How RPO enforcement in the Proposed Amendments undermines RE Transition

How Section 142(2) of the Proposed Electricity (Amendment) Bill May Cap Renewable Markets and Cripple India’s Carbon Pricing Future

India’s power sector is at a pivotal transition point. On one hand, it’s pushing aggressively toward renewable energy (RE) integration and net-zero alignment. On the other, it’s still burdened with distribution inefficiencies, regulatory fragmentation, and uneven state-level RE potential.

Amidst this, the proposed Electricity (Amendment) Bill, 2025 introduces a small but powerful clause — Section 142(2) — which, though intended to enforce Renewable Purchase Obligation (RPO) compliance, could end up reshaping the economics of both Renewable Energy Certificate (REC) trading and the nascent carbon market that India is preparing to launch under the Carbon Credit Trading Scheme (CCTS).

This blog examines how a well-intentioned penalty clause could unintentionally cap REC prices, distort carbon price signals, and shift compliance burden disproportionately to certain states and consumers.

1. The Amendment: Section 142(2)

The newly proposed Section 142(2) reads as follows:

“Notwithstanding anything contained in subsection (1), where the Appropriate Commission is satisfied on a complaint filed before it or otherwise, that a person has not consumed power from non-fossil sources of energy as specified under clause (e) of sub-section (1) of section 86, the Commission shall after giving such person an opportunity of being heard, by order in writing, direct that, without prejudice to any other penalty to which he may be liable under this Act, such person shall be liable to pay a penalty of a sum calculated at a rate of not less than thirty-five paisa per kilowatt-hour and not more than forty-five paisa per kilowatt-hour for default.”

In plain terms, this means:

Every obligated entity — DISCOM, captive generator, or open access consumer — must consume a prescribed percentage of power from renewable or non-fossil sources (as mandated under Section 86(1)(e)).

If it fails to do so, the State Electricity Regulatory Commission (SERC) will impose a financial penalty between ₹0.35 and ₹0.45 per unit (kWh) of shortfall.

This is in addition to any other penalty already applicable.

This turns the RPO from a soft administrative obligation into a hard, monetized compliance liability.

2. Why the Clause Was Introduced

Historically, RPO enforcement has been weak. Many state DISCOMs and captive consumers have chronically under-complied, citing lack of local RE availability, transmission constraints, or cost pressures.

Even after two decades of RPO regulations, national compliance has hovered 10–15% below notified targets. For instance, in 2024–25, the RPO target was 29.9%, while actual RE generation accounted for only around 22.9% of total consumption — a 7-percentage point gap.

This persistent non-compliance undermined the credibility of India’s RE targets. Hence, the government decided to add teeth — a clear monetary penalty.

In theory, this is a positive step. It signals regulatory seriousness and strengthens accountability. But in practice, the economic consequences of such a fixed penalty band ripple far beyond the RPO framework.

3. The REC Paradox: When Enforcement Caps the Market

The Renewable Energy Certificate (REC) system was designed to provide flexibility.
Entities unable to source RE physically could purchase RECs — each representing 1 MWh of renewable power injected into the grid elsewhere — and use them to meet their RPO obligations.

REC trading was meant to discover a market price for renewable attributes, balancing RE-surplus and RE-deficit regions.

However, the introduction of a fixed penalty band now disrupts that price discovery.

Why?

Because the penalty = cost of non-compliance.
If paying a penalty of ₹0.35–₹0.45 per kWh legally fulfils one’s obligation, no DISCOM will ever buy an REC above that price.

→ This transforms the penalty band into an effective price ceiling for RECs.

Once this clause becomes law, REC prices — currently market-linked — will collapse toward ₹0.40/kWh. The entire incentive for REC trading (and therefore for over-compliance by RE-rich states) will erode.

In essence, a measure designed for compliance enforcement ends up freezing a market instrument.

4. The Geographic Inequality: RE-Rich vs RE-Deficit States

India’s renewable potential is highly uneven.
States like Gujarat, Rajasthan, Tamil Nadu, Karnataka, and Andhra Pradesh are RE-rich, producing far more renewable energy than their consumption obligation.
Conversely, large northern and eastern states — Uttar Pradesh, Bihar, Haryana, Jharkhand, West Bengal — remain RE-deficit, dependent on thermal generation and long transmission corridors.

Under the new regime:

RE-rich states will easily meet or exceed their RPOs. Their surplus can be monetized through RECs — but at a capped price.

RE-deficit states will face structural non-compliance and either:

buy RECs (now limited in price), or

pay direct penalties.

While the per-unit cost (₹0.35–₹0.45) appears modest, the aggregate financial burden on large DISCOMs is substantial.

Example:
  State like UP has shortfall of more than 12% on a 120,000 MU annual sale volume:

Shortfall = 14,400 MU

Average Penalty @ ₹0.40 = ₹576 crore

If not allowed as a tariff pass-through, this becomes a fiscal blow to DISCOMs. If passed through, it’s around an additional paise 4.8 per unit burden on consumers.

5. Why the Actual Cost Will Be Even Higher

The statutory penalty is only the visible part. The real economic cost of RPO shortfall includes:

Transmission losses: RE generated in one state must be transmitted to another; around 10% is lost in transit. Yet RPO compliance is based on consumption, not generation. This inflates effective RE procurement cost.

Balancing and deviation cost: Intermittent RE requires thermal backup or storage; this adds operational cost.

REC scarcity premium: When only a few states overachieve, REC supply shrinks — pushing prices right up to the penalty ceiling.

Administrative cost: Legal, regulatory, and accounting overheads of compliance proceedings add 0.5–1 paise/kWh in indirect cost.

Cross-subsidy distortion: As DISCOMs pass cost to industrial users, it raises cross-subsidy burden and tariff inequity.

So, while the headline penalty is ₹0.35–₹0.45/kWh, the true economic cost of RPO non-compliance may approach ₹0.55–₹0.65/kWh for RE-deficit states.

6. The Hidden Consequence: Distortion of India’s Carbon Market

India is on the verge of operationalizing its Carbon Credit Trading Scheme (CCTS) under the Energy Conservation (Amendment) Act, 2022.
The goal: create a unified carbon market where entities can trade emission reductions or credits across sectors.

But the RPO penalty clause threatens to undermine this system before it starts.

(a) The penalty fixes a carbon price ceiling

Every ₹1/kWh penalty equals roughly ₹1369 per tonne of CO₂ (given 0.73 tCO₂/MWh

0.35 ₹/kWh → ₹/tCO₂

₹ per MWh = 350.

Implicit carbon price = 350 ÷ 0.73 = 479.4520... ₹/tCO₂ ≈ ₹479.45 / tCO₂.

In USD: 479.45 ÷ 88 = US$5.45 / tCO₂.

0.45 ₹/kWh → ₹/tCO₂

₹ per MWh = 450.

Implicit carbon price = 450 ÷ 0.73 = 616.4383... ₹/tCO₂ ≈ ₹616.44 / tCO₂.

In USD: 616.44 ÷ 88 = US$7 / tCO₂.

₹0.35/kWh → ₹479.45 / tCO₂ (~US$5.45)

₹0.45/kWh → ₹616.44 / tCO₂ (~US$7)

So, a ₹0.35–₹0.45/kWh penalty fixes the national carbon cost at ₹480–₹616/tCO₂ — or around US$5.45 –$7 per tonne (1 US$= ₹88)

That’s dramatically below or less than 10% of the other nations:

EU ETS: €70–€80/tCO₂ (₹6,000+)

UK ETS: £60/tCO₂ (₹6,300)

China ETS: ¥90/tCO₂ (₹1,000)

By legislating this penalty, India has effectively declared a carbon price cap — albeit unintentionally.

(b) Dual compliance distortion

Once carbon trading starts, industries or DISCOMs will compare:

Cost of carbon credit (CCTS market price), and

Cost of RPO penalty.

If carbon credit > ₹500/tCO₂, it’s cheaper to default on RPO and just pay the penalty.
Hence, the RPO penalty becomes a benchmark for carbon cost, flattening the carbon market’s price elasticity.

In other words: the RPO penalty becomes the reference price for non-fossil compliance across sectors — not just in power, but in industry, transport, and buildings too.

(c) Market fragmentation risk

India will end up with two overlapping carbon instruments:

RPO-REC system under Electricity Act (regulated by CERC/SERCs)

CCTS under Energy Conservation Act (regulated by MoEFCC/BEE)

Without price harmonization, the RPO penalty will anchor REC and carbon credit prices alike.
Instead of convergence, we’ll get fragmented, capped markets — with minimal liquidity and weak investment signals.

7. Policy Irony: Certainty vs. Market Dynamism

To be fair, the Ministry of Power’s intent is not misplaced.
For years, RPO enforcement suffered because there was no credible penalty. States routinely missed targets without consequence.
Section 142(2) fixes that problem by ensuring certainty and accountability.

But economic certainty achieved through static pricing is a double-edged sword.

In a developing energy market, prices must convey marginal cost of abatement — not administrative flat rates.
Fixing a penalty band ignores variability in:

Technology cost (solar, wind, hybrid, storage)

RE availability by region

Transmission congestion

Carbon intensity of the grid

A fixed ₹0.40/kWh penalty today may be too low to drive actual RE investment — especially for storage-backed or round-the-clock renewables.

8. The Emerging Behavioural Risk: “Pay and Forget”

With a known penalty and capped exposure, DISCOMs may simply budget the penalty as a routine cost in their Annual Revenue Requirement (ARR).

Instead of procuring additional RE or buying RECs, they’ll pay the penalty — since it’s cheaper, predictable, and legally sufficient.

This converts the RPO mechanism into a fiscal compliance exercise rather than a decarbonisation instrument.

RE-rich states will overcomply slightly and sell a limited number of RECs at the capped rate.
RE-deficit states will undercomply, pay penalties, and move on.
The result?
National RPO targets met only on paper, with negligible change in actual renewable consumption.

9. Impact on Consumers and Tariffs

If penalties are passed through, the consumer bears it.

For an average consumer, the cost impact appears small — 3–5 paise/kWh.
But aggregated over billions of units, it’s significant:

₹4,000–₹12,000 crore nationally per year, depending on shortfall.

For large deficit states, the burden will be higher.

Industrial and commercial users, already cross-subsidizing agricultural and residential consumers, will face another surcharge layer.
Thus, the penalty indirectly becomes a carbon tax on consumption, without the benefits of a carbon market.

10. Strategic Implications for India’s Carbon Future

If India’s carbon pricing architecture evolves under these constraints, three key outcomes are likely:

(a) Carbon market stagnation

CCTS credits will trade close to the RPO penalty-equivalent rate (₹400–₹500/tCO₂).
That’s too low to drive innovation in storage, hydrogen, or CCUS.
The market becomes compliance-only, not investment-driven.

(b) Investment deterrence

Investors in renewable or carbon-offset projects depend on credible, rising carbon prices.
A legally fixed ceiling destroys long-term price visibility.
Result: capital moves to more flexible international markets.

(c) Loss of global linkage

If India’s carbon credits are priced at ₹400/tCO₂ while global credits are at ₹5,000–₹6,000/tCO₂, linking or exporting credits becomes unviable.
India risks isolation from the international carbon finance ecosystem it hopes to tap for green transition funding.

11. The Way Forward: How to Fix the Design Without Weakening Enforcement

The policy intent is sound — enforcement was overdue.
But the mechanism needs dynamic calibration to avoid market freezing.
A forward-looking design would:

-Make the penalty dynamic, not static.

-Peg it to the average REC or carbon credit price (say, 1.2× trailing Annual REC price).

This ensures penalty remains above market rate, preserving compliance incentive.

-Allow cross-crediting between RECs and carbon credits.

An entity fulfilling RPO via RECs could also claim equivalent carbon credits under CCTS, creating unified demand.

-Phase penalties gradually upward.

-Start with ₹0.40/kWh but escalate 10% per year to match falling RE costs and rising climate ambition.

-Account for T&D losses in RPO computation.

-Use “net energy delivered” instead of gross generation to ensure fairness across states.

-Integrate MoP and MoEFCC registries.

-A single compliance ledger ensures consistency between RPO, REC, and carbon credits.

-Reward early compliance or overachievement.

-Provide tradable incentives or tariff advantages for states exceeding RPOs.

12. Conclusion: A Clause That Could Define or distort the Future

Section 142(2) may appear a technical footnote in the Electricity (Amendment) Bill, but its ripple effects are profound.
It will:

-Strengthen RPO enforcement,

-Cap REC prices,

-Implicitly define India’s carbon price, and

-Potentially freeze the market dynamics needed for true decarbonisation.

In the short run, it delivers discipline.
In the long run, it risks stagnation — locking India into a low-carbon-price equilibrium that neither attracts global investment nor accelerates real renewable transition.

A law should not just penalize non-compliance; it should reward genuine decarbonisation.

As India prepares for a net-zero century, the question isn’t whether RPO targets are met — it’s whether they’re met meaningfully.
Section 142(2) can be the turning point — if designed as a dynamic, evolving instrument, not a static penalty grid.