India is part of the global pledge for a sustainable future. In order to further its ambition, the country aims to transition from fossil fuel to greener, more renewable sources. As a result, it plans to have 500 GW of generation capacity from non-fossil energy-based sources by 2030. Solar and wind power projects, being clean, green, and sustainable play a paramount role in the country’s clean energy transition journey. Hence, the success of India’s pledge for non-fossil fuel-based energy is largely linked to the efficiency of electricity distribution grids and ISTS.
Inter-State Transmission System (ISTS) refers to the transport of electricity generated from any kind of source of energy. Through this, the surplus areas can share their excess electricity with deficit regions that have a higher demand for electricity but lack access to energy sources.
In order to promote the development of renewables in RE-rich states and encourage inter-state procurement of renewables, the Ministry of Power, Government of India notified waiver of ISTS charges and losses for solar and wind projects in 2016 via Tariff Policy. Since then the government has extended the deadline multiple times. Recently, the government waived the inter-state transmission system (ISTS) charges and losses on all solar and wind projects commissioned before June 30, 2023. The Ministry subsequently announced an extension of the waiver up to June 30, 2025. After the deadline ie 2025, ISTS charges will be levied on Renewable Energy projects commissioned after 30th June 2025 in a phased manner. A Central levy of 25% will be applicable on projects commissioned between 1st July 2025 and 30th June 2026. For RE projects commissioned after 1st July 2028, 100% ISTS charges will be levied.
The companies will benefit by Procuring Renewable Energy Via ISTS in multiple ways. Firstly, the waivers will ensure Cost-Effective Energy Solutions and companies can reduce energy costs by 20-50% annually thus increasing their competitiveness. The companies will ultimately transfer this benefit to the consumers which will benefit them in the form of reduced costs. Further, the waiver of ISTS charges will encourage renewable capacity addition by reducing the cost of generation to help achieve the country’s goal of non-fossil fuel energy capacity of 500 GW by 2030. Considering the fact that the Central Electricity Regulatory Commission has multiple separate transmission zones with the resultant ISTS charges for renewables ranging from about ₹1 ($0.012)/kWh to ₹2.30 ($0.028)/kWh, without the waiver, some projects may become unfeasible and lose their competitiveness in the market.
There is no doubt that ISTS will allow green power to be delivered through open access to states lacking favorable policies or availability of land thus benefitting both consumers and developers by allowing access to green power at a reasonable cost. While the initiative and relief provided by the extension of the waiver played essential roles, the critics warn about various flaws that can impact the fulfillment and effective implementation. One such challenge includes transmission infrastructure challenges including the shortage of substations. It is a huge concern for the project’s development because delayed projects will miss out on the waiver, and the projects will end up being economically unviable. In such a situation it is important for the government to take proactive measures to address the infrastructure gap timely. Another concern arises from the fact that the power generators were required to pay the ISTS charges during the long-term access regime which led to the concentration of the majority of the renewable energy capacity in some regions like Rajasthan and Gujarat. This led to huge grid congestion. Now, ISTS charges are shifted to the beneficiaries. However, for projects developed through competitive bidding by implementing agencies, these charges discourage ISTS-connected projects. To address this, the government is promoting renewable energy development via state-level bids, especially in states with low renewable energy adoption and minimal grid congestion, such as Bihar, Uttar Pradesh, Punjab, and Haryana.
In the beginning, the ISTS waiver encouraged renewable energy (RE) growth in states with abundant solar and wind resources like Rajasthan, Gujarat, and Karnataka. These states exported surplus renewable energy to other states, helping them meet Renewable Purchase Obligations (RPOs) without worrying about transmission charges. However, over time, the waiver resulted in uneven growth across states. Many states possess good solar potential, still, 83% of RE capacity is concentrated in just a few states, like Rajasthan, Gujarat, and Tamil Nadu. This is the result of the cost advantages created by the waiver. When power is imported from RE-rich states to low-RE states, the total cost includes generation and ISTS charges. The waiver offsets these costs and makes importing cheaper as compared to generating locally. Further, the unequal distribution of transmission costs leads to some states like those in the northeast paying more despite low usage of RE from the grid. Hence, it has become more pertinent now than ever to ponder over supportive measures like subsidies in low-RE states to counteract the negative effects and ensure fair growth and healthy competition. In the long run, phasing out of the waiver as planned can be an effective measure. The timeline for setting up all transmission projects is another concern for the companies, as not all projects can be completed within this timeframe. The reasons can be many including the involvement of numerous nodal agencies in the approval process, which creates obstacles in securing timely and seamless approvals. Recently, the government extended the ISTS waiver for green hydrogen and green ammonia projects until December 31, 2030, provided they utilize renewable energy.
There has been a demand for further extension of the waiver policy. It is true that extending the ISTS charges waiver will undoubtedly serve as a catalyst for exponential growth within the industry. Without such an extension, consumers could be exposed to an open risk of transmission charges. However, there are various challenges that will persist, the effective resolution of which is not only beneficial for the stakeholders and states but also for the overall realization of the goal for which the waiver policy was intended. It is essential to ensure infrastructure development, particularly the establishment of additional substations, for the seamless execution of ISTS projects. Also, it is essential to ensure equitable and inclusive growth along various states not only the ones which are RE surplus.
In a significant ruling that could shape the future of India's solar power sector, the Delhi High Court has upheld the rights of solar power-producing units to access benefits under the Manufacture and Other Operations in Warehouse Regulations, 2019 (MOOWR). The Court's decision, delivered in May 2024, strikes down instructions issued by the Central Board of Indirect Taxes and Customs (CBIC) that had attempted to exclude solar power producers from the scheme. As noted by the Court, the impugned instruction, dated 09 July 2022, issued under Section 151A of the Customs Act, 1962, was deemed to have exceeded its advisory mandate, leading to this pivotal decision.
The MOOWR scheme, introduced in 2019, is a duty deferment program designed to facilitate manufacturing operations in India. Under this scheme, manufacturers can import capital goods and inputs into customs-bonded warehouses without paying upfront customs duties. The duty payment is deferred until the goods are cleared for home consumption, providing significant working capital benefits to manufacturers. As observed by the Court, the MOOWR Regulations essentially facilitate the housing of imported capital goods or imported raw materials in a duly designated warehouse and for a manufacturing process being undertaken in relation to those goods.
The controversy arose when solar power producers, who had obtained necessary permissions under MOOWR, began importing capital goods such as solar panels and equipment without immediate duty payment. The unique aspect of their operation was that their only output product - electricity - is exempt from customs duties. This created a situation where these producers could potentially operate without paying any customs duties throughout their production lifecycle, even when clearing electricity for domestic consumption.
In July 2022, the CBIC issued instructions asserting that electricity production fell outside the scope of MOOWR. The primary justification for this exclusion was the technical requirement in Regulation 15 of MOOWR, which mandates the affixation of a one-time lock to goods removed from warehouses for export. CBIC argued that this condition could not be met in the case of electricity, which cannot be physically locked for transportation. As per the instruction, Electricity, which may come to be cleared for home consumption, cannot possibly comply with the one-time-lock condition thus it would consequently fall outside the scope of the MOOWR Regulations.
The legal challenge was led by Acme Heergarh Powertech Private Limited and other solar power producers, who contested the validity of the CBIC's instructions before the Delhi High Court. The petitioners argued that they had valid licenses under MOOWR and that solar power generation should not be excluded from the scheme. The petitioners also highlighted that the CBIC's instructions effectively revoked their rights without proper legal justification. The impugned Instruction compels and commands the Customs authorities to cancel all licenses pertaining to solar generation units and thus impeding the statutory discretion.
The Court's decision rested on several crucial observations. The Court found that neither Section 61 (duration of warehousing) nor Section 65 (manufacturing and other operations) of the Customs Act, 1962, could be interpreted to exclude solar power-producing units from MOOWR benefits. The Court emphasized that the MOOWR Regulations apply to all goods that undergo a manufacturing process or other operations in customs-bonded warehouses. The fact that electricity could not meet technical requirements like a one-time lock did not justify exclusion from the scheme.
The Court determined that CBIC had exceeded its advisory mandate under Section 151A of the Customs Act. While Section 151A allows CBIC to issue policy directions, the Court pointed out that these instructions cannot interfere with the exercise of discretion by customs officials. The instruction issued on 09 July 2022 was seen as an attempt to curtail the discretion vested in customs officers by compelling them to revoke the licenses of solar power producers without proper justification
The Court clarified that capital goods need not be consumed or integrated into the final product to qualify for MOOWR benefits. The Court highlighted that the MOOWR scheme's intent was to facilitate manufacturing operations, and the use of capital goods in the generation of electricity should qualify for the same benefits, even if electricity is exempt from customs duties. The Court rejected CBIC's argument that technical requirements like input-output ratios should determine scheme eligibility. It emphasized that the MOOWR scheme was designed to defer duties, and such requirements should not be a limiting factor. The Court stressed the importance of a purposive interpretation of the law to fulfill its objective of facilitating manufacturing operations in bonded warehouses.
This ruling has significant implications for India's solar power sector. Solar power producers can continue to benefit from duty deferment on imported capital goods, reducing their initial capital expenditure burden. The judgment provides clear guidance on the applicability of MOOWR to solar power generation activities. The ruling may encourage more investment in the solar power sector by maintaining favorable import duty structures.