Development of Offshore Wind Energy in India - Legal Framework

The legal framework is governed by several layers of laws and regulations, with certain aspects that are still not fully regulated. Below we only provide a broad and initial overview.

1. Legal framework for the development of wind energy

The Ministry of New and Renewable Energy (“Ministry”) creates policies and schemes for promoting electricity generation through renewable energy sources. The National Offshore Wind Energy Policy - 2015 ("Policy") was released by the Ministry to ensure optimum exploitation of the offshore wind energy potential in India. Under the Policy, the National Institute of Wind Energy (NIWE) is responsible to call for proposals regarding the development of offshore wind power projects through an open international competitive bidding process. It also states that a designated agency or a distribution utility or a private company to enter into a power purchase agreement with the offshore wind power developers as per the guidelines fixed by the electricity regulatory commissions.

The Electricity Act, 2003 (“Electricity Act”) governs the generation, transmission, distribution, trading, and use of electricity in India. Compliance with technical standards prescribed by the Central Electricity Authority under the Electricity Act is necessary for the construction of power plants. The Electricity Act also establishes regulatory commissions at the central and state level whose functions include regulating tariffs and transmission of electricity.

Overall, it is a complex legal framework that is still evolving and very much susceptible to unforeseen changes. Against that background, effective dispute resolution and investment protection is essential when it comes to projects with state-owned actors.

2. Dispute resolution

Apart from the courts of India, other dispute resolution mechanisms include:

1. Dispute Resolution Committee

The Ministry has designated different agencies as renewable energy implementing agencies (“REIA”). These agencies facilitate the implementation of various schemes of the Ministry. They also enter into contracts with renewable energy developers for the purchase of power with power plants set up by developers on a build-own-operate basis. These contracts have clauses that provide ‘scheduled commissioning date’ which may give rise to delay related claims.

For disputes that may arise between REIA and developers, the developers must submit an application regarding the dispute to the REIA and the REIA is obliged to pass a speaking order. If the developer is not satisfied with the decision of the REIA, it can approach the dispute resolution committee to appeal the decision. The dispute resolution committee deals with disputes regarding the following:

• requests for extension of time due to recognized ‘force majeure’ events. 
• requests for extension of time not covered under the terms of contract
• all disputes other than disputes relating to extension of time between REIA and developers.

The dispute resolution committee, after hearing the dispute, submits its recommendations regarding the dispute to the Ministry. The recommendations of the dispute resolution committee along with the observations of the Ministry is then submitted to the Minister for New and Renewable energy for a final decision. The dispute resolution committee has already resolved 27 cases as of March 2022. It is expected that the local courts will address any issues arising due to competing jurisdiction of the other agreed dispute resolution mechanisms such as arbitration as well as possible appeal mechanisms in the future. 

2. Commercial Arbitration

Commercial arbitration is often considered the gold standard for resolving complex disputes between international parties, often also involving several contractual layers [See also Arbitrating Complex Disputes using Third Party Notices insight tagged below]. India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention). It is also possible to initiate arbitration against state and state-owned entities.  Sovereign immunity is not extended to state entities in commercial disputes.

It must be noted that party autonomy to choose arbitration as means of resolving disputes in the power sector is limited by the Electricity Act. The regulatory commissions adjudicate disputes as per section 79(1) (f) and section 86(1) (f) of the Electricity Act. Under both these provisions, the regulatory commissions can either adjudicate the disputes themselves or can refer the disputes to arbitration at their discretion. The orders of the commissions can be appealed before the Appellate Tribunal for Electricity (APTEL). The decisions of APTEL are appealable before the Supreme Court of India. In simple words, only disputes which do not fall within the jurisdiction of regulatory commissions under the Electricity Act are open to arbitration, where agreed.  

3. Investment Arbitration

Complex energy projects often involve large upfront capital investments with third party financing. Such investments are often based on a regulatory framework in place at the time of the investment. However, the regulatory framework is susceptible to political interference and changes to that framework can render investments unprofitable or even threaten existing business models and financing. Investment protection under international treaties can offer protections against discriminatory and arbitrary action, among others whilst providing the possibility to commence arbitration directly against the host state.     

Till 2015, India had bilateral investment treaties and agreements in place with 83 nations. However, India published a model bilateral investment treaty in 2015 and terminated existing (old) bilateral investment treaties with 77 nations. The investments made prior to the termination are governed by sunset clauses under some of those treaties. India is currently negotiating new bilateral investment treaties.

Article 15 of the new model bilateral investment treaty retains investment arbitration as an option only after domestic remedies are exhausted. Further, it does not provide ‘Fair and Equitable Treatment’ as a standard of protection and, hence, also no protection of investor’s legitimate expectations.

Enforcement of investment arbitration awards is also a challenge in India. India is a not party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965 (ICSID Convention). Moreover, India has signed the New York Convention with the ‘commercial reservation’. There are conflicting decisions regarding the applicability of the Arbitration and Conciliation Act 1996 (“Arbitration Act”) to investment arbitration. While the High Court of Delhi, in Union of India v. Vodafone Group PLC, United Kingdom and in Union of India v. Khaitan Holdings (Mauritius) Ltd. & Ors., excluded the application of the Arbitration Act to investment arbitrations stating they are not  commercial in nature, the High Court of Calcutta in the Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS applied the Arbitration Act to investment arbitration. Due to such conflicting decisions, enforcement of investment arbitration awards in India poses various challenges.  

For investors, the dispute resolution committee and commercial arbitration remain the recommended mechanisms for dispute resolution also with state entities. Investment protection in India is limited due to the restricted wording of the new model treaties and the termination of many existing treaty. For certain investments, it might well be advisable to conclude stabilisation agreements with the state in order to ensure sufficient protection against a detrimentally evolving regulatory framework in absence of sufficient protection under bilateral treaties. Considering that many treaties have been terminated, structuring your investment through countries that continue to have existing BITs in force with India, might be advisable and in some cases feasible. There are certain limits to treaty structuring that also need to be taken into account. In particular, restructuring an investment after a dispute is already “on the horizon”, could be considered an abuse of process and restrict access to investment arbitration.  

We recommend investors to always assess whether adequate investment protections (BITs, stabilisation clauses) and sufficient arbitration mechanisms are in place before making an investment or concluding a contract. If need be, effective treaty structuring prior to the investment might be advisable. Moreover, complex energy investments with several contractual layers and subcontractors can benefit from arbitration clauses that also provide for the involvement of “third parties” in order to cover also recourse claims [See also Arbitrating Complex Disputes using Third Party Notices insight tagged below].

We continue to monitor the developments in India in the offshore wind sector together with our colleagues in the region.