Tighter DSM rules for grid stability raise concerns over RE viability

India's tighter DSM rules aim to improve grid discipline amid rising renewable energy penetration, but industry experts say wider reforms are needed to balance stability and project viability

Changes introduced to a key piece of regulation by power sector regulator Central Electricity Regulatory Commission (CERC) to boost grid security have not gone down well with India's renewable energy (RE) producers, who say the implementation of new Deviation Settlement Mechanism (DSM) regulations will lead to high penalties capable of disturbing plant operations and financials.

 

RE projects now account for more than half of India's total installed capacity, giving rise to grid management challenges owing to increasing RE evacuation. To tackle the intermittency issue of the RE assets and keep the gap between electricity scheduled and electricity generated to a minimum, CERC introduced the DSM regulations in 2014, a framework that penalises power generators for deviations between the electricity they schedule and the actual power they inject into the grid.

 

Under the new norms, CERC has proposed the narrowing of the tolerance bands from 10 per cent to 5 per cent for solar and hybrid projects, and from 15 per cent to 10 per cent for wind projects. It also proposed the gradual move of renewable generators from a relaxed available-capacity-based DSM system to a stricter schedule-based deviation regime.

 

The revised framework, effective April 2026, requires deviation to be computed against a blended denominator combining available capacity and scheduled generation. The transition from the available-capacity to scheduled-capacity-based system will take place in a phased manner, with complete transition to the latter by FY32.

 

RE generators are up against the revised framework as they face significant financial losses in case of any violations of the rules. The tightened DSM bands can potentially increase penalty exposure materially, especially for wind generators because of wind’s higher generation variability.

 

A Grid-India simulation across 16 RE projects indicates potential revenue losses of 3.5–11.1 per cent for solar, 2.4–11.8 per cent for hybrid projects, and as much as 48 per cent for wind projects. The simulation also showed that generators remain within permissible deviation limits only 45–58 per cent of the time for solar, 32–73 per cent for wind, and 38–47 per cent for hybrid projects.

 

Why are renewable energy producers opposing the new DSM rules?

 

“This implies that developers could face DSM charges in roughly half of all 15-minute time blocks. The revised DSM norms are likely to increase the financial penalty attached to intermittency, making project returns more sensitive to forecasting and scheduling performance,” said Anujesh Dwivedi, partner, Deloitte India.

 

The regulation can also alter capital allocation across renewable technologies. “Standalone wind projects could become relatively less attractive unless supported by improved forecasting, aggregation or storage, while hybrid and solar-plus-storage models may gain preference because they offer better control over injection profiles and lower exposure to DSM charges,” Dwivedi said.

 

Under the DSM regulations, there are different operating regimes across states and the central grid. “Overall exposure of DSM for an RE generator stands anywhere between 0.05–4 per cent of revenue (annualised) based on size and data quality of the asset, operating rules of DSM and the quality of O&M,” said Vishal Pandya, managing director, REConnect Energy. He further added that under the ISTS projects, where the new DSM rules are now applicable, the solar and wind assets would spend 0.3 to 4 per cent of revenue on the DSM. It would imply an annualised cost of 0.7–10 paise per kilowatt hour for an Independent Power Producer (IPP) having ISTS assets, he added.

 

The revised regulation also applies to existing projects, including those competitively bid and commissioned around 2017–2018 under an entirely different regulatory framework. Its retrospective impact on project viability is even more pronounced. Raghvendra Upadhya, chief executive officer (CEO), Wind Independent Power Producers Association (WIPPA), said: “Projects that were built under a different regulatory regime are now exposed to significant revenue uncertainty, which affects their financial viability and lender confidence.”

 

While grid discipline is essential, policy stability is equally important. Frequent policy changes increase risk, thereby increasing costs. “Such changes risk increasing perceived regulatory risk, which could translate into higher cost of capital and, ultimately, higher tariffs in future RE bids,” he added.

 

Many industry players have written to the regulator for some relief in the form of a phased approach to the tightening of bands, given the fact that renewable generation remains inherently weather-dependent, while forecasting accuracy is still constrained by limited hyperlocal weather data and inadequate real-time balancing tools. In addition to increasing operational uncertainty for developers, especially for standalone projects with fixed tariffs and limited flexibility to absorb scheduling variances, the tighter deviation thresholds can increase pressure on project bankability, said Akshay Hiranandani, CEO, Serentica Renewables.

 

“This could increase pressure on project bankability, affect lender confidence, and elevate long-term investment risk across the sector,” he said.

 

India's weather forecasting operates at a spatial resolution of around 12 km-by-12 km with updates only twice daily, while power scheduling runs on 15-minute blocks. This structural mismatch, compounded by increasing weather volatility, means that even well-managed projects will routinely breach the tighter deviation bands, triggering penalties for factors beyond their control.

 

Why does India still need stricter grid discipline for renewables?

 

However, the mechanism is essential for creating a financial incentive for every stakeholder to follow schedules accurately. With increasing RE integration, sudden deviations can cause frequency fluctuations, making the grid highly unstable and threatening widespread blackouts. “... DSM regulations seek to ensure, through a commercial mechanism, that users of the grid do not deviate from and adhere to their schedule of drawal and injection of electricity in the interest of security and stability of the grid,” the CERC had stated as the objective behind the rules.

 

Higher RE variability raises dependence on reserves and ancillary services, increasing overall procurement costs for system operators. Discoms and system operators, citing improved forecasting quality over time, advancements in AI and machine learning models, and the availability of computing power, argue for tighter norms since they often have to bear the cost of balancing RE under- or over-injection through backup procurement or absorption of excess power.

 

While the regulation could impose a financial strain on power generators, it remains essential and non-negotiable for avoiding blackouts, say industry experts. Large-scale RE integration can only happen when there is grid discipline. However, there is a need for further improvements in the system to achieve stability while also maintaining project viability.

 

“Tightening of the DSM bands for generators is the need of the hour and will play a crucial role in further increased penetration of RE in the grids, however a phased approach is essential to enable improved stakeholder preparedness,” said Dwivedi.

 

What reforms are needed alongside tighter DSM norms?

 

Power sector experts call for measures such as shifting from 15-minute to 5-minute time blocks for scheduling, aggregation of deviations of multiple RE projects by a single coordinating entity, rapid Battery Energy Storage System (BESS) deployment, demand-side flexibility, and investment in advanced technologies such as data analytics and real-time monitoring systems.

 

“The transmission evacuation needs further strengthening along with rapid deployment of BESS and massive demand-side flexibility programmes which can rapidly shift demand during the solar or high RE hours of the day at short notice,” said Pandya.

 

For aggregation of deviations, Dwivedi said: “As per the comments raised by stakeholders in the petition, pooling-station-level aggregation could reduce penalties by 30–65 per cent.”

 

Additionally, linking penalties partly to the power purchase agreement (PPA) tariff rather than only to ancillary prices would prevent the 80–100 per cent penalty problem on low-tariff legacy projects, said Dwivedi. Domestic industry body National Solar Energy Federation of India (NSEFI) also recently proposed the measure.

 

The right policy framework could possibly consist of phased band tightening as forecasting infrastructure catches up, along with transitional relief for legacy projects through softer penalties or change-in-law recovery mechanisms, Dwivedi said.