Stricter DSM rules may cut renewable project IRRs by up to 100 bps: Crisil

Better forecasting, aggregation and storage will increasingly decide cash flow resilience

India’s renewable energy (RE) sector is entering a phase of stricter grid discipline, and as wind and solar capacities continue to rise, forecasting errors measured under the Deviation Settlement Mechanism (DSM) could have increasingly significant commercial consequences, ratings agency Crisil said.

 

The revised Central Electricity Regulatory Commission (CERC) DSM Regulations came into effect on April 1, 2026, seeking to improve alignment between scheduled and actual generation in the interest of grid security and stability.

 

DSM charges arise when actual generation deviates from scheduled generation.

 

“If left unmanaged, these could affect project cash flows and lower the internal rate of return (IRR) by 50-100 basis points. Consequently, DSM could emerge as an important credit monitorable. In this evolving regulatory landscape, improved forecasting, aggregation and storage will be critical mitigants,” said Manish Gupta, senior director and deputy chief ratings officer, Crisil Ratings.

  

Even under the earlier framework, deviations were calculated as the difference between actual and scheduled generation relative to available capacity.

 

This allowed renewable generators greater flexibility than conventional generators, for which deviations have been assessed against scheduled generation.

 

However, this is now changing under the revised framework, which mandates a phased transition from using available capacity as the denominator to using scheduled generation.

 

“As a result, the same quantum of generation shortfall will translate into a much larger deviation percentage. The numerator remains unchanged and continues to represent the difference between actual and scheduled generation,” Crisil said.

 

The tightening extends beyond the change in denominator.

 

The revenue-neutral tolerance band (RNTB) for renewable energy projects has also been narrowed.

 

The RNTB represents the permissible deviation range between scheduled and actual generation within which no DSM penalty is levied, rendering the financial impact neutral for the generator.

 

Effective April 1, 2026, the RNTB for solar and wind-solar hybrid projects has been reduced from ±10 per cent to ±5 per cent, while that for wind projects has been reduced from ±15 per cent to ±10 per cent to account for higher volatility in wind generation.

 

Consequently, the same solar project recording a DSM deviation of -5.3 per cent would attract a DSM penalty in FY32, whereas no penalty would have been payable under the earlier ±10 per cent tolerance band.

 

“DSM payouts either reduce revenue or increase operating costs incurred to manage deviations, thereby compressing cash flows, weakening debt-servicing cushions and reducing returns. Alternatively, if a developer deploys storage to offset generation deviations, it will incur additional capital expenditure. As a result, project’s debt service coverage ratios could dampen by up to 0.05 times,” said Ankit Hakhu, director, Crisil Ratings.

 

Crisil, however, said certain provisions could help mitigate the impact.

 

The regulations allow DSM deviations to be assessed at a common pooling station where power from multiple wind and solar generators is aggregated. Overall, the revised DSM framework represents a key step towards strengthening grid planning and enabling the integration of a larger share of renewable energy into the grid.