While strengthening grid discipline is a legitimate regulatory objective, the retrospective economic impact of the revised DSM framework on existing, competitively bid renewable energy projects raises serious concerns.

The recent change in the commercial mechanism used to maintain grid discipline and security mandated by the Central Electricity Regulatory Commission (CERC) has the domestic green energy producers worried and knocking at the doors of the Ministry of New and Renewable Energy for reconsideration or dilution.

Termed as Deviation Settlement Mechanism (DSM), it is meant to ensure that grid users (generators and buyers) adhere to their scheduled injection or drawal of electricity. In the energy sector, DSM refers to two distinct but related regulatory frameworks: Deviation Settlement Mechanism (supply-side grid discipline) and Demand Side Management (consumer-side efficiency).

The CERC, through its Order dated March 31, 2026, has determined the value of “X” for computation of deviation (in per cent) for Wind, Solar and Hybrid (Wind/Solar) Sellers under the Deviation Settlement Mechanism Regulations, 2024, applicable from April 1, 2026 onwards.

This order operationalises a fundamental change in the deviation computation framework by initiating a transition from an Available Capacity–based method to a Scheduled Generation–based method, through a phased reduction of the parameter “X”. The decision applies not only to new projects but also to existing renewable energy projects commissioned under earlier regulatory regimes, including those competitively bid and commissioned around 2017–2018.

An unwelcome change

From 1 April 2026, the deviation percentage for Wind and Solar sellers will be computed using a weighted denominator comprising X per cent of Available Capacity and (100−X) per cent of Scheduled Generation. This marks a structural departure from the earlier approach, under which deviation was computed solely with reference to Available Capacity.

CERC has finalised a phased trajectory for reduction of X. Simultaneously, the revenue-neutral tolerance bands have been tightened with effect from April 1, 2026.

This is a serious challenge for renewable energy projects commissioned around 2018, including those awarded through competitive bidding under Section 63 of the Electricity Act, on the basis of a regulatory framework. At the time of bidding and financial closure, there was no indication in regulations, statements of reasons, or bid documents that such a material structural change would be introduced.

The subsequent modification of the deviation computation framework therefore gives rise to concerns of promissory estoppel and breach of legitimate expectations. While the Order applies prospectively from April 2026, it retrospectively alters the economic assumptions underlying investments already made.

The simultaneous tightening of deviation bands materially increases exposure to DSM charges. Empirical studies referenced by CERC indicate that, under tightened bands, projects remain outside the revenue-neutral range for a substantially higher proportion of time. This increases both the frequency and quantum of payable DSM charges, particularly for wind projects which face higher natural variability and forecasting uncertainty.

Industry pushes back

According to multiple sources, the industry players as well as National Solar Energy Federation of India has taken it up with the policy makers that these regulations should not be applied retrospectively to projects bid under earlier regulatory regimes.

Subrahmanyam Pulipaka, the Chief Executive Officer of National Solar Energy Federation of India, told businessline that “India’s current weather forecasting operates at a spatial resolution of approximately 12 km X 12 km with updates twice daily, whereas power system scheduling operates in 15-minute time blocks. Although efforts are underway to improve resolution to 4 km X 4 km, the inherent mismatch between atmospheric variability and grid scheduling intervals remains a structural constraint.”

Recent years have also witnessed increased weather volatility, amplifying intra-day and intra-block variability in renewable generation, an industry expert said.

“The trajectory for reduction of the X factor should be deferred by at least 2-3 years. This deferral would allow time for meaningful improvement in forecasting infrastructure, including enhanced spatial resolution, data assimilation capabilities, and model refinement,” Pulipaka said.

CERC currently permits schedule aggregation at the sub-station level. Enabling aggregation at portfolio, regional, or national levels would improve statistical balancing outcomes and utilisation of natural geographic diversity of RE resources, the industry feels.

While strengthening grid discipline is a legitimate regulatory objective, the retrospective economic impact of the revised DSM framework on existing, competitively bid renewable energy projects raises serious concerns.

Published on April 16, 2026