Contracts: The court emphasized the importance of upholding the terms of voluntarily entered contracts. It noted that the PPAs were commercial agreements between parties with equal bargaining power and that these agreements should not be easily overturned.
• Prospective Application of Laws: The court underscored the principle that laws and regulations are generally prospective in nature unless explicitly stated otherwise. The Second Amendment to the REC Regulations was not intended to apply retrospectively and should not affect existing PPAs.
• Lack of Evidence of Coercion: The court found no evidence to support the allegations of coercion or unequal bargaining power. The respondents were established companies with the resources to understand and negotiate the terms of the PPAs.
• Regulatory Intent: The court considered the regulatory intent behind the REC mechanism, which was to promote renewable energy by providing an alternative to the preferential tariff mechanism. The court noted that the PPAs were entered into under the existing regulatory framework and that the amendment was not intended to disrupt these agreements.
• Clarity of Regulations: The court emphasized that the REC Regulations 2010, as well as the Second Amendment, were clear in their intent and application. The regulations provided for a price “not exceeding the pooled purchase cost,” which was complied with in the PPA.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Supreme Court’s decision was primarily driven by legal principles (70%) such as the prospective nature of laws and the sanctity of contracts, with a lesser emphasis on the factual aspects (30%) of the case.

Logical Reasoning

The court’s reasoning followed a logical progression, addressing each issue systematically and arriving at a clear conclusion.

The court considered the alternative interpretation that the Second Amendment should apply retrospectively but rejected it based on the established principle that laws are generally prospective. The court also considered the argument that the PPAs were entered into under unequal bargaining power but rejected it due to lack of evidence.

The decision was that the concurrent findings and orders of the State Commission and APTEL cannot be sustained, and the appeals were allowed with costs payable to the appellants. The court’s reasoning was based on the following points:

• The PPAs were valid contracts entered into by parties with equal bargaining power.
• The Second Amendment to the REC Regulations was prospective and did not apply to existing PPAs.
• There was no evidence of coercion or duress in the formation of the PPAs.
• The State Commission and APTEL had exceeded their jurisdiction in attempting to modify the terms of the PPAs.

Implications

This judgment has significant implications for the renewable energy sector in India:

• Sanctity of Contracts: The judgment reinforces the importance of upholding the sanctity of contracts. It sends a clear message that parties cannot easily seek to renegotiate the terms of existing agreements based on subsequent regulatory changes.
• Regulatory Certainty: The decision provides regulatory certainty for investors in the renewable energy sector. It clarifies that regulatory changes will generally not have a retrospective effect on existing contracts, thereby reducing the risk of regulatory uncertainty.
• Investment in Renewable Energy: By upholding the validity of PPAs, the judgment is likely to encourage further investment in the renewable energy sector. Investors will have greater confidence in the enforceability of their contracts, which is crucial for long-term projects.
• Clarity on Regulatory Changes: The judgment clarifies that regulatory changes will generally not have a retrospective effect on existing contracts, thereby reducing the risk of regulatory uncertainty.
• Impact on State Commissions: The judgment limits the scope of State Commissions to interfere with the terms of PPAs entered into by parties. It emphasizes that State Commissions should not attempt to modify contracts that were validly entered into under existing regulations.
• Future PPA Negotiations: The judgment may lead to more careful negotiation of PPAs in the future. Parties will need to ensure that their contracts clearly address the possibility of future regulatory changes and that they have a clear understanding of their rights and obligations.

Conclusion

The Supreme Court’s decision in Gujarat Urja Vikas Nigam Limited vs. Renew Wind Energy (Rajkot) Private Limited is a landmark judgment that upholds the sanctity of contracts in the renewable energy sector. The court’s emphasis on the prospective nature of laws and the importance of regulatory certainty provides much-needed clarity for investors and stakeholders. By ruling that the Second Amendment to the REC Regulations did not have a retrospective effect on existing PPAs, the court has reinforced the principle that contracts should be honored and that regulatory changes should not be used to disrupt valid agreements. The judgment also clarifies the limits of State Commissions’ powers to interfere with the terms of PPAs and underscores the importance of careful negotiation and drafting of contracts in the renewable energy sector. This decision is likely to have a positive impact on the growth and development of the renewable energy sector in India by promoting investor confidence and reducing regulatory uncertainty.