Renewable Energy and Competition Law: Market Power, DISCOM Behaviour, and Auctions Design

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India’s renewable energy sector operates at the intersection of two competing policy objectives: accelerating capacity deployment through competitive markets and protecting investor returns through regulatory mechanisms. The interplay between reverse auctions, preferential tariffs, DISCOM procurement authority, and competition law principles reveals fundamental tensions in market design that have forced regulatory recalibration. This article examines how auction mechanisms including the transition from reverse auctions to closed bidding with bucket-filling, preferential tariff regimes as ceiling prices, and DISCOM monopsony power collectively shape PPA allocation and pricing, while raising distinct competition law risks under the Competition Act, 2002. This article examines how auction mechanisms (including the transition from reverse auctions to closed bidding with bucket-filling), preferential tariff regimes as ceiling prices, and DISCOM monopsony power collectively shape PPA allocation and pricing, while raising distinct competition law risks under the Competition Act, 2002.

The Evolution of Auction Design: From Reverse Auctions to Closed Bidding

Until 2022, India’s renewable energy procurement relied heavily on electronic reverse auctions (e-RA), where bidders matched the lowest tariff (L1) discovered in sequential rounds. The Ministry of New and Renewable Energy (MNRE) explicitly halted e-reverse auctions for wind energy in July 2022, citing “unhealthy competition” and artificially depressed tariffs that jeopardized project financial viability. This decision reflected industry concerns that aggressive competitive pressure was forcing developers to quote unsustainably low bids, creating moral hazard for project execution and long-term grid stability. The government’s rationale centered on two dynamics: first, the bucket-filling methodology under reverse auctions required all participants to match the lowest discovered tariff or face retendering and project cancellations; second, this design created downward price pressure divorced from underlying project economics, as developers bid strategically to capture market share rather than price actual costs. The SECI’s 2.5 GW round-the-clock (RTC) tender exemplified this risk, when Hindustan Power quoted Rs. 3.01/kWh for 250 MW and other bidders declined to match, the entire 2,500 MW tender was cancelled rather than using the bucket-filling mechanism to award remaining capacity at higher (but still competitive) bids.

The Transition to Closed Bidding with Bucket-Filling

Beginning in 2023, the Ministry of Power’s revised Guidelines for Tariff Based Competitive Bidding Process shifted renewable energy procurement toward closed bidding with bucket-filling allocation. Under this model, various strategies were used including:

Single-round bidding: Procurers invite sealed bids for total capacity without subsequent rounds.
Bucket-filling allocation: Bids are ranked as L1, L2, L3, etc. The L1 bidder receives its full quoted capacity at its quoted price. L2 then receives its capacity at its quoted price, and so on until total tender capacity is allocated.
2% band allocation (recent variant): In certain configurations, only bidders quoting within L1 + 2% receive capacity, addressing concerns that excessive price variation compromises grid reliability and financial certainty.

This design preserves competition as multiple bidders compete to set their own awarded quantities, while avoiding the artificial tariff compression of reverse auctions. Developers quote based on project economics rather than matching-game dynamics, yielding more realistic discovered tariffs reflecting true cost of capital and internal rates of return. The Ministry noted that closed bidding increases tender participation and reduces bid cancellations.

III. Regulatory Adoption and The Dual Regime: Preferential Tariff vs. Competitive Bidding

Section 63 of the Electricity Act, 2003 mandates that the Appropriate Commission (CERC or SERC) adopt tariffs discovered through “transparent process of bidding in accordance with the guidelines issued by the Central Government.” The procurer must file for tariff adoption within 15 days of tariff discovery, and the Commission must examine the entire bidding process to confirm compliance with notified guidelines before adoption. This creates a two-stage filter: firstly, the procurer (SECI, NTPC, DISCOM, or intermediary) conducts transparent bidding and secondly, the regulator confirms procedural compliance. Neither stage involves discretionary re-evaluation of discovered tariff levels.

The requirement that DISCOMs and REIAs file for tariff adoption under Section 63, with CERC/SERC examination of entire bidding process compliance, creates a regulatory gate. However, CERC and SERCs have consistently adopted tariffs discovered through transparent bidding without re-evaluating tariff levels. This hands-off approach reflects a policy choice to preserve bidding authority at the procurer level and avoid regulatory repricing. The gate is procedural and not substantive.

The Ministry of Power guidelines mandate that procurers publicly disclose successful bidders, quoted tariffs, and tariff breakup for at least 30 days. This requirement addresses information asymmetry and enables external audit of bidding outcomes. However, disclosure does not prevent post-bid renegotiation or selective enforcement of PPA terms, particularly where bilateral bargaining resumes after regulatory approval.

The Tariff Policy 2016 introduced a hierarchical procurement framework. States are directed to “endeavor to procure power from renewable energy sources through competitive bidding to keep the tariff low.” However, a maximum of 35% of a state’s installed generation capacity can be sourced from SERC-determined preferential tariffs. Preferential tariffs, set by the Appropriate Commission through formal tariff determination proceedings (Section 62, Electricity Act, 2003), are technology-specific benchmarks designed to ensure cost recovery while attracting investment.

The Central Electricity Regulatory Commission’s 2024 Renewable Energy Tariff Regulations distinguish between:

Generic tariff: Applicable to a category of projects (e.g., Small Hydro, Biomass, Waste-to-Energy) with standardized assumptions about capital cost, capacity utilization, and operating expenses. Generic tariffs serve two functions:

they provide revenue certainty for smaller or remote projects unsuited to competitive bidding, and
they act as regulatory ceiling prices in competitive bidding, ensuring discovered tariffs do not fall below cost-recovery thresholds that would undermine project bankability.

Project-specific tariff: Applied when a project’s characteristics such as site-specific renewable resource, land costs, grid proximity etc. materially differ from normative assumptions, justified by applicants through detailed engineering and financial analysis.

The State Electricity Regulatory Commissions explicitly use preferential tariffs as bidding ceilings. Tamil Nadu’s 2020 Order approved reverse bidding with preferential tariff as the ceiling price, preventing DISCOMs from extracting prices so low that they render projects unviable. Similarly, the Andhra Pradesh ERC set a Rs. 3.09/kWh ceiling for PM-KUSUM solar projects, acknowledging that while competitive bidding had generated lower weighted-average tariffs (Rs. 3.17/kWh), regulatory certainty required an upper bound to protect against post-bid renegotiation risk and developer financial stress. This ceiling mechanism reflects a core competition law concern: without price floors, monopsony buyers (DISCOMs) could exploit their concentrated demand to extract prices below competitive cost-recovery levels, deterring market entry and investment. The preferential tariff regime, though ostensibly a fixed-price support mechanism, also functions as a competitive bidding guardrail.

DISCOM Monopsony Power and PPA Negotiation Dynamics

Distribution licensees (DISCOMs) are the primary obligated buyers for renewable energy procurement, driven by Renewable Purchase Obligation (RPO) mandates under Section 86(1)(e) of the Electricity Act, 2003. Each state SERC sets RPO targets (non-solar and solar percentages) that DISCOMs must meet annually. This creates a procurement obligation, but considerable discretion in sourcing method and timing. DISCOMs, as monopsony buyers, exercise concentrated demand power. In many states, particularly those with weaker per-capita renewable resource endowment or smaller DISCOM service territories, a single DISCOM may represent 80% to 100% of near-term renewable demand. This structural imbalance creates bilateral negotiation asymmetry where developers must secure DISCOM offtake either directly or through intermediaries like SECI or NTPC. However, DISCOMs can delay or renegotiate post award.

As a result, a critical market friction has emerged where DISCOMs express apprehension in signing Power Sale Agreements (PSAs) for awarded bids with distant connectivity timelines. As of September 2025, 43,942 MW of Letters of Award (LoAs) lack corresponding PSAs with end procurers, representing a 41% gap between awarded capacity and committed offtake. This gap signals DISCOM hesitation to lock in multi-year fixed obligations under uncertain supply conditions. The government’s 2025 decision to scrap centralized renewable energy pricing pools and allow direct tariff negotiation between developers and buyers reflects this friction. Buyers had been reluctant to commit to pooled tariffs locked months or years before supply commencement, fearing tariff obsolescence if equipment costs or interest rates shifted. By removing centralized pooling, the government aimed to restore bilateral price discovery, allowing parties to negotiate terms reflecting real-time market conditions.

Yet this shift reintroduces bilateral bargaining, where DISCOM leverage becomes pronounced. Smaller or younger developers face pressure to accept unfavorable terms such as low tariffs or flexible offtake to secure any LoA while larger developers with diversified portfolios extract better terms. This creates segmentation in tariff outcomes not predicted by competitive bidding theory.

Competition Law Implications of DISCOM Market Power

The Competition Commission of India’s framework for renewable energy identifies several pathways through which DISCOM monopsony power can trigger anti-competitive concerns:

Exclusionary contracts: PPAs requiring a DISCOM to source all or majority of renewable needs from a single developer foreclose rivals, especially in states with limited procurement windows.
Minimum offtake clauses: Contracts requiring buyers to purchase minimum quantities at fixed tariffs, even as demand varies, can lock out other suppliers and reduce switching incentives.
Discriminatory treatment in negotiations: If a DISCOM systematically offers unfavorable PPA terms to certain developers while accommodating others, and this reflects developer characteristics unrelated to project efficiency (e.g., developer size, location, affiliation with procurer group), it may constitute abuse of buyer dominance.
Post-bid renegotiation: Serial requests by DISCOMs to reduce tariffs after LoA issuance (as observed in PM-KUSUM procurement), unless applied uniformly, signal anti-competitive rent extraction rather than efficiency-driven repricing.

The CCI has shown willingness to scrutinize such conduct. The renewable energy sector’s competitive risks lie less in developer collusion and more in procurer-side abuse where concentrated DISCOM demand is leveraged to suppress prices or impose onerous non-price terms.

Intermediary Procurement and Risk Allocation

The Solar Energy Corporation of India (SECI), NTPC Limited, NHPC Limited, and SJVN Limited act as Renewable Energy Implementing Agencies (REIAs) conducting tenders on behalf of end procurers (DISCOMs and open access consumers). REIAs issue tenders, conduct bidding, sign Power Purchase Agreements (PPAs) with winning developers, and simultaneously negotiate Power Sale Agreements (PSAs) with DISCOMs for corresponding capacity. This intermediary structure theoretically decouples developer risk from individual DISCOM credit quality as developers sign PPAs with REIAs who are generally stronger financially and backed by sovereign guarantee and not directly with potentially distressed DISCOMs. However, REIAs maintain back-to-back PPA-PSA structure; they generally do not execute PPAs until PSAs are committed. This creates a cascading constraint where if DISCOMs delay or refuse PSA signatures, LoA issuance to developers stalls, and developers face indefinite uncertainty.

As of December 2025, government press statements indicate that REIAs are undertaking due diligence on unsigned PSAs, categorizing LoAs by likelihood of PSA execution and considering selective cancellation of awards with “minimal or no prospects” of PSA signature. This triage approach, while pragmatic, shifts risk back to developers awaiting PSA clarity and potentially creates incentive for developers to accept lower tariffs to prioritize PSA execution.

VII. Auction Design and Competition Law: Structural Risks

Closed bidding preserves collusion risks present in all auctions. Competitors can communicate tariff expectations, agree to bid in defined bands, or employ coordination mechanisms through shared OEMs, advisors, or financing partners acting as “hub-and-spoke” information conduits. The MNRE’s removal of e-reverse auction complexity by eliminating sequential matching dynamics, may actually reduce apparent collusion opportunities, but collusion in sealed-bid single-round auctions remains viable if coordination mechanisms are disciplined. Joint venture or consortium bids reduce project risk and can reflect genuine efficiency as they are more technology complementary, have increased risk-pooling as well as capital access. However, they become problematic if used as cover to eliminate competition between otherwise independent bidders. The CCI focuses on whether consortium arrangements reflect substantive efficiency or merely provide coordination camouflage.

Wind and solar developers depend on turbine manufacturers and module suppliers. Exclusive supply arrangements between developers and OEMs, or preferred-partner agreements, can foreclose rival developers’ access to critical inputs if the OEM holds dominant market position in the region. Similarly, bundled O&M contracts tied to equipment sales limit post-sales competition in maintenance and spare parts.

VIII. Policy Tensions and Remaining Ambiguities

Preferential Tariff vs. Competitive Tariff Hierarchy: The Tariff Policy’s 35% preferential tariff cap theoretically limits DISCOM reliance on fixed-rate renewable contracts. However, states interpret this cap variably. Some apply it only to solar; others aggregate all technologies. Regulatory inconsistency creates procurement unpredictability.
Reverse Auction Discontinuation and Entry Effects: The government’s shift away from e-reverse auctions was justified on grounds of project viability, but it may also reduce competitive pressure on tariff discovery. Closed bidding with bucket-filling produces price outcomes determined by each bidder’s cost estimate, not by sequential matching. This could yield higher equilibrium tariffs if bid competition is weaker under closed structures.
PSA Execution Timelines and Stranded Risk: The growing gap between LoA and PSA issuance signals that capacity allocation is outpacing offtake commitment. Developers awarded capacity with multi-year delays to grid connectivity face stranded investment risk. Regulators have proposed phased LoA cancellation, but this creates retroactive uncertainty.
Conclusion

India’s renewable energy sector exemplifies a market in regulatory transition. Auction design has migrated from reverse auctions toward closed bidding to protect project economics; preferential tariffs serve as regulatory ceilings in competitive bidding; and DISCOM monopsony power operates through post-award negotiation rather than formal market power abuse. Competition law risks are real but asymmetric: developer collusion in auctions is prosecutable but less common; DISCOM leverage in PPA negotiation is structural and harder to police without cartelization evidence.

The interplay between auction design, tariff ceilings, and DISCOM procurement authority reveals no equilibrium yet. Government efforts to unlock stranded capacity through direct negotiation and removal of centralized pooling shift risk allocation toward developers, potentially offsetting competitive bidding gains. Regulators and the CCI will need to monitor whether this rebalancing produces efficiency or merely shifts monopsony extraction from tariff suppression to non-price PPA terms. Ultimately, the sector’s maturation depends less on auction mechanics than on DISCOM financial health and credible RPO enforcement. If DISCOMs remain cash-constrained and RPO compliance is unenforced, no auction design or preferential tariff regime will ensure sustained renewable capacity growth.

Authored by: Mr. Akhand Pratap Singh Chauhan, Partner

References:

Renewable Energy and Competition Law: Market Power, DISCOM Behaviour, and Auctions Design

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