21 January 2020

Energy Laws In India

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The overarching legislative framework relating to the electricity sector in India is provided by the Electricity Act, 2003, which governs the generation, transmission, distribution and trading of electricity, ...
India Energy and Natural Resources
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The overarching legislative framework relating to the electricity sector in India is provided by the Electricity Act, 2003, which governs the generation, transmission, distribution and trading of electricity, including the tariff for sale of electricity.

The institutional framework under the Electricity Act, 2003, comprises electricity regulatory commissions at the central and state levels, with appeal provision provided to an Appellate Tribunal for Electricity (APTEL) which has been created under the Electricity Act, and from APTEL appeal to the Supreme Court of India.

In 2019 the Supreme Court clarified that it would not interfere with the decisions of APTEL, or with those of any of the regulatory commissions established under the Electricity Act, unless a specific question of law is presented. It further clarified that it would not interfere with issues such as elements of tariff determination that do not involve questions of law.

The upstream segment of the natural gas sector in India (i.e., exploration and production, or E&P) is not governed by any specific statute, but instead falls under the overall executive authority of the government of India and an executive body, namely, the Director General of Hydrocarbons (DGH), which oversees the implementation of E&P operations. However, some aspects of upstream operations are controlled by certain laws such as the Oilfields (Regulation and Development) Act, 1948, and the Petroleum Act, 1934.

The role of liquefied natural gas (LNG) in the natural gas sector has been steadily increasing, and in September 2019 up to 57% of the total demand for natural gas in India (i.e., 2,728 million metric standard cubic metres, or MMSCM, out of total demand of 4,754 MMSCM) was met through regasified LNG.

The import of LNG is not regulated and is undertaken under the open general licence regime. Although LNG terminals are required to be registered with the Petroleum and Natural Gas Regulatory Board (PNGRB), the regulatory body under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB Act), no rules providing the manner of registration have been notified to date. However, entities engaged in construction/installation/operation of LNG terminals should notify the PNGRB to ensure due compliance.

The natural gas transmission and distribution segment is regulated by the PNGRB, which has statutory jurisdiction over natural gas pipelines and city gas distribution (CGD) networks. The regulatory framework mandates the development of CGD networks only through grant of authorization to a single entity for specifically demarcated geographical areas. It vests the authorized entity with marketing exclusivity for eight years, and infrastructure exclusivity for the economic life of the network (typically considered as 25 years).

The authorizations for CGD networks are awarded by the PNGRB, usually through a competitive bid process, unless the government of India issues a specific policy direction to vest authorization with specific entities for the purposes of enabling overall economic development. Such a policy direction has been issued only once, in 2018, when the government of India directed government company GAIL India to be vested with authorizations to develop the CGD network along the route of a specific natural gas pipeline in order to ensure viability of the pipeline.

The pricing of natural gas, other than gas produced by government-controlled companies, or by companies under specific contractual provisions with the government, is not regulated.

FDI in the energy sector

Foreign direct investment (FDI) up to 100% under the automatic route is allowed in the power sector in respect of any investor seeking access to generation, distribution or transmission of electricity, both in respect of conventional and renewable energy. The only exception to this is the atomic energy sector. FDI in power exchanges under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, is restricted to 49% under the automatic route.

Energy sector trends

In the LNG and natural gas sector, the trend since 2016 has been to shift towards short and medium-term contracts, rather than long-term contracts, and this has continued in the past year. A significant development in India in 2018-2019 has been the increasing potential for distributed LNG projects.

What was earlier limited to or possible by pipeline connectivity is now possible by smaller-scale and lower capital-intensive distributed LNG projects, which have enabled the development of virtual pipelines by fleets of LNG trucks, and conversion of larger commercial vehicles to LNG-based fuel.

Another key growth area has been the CGD sector. The provision of marketing and infrastructure exclusivity within specific geographical areas has been a material factor for generating interest from the private sector in CGD projects.

With the completion of the ninth CGD bidding round in 2018, and the 10th CGD bidding round in February 2019, CGD networks will now be developed across 136 geographical areas (GAs) across 27 states of India.

These bidding rounds saw the participation of large private sector entities such as Adani and Torrent, which won the maximum number of GAs. Public sector undertakings such as the Indian Oil Corporation, GAIL India, Bharat Petroleum Corporation and Hindustan Petroleum Corporation also participated and won several GAs.

The CGD segment is presently seeing significant FDI from multinational companies into India's energy sector, with French multinational Total undertaking a transaction to acquire controlling voting rights and management of Adani Gas Limited (AGL), thereby making AGL, upon completion of the transaction, a subsidiary of Total for a consideration of about US$600 million.

AGL is an entity undertaking only CGD network development, operation and maintenance, and has authorizations over an aggregate of 19 GAs. AGL also has a 50:50 joint venture with Indian Oil Corporation, called Indian Oil Adani Gas Private, which holds CGD authorizations for another 19 GAs.

The acquisition by Total of AGL will provide the French multinational with control in the retail gas sector in 15 states, 71 districts and 68 towns of India, and about 7.5% of India's population. The Total-AGL transaction can be said to roughly value each GA authorized for CGD development at about US$21 million.

Another important development in the CGD sector was the judgment in January 2019 of the Supreme Court of India in the case of Adani Gas Limited v Union of India and Ors, where the court directed the PNGRB to consider the provisions of "deemed authorization" for entities undertaking development of the CGD network prior to 1 October 2007.

Although this point of law is still pending consideration, it provides a shot in the arm for the few entities that were undertaking CGD network development prior to 1 October 2007.

Stranded natural gas plants

Based on the discovery of large natural gas reserves in KG D-6 basin, by a consortium led by Reliance Industries, which was accepted by the DGH and the government, the government had invited proposals for development of natural gas-based power generation capacity.

However, various reasons including technical difficulties in the extraction of the natural gas from the deep sea reservoir resulted in a shortfall in natural gas production, and consequently natural gas-based power generation capacity of 27,123MW, including plants that were commissioned, as well those ready for commissioning, became stranded and non-operational, with 14,000MW of power generation capacity out of that total not having any gas supply at all.

One of the reasons for this is because regasified LNG is not a viable source of natural gas for power generation, particularly since state electricity regulatory commissions have refused to allow a passage through of dollar-indexed LNG fuel prices into the price of electricity.

Although the government implemented a short-lived scheme for supporting operations of such stranded power plants to enable servicing of interests for lenders to such plants, this was of little benefit. One of the main concerns for projects in this sector in the past couple of years has been the fear of stressed assets being declared as non-performing assets (NPAs).

The direction issued by the Reserve Bank of India on 12 February 2018 (RBI direction) prevented further restructuring of debt and directed banks to consider initiating insolvency proceedings. However, undertaking corporate insolvency resolution processes under the Insolvency and Bankruptcy Code, 2016 are not considered viable as there is no market for taking over such assets without a viable source of natural gas.

The Supreme Court of India, in its judgment in April 2019, set aside the RBI direction on the ground of being arbitrary, which provided much needed relief against the imminent scrapping and liquidation of established natural gas generation capacities.

However, until such time as domestic natural gas production increases, which is likely by 2022 with the revised filed development plan of KG D-6 expected to bear results, there will be a need to implement a policy to support the operation of the stranded gas-based power generation capacity.

Originally published by Asia Business Law Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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