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Business News/ Industry / Energy/  Covid-19: Will arbitration help India navigate legal wildfire expected in energy sector?

Covid-19: Will arbitration help India navigate legal wildfire expected in energy sector?

  • The energy sector is built on a structured framework which relies on predictable demand and supply
  • Arbitration has various advantages facilitated by recent amendments to the Arbitration and Reconciliation Act

Discoms, already affected by payment delays before the pandemic hit, have expressed their inability to pay generation companies. Photo: Mint

Billions have been confined between their walls and are lost in their devices due to the COVID-19 crisis. In these unprecedented times, the irreplaceable role of electricity in modern lifestyle has been highlighted. In India, the maximum daily load of electricity was 162 GW on March 22nd. However, this load dropped by 41 GW to 121 GW by March 31 after the announcement of the much needed lockdown. While the share of fossil-based dispatch has gone down substantially, renewable power, being a priority dispatch, has largely maintained its supply.

The spirit of Indian entrepreneurs along with proactive government policies has driven the growth of the energy sector in recent years. Despite the uncertainty caused by the COVID-19 lockdown, state-owned NHPC Ltd auctioned 2 gigawatts of solar projects at tariffs (Rs.2.552) below the 2019 average. The auction was reportedly (BloombergNEF) oversubscribed and saw strong competition during the price bidding.

Developers have taken an optimistic view of India’s ability in management of this crisis. The optimism shown by industry players should be valued, notwithstanding the imminent challenges.

DISCOMs had already accumulated dues of about 87,000 Crores before the pandemic hit. They have now expressed their inability to pay Generation Companies. The Union Ministries have proactively outlined clear directions of ‘Force Majeure’ during the lockdown. This is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that could not have been anticipated. Any inadequacy or incoherence in adaptation of these guidelines at the state level, may lead to several contractual disputes.

Furthermore given the impact of COVID-19, it is expected that the energy sector may also see disputes through project commissioning differences, payment delays, bankruptcies, forecasting accuracy challenges and curtailment of power purchased through long-term PPAs.

The energy sector is built on a structured framework relying on predictable demand and supply. COVID-19 has brought in bucketloads of uncertainty, risking the already litigation heavy sector with a legal blowout of skyrocketing court cases. We should preemptively prepare for such risks which would hinder operations or growth in the energy sector.

This preparation should involve bolstering trust in the ability of the country's governance modules to deal with anticipated challenges. The Economic Survey 2019-20 brings forth the concept of “trust as a public good that gets enhanced with greater use". A significant augmentation of this trust would involve access to institutions and mechanisms that facilitate the quick, affordable and accessible resolution of disputes which may arise in the energy sector.

The Central Electricity Regulatory Commission (CERC) tries to resolve several disputes at its own level. However their rulings are most often referred to the appellate tribunal and subsequently to the Supreme court, making dispute resolution a cumbersome and long relay play. As per the latest estimates, the pending case numbers in the judiciary are at 60,469 for the Supreme Court, 46 lakh for the High Courts and 3.2 crores for the District Courts.

According to World Bank estimates it would take 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies. Moreover, State utilities, which are some of the most common parties to litigation, often do not have resources to deploy during lengthy and repetitive court trials.

In this context, an out of court dispute resolution mechanism which must be proactively considered for the energy sector is Institutional Arbitration. When disputes are referred to such institutions, deliberation for its resolution are curated by legal and sectoral experts. Subsequently an “Arbitral Award" is issued which potentially resolves the dispute.

High-quality arbitration institutions with personnel capacity, operational excellence and a framework to handle complex sectoral disputes are an attractive prospect for investors, developers and utilities alike. Resorting to them in the first instance would build trust in the energy economy even in times of uncertainty.

Arbitration has various advantages facilitated by recent amendments to the Arbitration and Conciliation Act. Firstly for domestic commercial arbitrations, under section 29 A, there is a time cap of 12 months extendable by 6 months, within which the arbitral tribunal must give its final award.

For international commercial arbitrations, the 2019 amendment invokes an “endeavour may be made to dispose of the matter within a period of twelve months." Considering the operational nature of the energy sector, power ministry’s model PPA format may incorporate an institutional arbitration clause with an aggressive timeline such as 3 months. This may be facilitated by Section 29 B of the act which incorporates “fast track procedures" to resolve disputes. Secondly, there is also the advantage of certainty and finality with arbitral awards. As per section 34 of the act, a final award may be challenged in the court system only on certain specific conditions, within 3 months which could be extended maximally by another 30 days. After this time period, the award attains finality. Thirdly, disputes in this sector arise from many technical issues that need the gaze of a subject expert.

Institutional arbitration can provide an opportunity for appointing such experts. Subject experts, overseeing the resolution of the dispute substantially raises the legitimacy of the arbitral awards. Finally, there is the possibility of incorporating best practices in arbitration such as ‘scrutiny of awards’ before the final order. This practice ensures that arbitral awards are of the highest possible standards and thus less susceptible to annulment in the court system.

"Quick resolution (around 3 months) of disputes through institutions with specialized support systems and a single-minded focus of delivering highly scrutinized rulings will be a dream for international investors. It is within the realm of possibility in India.", quips Suman Kumar, Vice President, National Solar Energy Federation of India, which closely works with India’s largest private investors. It is well known that domestic disputes detract international investment as well.

The Hon’ble Prime Minister has laid out an ambitious target of achieving 450 GW of renewable power capacity by 2030. There is a potential appetite for an 533 billion $ worth investment for renewable power generation targets and almost 1 trillion $ worth investment for the entire power sector by 2035. This investment value has its importance in facilitating businesses, creating quality infrastructure and also enabling human development.

The possibility of mounting litigation on an overburdened judiciary shouldn’t hijack this potential. In these times, an ally of the energy sector would be a robust institutional arbitration framework that has the potential to deliver timely, consistent and amicable dispute resolution in the energy sector.

This article was drafted before the New Draft of Electricity Amendment Bill introduced by the Power Ministry.

Kowtham Raj VS & Satwik Mishra are team members of Energy and Governnance divisions of NITI Aayog, respectively.

The views expressed here are strictly personal and do not reflect the positions of affiliations of the authors.

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