Gains from messy regulatory footprints

by Amrita Agarwal and Ajay Shah. 

The traditional view

Regulatory architecture is the design of regulatory agencies as a block diagram with a box for each agency, a clear problem statement for each agency, and a set of definitions about how the agencies interact. In the analysis of regulatory architecture in India, we generally think there should be full clarity on the regulatory perimeter (what activities are regulated) and on the state agency that is vested with the relevant regulatory power (who regulates what). It is believed that regulatory arbitrage is a bad thing. Firms should not be able to choose the regulator that they prefer, and firms should not be able to opt out of regulation by going to the edges of a poorly defined regulatory perimeter. 

Consider the long journey to the Gold ETF (documented in Box 9.4 of Mistry, 2007). The Gold ETF was delayed by 5 years because all of the RBI, SEBI and FMC claimed jurisdiction over it. Reformers have long argued that regulatory architecture changes are required so as to eliminate such regulatory logjams. 

In the conventional Indian discourse, a clean block diagram has been prized (Roy et. al. 2019). It is felt that there should be a simple diagram and then everyone knows where they stand. The firms then organise themselves to go to the right state agency and civil servants do not waste time fighting turf battles. State power is unambiguously defined, for any aspect of the coercive power of the state, private firms have clarity on who wields that power, private firms have no agency on these questions, there is no regulatory arbitrage. For the field of finance, FSLRC offered such a clean block diagram (FSLRC, 2013). 

In this article, we explore limitations of this approach.

Dispersion of power

In the field of political science, the essential idea is that of dispersion of power, of checks and balances. The state performs better when power is contestable, when we `pit interest against interest' (Madison, 1788). Pure power becomes tyranny; checks and balances are the path to state capability. 

This is the motivation for separation of powers (split the state vertically between the legislative, executive and judicial branches) and federalism (split the state between union, state government and city government). These give dispersion of power. 

The checks and balances, the conflicts between these multiple elements of the state, is messy. But we get better outcomes out of this untidy mess than we would with concentration of power (and the associated clarity of who is in charge). 

There is an interesting analogy in urban planning. Jane Jacobs (1961) and James C. Scott (1998) have emphasised that a highly legible, master-planned city is rarely a thriving one. A good city is teeming with a million kinds of thoughts and actions. It is a great city, but it's not easily understood. By pursuing simplicity of control and the ease of achieving state legibility (Scott, 1998) and state control, we don't get to a good society. Ultimately, we are after a great society, not a powerful state. 

Three kinds of reasons favour epistemic pluralism in state building:

1. The world is complicated, and nobody knows what the correct state intervention is (Hayek, 1945). In this case, clearly handing over all the power to one state agency is less effective. It is better to have multiple different approaches by multiple agencies, which would yield more experimentation and diversity in the society. When one agency is doing something wrong, private persons benefit from having agency on going to another. Multiple agencies doing diverse things creates more knowledge as compared with one agency doing one thing.
2. Public choice theory shows us a causal pathway from greater power to reduced performance. When state personnel command more absolute power, there is a greater chance of going down pathways that suit the interests of the state and not the interests of the people.
3. Sometimes, there may not be a one size fits all regulatory strategy. There may be gains from having different government organisations approach things in diverse ways.

We should see the problem of agencies and their footprint in a more heterodox way. Instead of full clarity that all the power of X nature is to be wielded by Y agency only, and that all private persons must stand in line without flexibility or choice, would it help to have a greater blurring of the lines where multiple agencies overlap, including a role for fully unregulated arrangements? This could create better checks and balances. 

If this approach is taken, there would be more experiments of alternative pathways to performing state functions and multiple government organisations would learn from these experiments. The people would be less controlled, they would have more choice on how to behave (Tiebout, 1956). This would generate better progress when compared with a monolithic approach.

Example: Hedge funds

The government believes it adds value by doing consumer protection for mutual funds. One could think of a single government regulatory system doing consumer protection that applies to all funds. But we don’t have to think like that. By the time a customer is bringing Rs.10M to a fund, there is no need for consumer protection. 

This gives the `hedge fund' idea: The regulations must carve out a distinct industry, hedge funds, where the customer is obliged to bring in over Rs.10M. In India, we see this with the SEBI 2012 AIF regulations. This industry requires contract enforcement and prudential regulation (promises should be upheld, lying is not okay), and extremely large hedge funds can raise concerns about systemic risk regulation. But there is no case for consumer protection for hedge funds, which reduces the burden of regulation. 

Once this is done, there will be competition in the eyes of some customers between the less regulated industry (hedge funds) vs. the more regulated industry (mutual funds). If regulation for consumer protection creates value, then all customers will be attracted to mutual funds. But if there are flaws in the regulation of mutual funds, the hedge fund industry will grow. The presence of less-regulated hedge funds is a constant counter-point to the consumer protection that’s sought to be done in mutual funds. 

Example: Micro-prudential regulation vs. financial resolution

 Consider the universal problem of a state-run financial resolution mechanism, the US FDIC and its ilk, vs the micro-prudential regulator. This is a messy world! On one hand, the micro-prudential regulator is charged with coercing the firm in ways that put a cap on its failure probability. But at the same time, the resolution corporation lurks over the firm, and unilaterally chooses when to force the closure of the firm.

One might think: Is it cleaner to have only one organisation that does these things? E.g. RBI that does micro-prudential regulation and also calls the shots on bankruptcy? This looks clean but it actually works poorly. The problems lie in public choice theory. The micro-prudential regulator does not like it when financial firms go bankrupt: these events show micro-prudential regulation in a poor light in public. So it has an incentive to ignore the problem and pretend things are okay. Only a fully arms length financial resolution, that does not consult the micro-prudential regulator when making the final decision, can get the job done right. The correct design inherently creates tension between two distinct government organisations. 

Example: Company law in the US

Companies in the US can register in any state while operating in others. This creates competition between the company laws across states. This gives companies the ability to shop for their preferred legal regime. The state of Delaware has done well in modifying its laws and agencies so as to be more attractive to companies for incorporation, mergers & acquisitions, and exit. Some other states like Wyoming have followed this example and innovated on other aspects to provide a distinctive regime to attract companies. 

This approach has created a rich tapestry of natural experiments which reveal the efficient frontier of how company law should work (Romano, 1993; Fisch, 2017). If there had been a single mechanism of company law for the full country, there would be less empirical learning.

Example: The US banking system

Banks in the USA have a choice between a National Charter, a State Charter and a State Non-Member status. They can switch between these when they so desire. A multi-state Bank may switch to a National Charter under the Office of the Comptroller of the Currency (OCC). An innovative local-oriented bank may choose a State charter under the state’s banking department and the Federal Reserve. The threat of banks switching also reshapes the incentives of each regulatory agency, where excesses of power will lead to flight of the regulated to a certain extent. This gives better flexibility and checks-and-balances when compared with a single national bank regulation system. 

These benefits come with difficulties. Multiple alternative regulatory authorities (SEC vs. CFTC, OCC vs. Fed vs. FDIC) were part of a race to the bottom that led up to the crisis of 2008. In that period, Washington Mutual and AIG chose the under-resourced Office of Thrift Supervision (OTS) as its regulator. In response to the 2008 crisis, the Office of Thrift Supervision (OTS) was dismantled as part of the Dodd Frank Act (Granza et al, 2024).

Example: Recent thinking in Argentina

Javier Milei has emphasised that regulators are often captured by the existing players. Regulators obtain coercive power under the excuse of addressing market failure, but often use these powers in ways that hinder competition, creating a cosy profitable and less innovative equilibrium. One difficult pathway to address this is deeper regulatory reforms (akin to the FSLRC concepts of improving checks and balances and curbing the arbitrary power of regulators). Another pathway, that is being attempted in Argentina, is to subject the incumbent regulator and industry to the competitive pressure of alternative regulatory regimes. 

Milei’s Minister of Deregulation, Federico Sturzenegger, has argued that economic reform needs to identify many points where a bureaucrat or a union has the power to say "No" and introduce an alternative pathway where the market can say "Yes" without them. 

Towards these objectives, in 2023, the Amendment to the Civil and Commercial Code (Decree 70/2023) enforced a strict ‘freedom of contract’ settlement via their currency of choice - US dollars, cryptocurrency or even commodities. This gives choice back to the people and removes the monopoly of the local central bank for controlling local transactions or introducing cross border capital controls.

Similarly, the Fondo de Cese Laboral (Employment Severance Fund, Decree 847/2024) gives employers the choice to replace the traditional lump-sum expensive and uncertain litigation prone severance regulatory framework with a pre-funded predictable payout. This creates an alternative mechanism that firms in agreement with their labour union can choose to adopt if they feel it is superior in their context. This is playing out on the ground with each firm and labour union making their choice. 

It is too early to tell whether Milei’s reforms will succeed in restoring high economic growth to Argentina. But they illustrate the ideas of the present article: When faced with a monolithic incumbent regime, there is value in creating ambiguity and flexibility about the regulatory perimeter and the power of each authority.

Example: Charter cities, Hong Kong and GIFT City

While nobody planned it this way, the fact that the British retained control of Hong Kong in 1949 created the possibility of forum shopping for private persons. If communist China did well in certain respects, individuals and firms could choose to locate in China. But if British style liberal democracy worked well in certain respects, individuals and firms could choose to locate in Hong Kong. 

In the event, we know that Hong Kong worked out much better than China, to the point where it became an embarrassment for the CCP. But in the years where Hong Kong was a genuine alternative (roughly 1949-2015), it gave private persons a choice: to be ruled by one kind of government or another. The presence of this alternative made a major positive impact on China’s trajectory. The removal of this alternative has had an adverse impact on China’s trajectory. 

Paul Romer has extended this idea into a more general possibility of establishing `Charter Cities’ where first world liberal democracies run enclaves in poor countries, and then individuals and firms get a choice about what kind of government they prefer. 

Potentially, GIFT City can evolve towards a more first world governance style, and then it would become a counterpoint to conventional Indian thinking on how financial law and regulation works. From this perspective, the role that has been given to incumbent regulators in the governance of GIFT City represents a limitation to the possibilities of GIFT City emerging as a competitive rival to mainstream Indian state mechanisms on financial economic policy. 

In each of these three settings -- Hong Kong vs. PRC, Charter Cities vs. developing country host, GIFT City vs. conventional Indian financial economic policy -- we see the gains from multiple choices being available to private persons as opposed to a simple monolithic state, where the people are crushed, where there is no possibility of forum shopping.

Epistemic pluralism as a consideration in agency architecture

Simplicity and clarity of a block diagram, a complete and unambiguous regulatory perimeter, the lack of turf battles: All these are appealing in the yearning of the state for more power. They fit well with a high-modernist desire for social engineering, to rearrange society in a way that increases state legibility and looks logical. But they come at the cost of epistemic pluralism. 

State personnel and agencies perform better when their power is lower, when there are greater checks and balances. The society works better when there is more freedom, when the people are placed under weaker state power, when the people have more choice. It is better to envision a world where the people have more of a say in who will regulate them and how. 

We fully recognise that this can be messy. Forum shopping can become a race to the bottom with private firms choosing the least burdensome regulation, creating incentives for government organisations to deregulate even when wise state action is required to address market failure. The messy arrangement will involve bigger payments to lawyers, and turf battles between government organisations. But we should simultaneously see the limitations of monolithic power. There is merit in careful choices that create some amount of a mess. 

Practitioners do not see this in a strategic way. It is typical for an exasperated private firm CEO to say "Just tell me who's my feudal lord, and I will figure out how best to optimise under that structure of state coercion". But public policy thinkers need to play at a different level. We need to ask: How can state power be organised in a way that gives greater possibilities for private persons to innovate and obtain economic growth?  

What we need is not a simple insistence on monolithic power. What we need is a sophisticated conversation on conditions under which we get a race to the top (more like Delaware) as opposed to a race to the bottom (more like the US Office for Thrift Supervision). 

It is easy to criticise the US financial system as a sequence of disasters from LTCM to Lehman. But it is also important to see that the US has the highest per capita GDP in the world. There is a connection between the freedoms of the United States -- which come with difficulties -- and the immense success of the United States. The same financial system that failed with crises from LTCM to Lehman is the financial system that innovated, invented most of modern finance, and funded innovators and risk-takers that made the United States what it is today.

 In India, we come from the other extreme: from the presumption of state power and low freedom. It would be useful to step back from the yearning for complete state power. A world with more checks and balances looks messier, but it is generally more conducive to a good society and economic success. 

Introducing greater ambiguity around the regulatory perimeter is an important third pathway for economic reform, in addition to the traditional twin engines of (a) Deregulation, of removing state interference on problems where there is no market failure and (b) Putting the cladding of checks-and-balances and the rule of law, upon state agencies that do wield coercive power. 

The field of regulation is far from figured out. On a global scale, regulators first came about less than 100 years ago in the United States. Here in India, it is only from the late 2000s that a conceptual understanding of regulators started emerging in the intellectual community. The world is complex, state capability is low, most state coercion in India is riddled with mistakes. A big journey lies ahead, both in India and elsewhere, to find the goldilocks zone, of addressing some market failure but avoiding the excesses of state power ranging from central planning (government control of products and processes) to corruption. One ingredient that we in India need to add to our regulatory philosophy is humility, the desire for epistemic pluralism.

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Improving electricity regulation in Tamil Nadu

by Akshay Jaitly, Charmi Mehta, Rishika Ranga, Renuka Sane, Ajay Shah and Karthik Suresh.

The Indian electricity sector is a centrally planned sector that faces increasing financial stress. In other words, a centrally planned decarbonisation would result in enlarged costs and political difficulties. The path forward for electricity reforms is to make changes one state at a time. We have started this journey with the state of Tamil Nadu.

The case of Tamil Nadu is particularly interesting. It holds great potential when it comes to the energy transition with high potential of offshore wind and solar. However, poor quality of supply along with indiscriminate subsidies for domestic and agricultural consumers has led to deep levels of fiscal stress on the Tamil Nadu state exchequer. Fiscal stress harms investibility in electricity, which is particularly a challenge for renewables. Due to multiple reasons, some of which may be attributed to the political economy at the state level, the state of Tamil Nadu has also revised tariffs only four times since the Electricity Act was enacted in 2003. These tariff revisions have often not reflected the cost of supply of electricity (e.g., the tariff revisions in 2017).

While the electricity sector in Tamil Nadu has recently undergone institutional changes in the form of TANGEDCO's demerger, the present state of regulatory challenges has not been adequately addressed. In a new paper, Improving electricity regulation in Tamil Nadu, we present evidence on regulatory failures of the electricity regulator in Tamil Nadu (TNERC) and contextualise the impact of this on associated aspects of public finance and private finance. We bring the knowledge of regulatory theory to bear upon the possible causes of these failures. We discuss the TNERC's performance on elements that make up a well-functioning regulator, such as clarity of purpose, separation of powers, selection of board members, fair adjudication, public consultations and financial independence.

Many aspects of regulatory reform require amendments to the Electricity Act, and hence the problem statement lies in identifying the levers available to make progress in Tamil Nadu. We identify several levers that the state government can use to undertake reforms, well within its powers under the Electricity Act, to make Tamil Nadu a turnaround story and a model for good electricity regulation nationwide. When these improvements are put into motion, they will materially change the views of private investors on the feasibility of investment in the Tamil Nadu electricity sector. This paper offers ideas on how this can be done.

Akshay Jaitly, Rishika Ranga and Renuka Sane are researchers at Trustbridge Rule of Law Foundation. Charmi Mehta, Ajay Shah and Karthik Suresh are researchers at XKDR Forum.

Offshore wind in Tamil Nadu: from potential to reality

by Akshay Jaitly, Charmi Mehta, Renuka Sane and Ajay Shah.

Foundations

The world of renewables is comprised primarily of solar and wind. Of these, solar electricity suffers from the limitation of dwindling away in the evening, at precisely the time at which electricity demand rises. This makes wind particularly important. There is a good deal of onshore wind generation in India. What is different and potentially superior about offshore wind?

1. Wind speeds tend to be higher offshore than on land. A wind turbine operating at a wind speed of 24 kph can generate twice as much energy as a turbine operating at a wind speed of 19 kph (American Geosciences Institute, 2023).
2. The wind offshore tends to be more consistent, with higher power capture for a greater number of hours per day.
3. Onshore wind requires land resources. Offshore wind is built in the open sea where land rights are cheaper, and it is easier to go to bigger blades.
4. Offshore wind does not impose noise pollution upon the human population.

These benefits, of course, come with a problem, that construction of windmills in the high seas is more difficult when compared with building on land. Windmills are best placed at locations with high wind. Figure 1 shows that Tamil Nadu is a hot spot for offshore wind in India. It is interesting to notice that Sri Lanka is also a hotspot for offshore wind (Figure 2).

Figure 1: Wind speeds off the Indian coast

Source: India Wind Potential Atlas (NIWE, 2019).

Figure 2: Wind speeds off Sri Lanka.

Source: Technical Assessment by World Bank, IFC and ESMAP (2020).

There is an analogy between offshore wind in Sri Lanka, and hydel resources in Nepal and Bhutan. Given the correct arrangement of foreign policy (Subramanian, 2023), the Indian private sector can possibly play a leadership role in building electricity generation in Sri Lanka, as has been the case with Bhutan.

Putting these facts together, there is an important natural resource in Tamil Nadu, and its vicinity, through which vast renewable electricity generation can become possible, given the correct configuration of policies and state institutions that create conditions of investibility. We can dare to hope that very large offshore wind generation can take place off the coast of Tamil Nadu, which would attract energy-intensive firms to operate in the region, and enabling sale of electricity into locations far from Tamil Nadu.

Public economics for offshore wind

We can imagine an uncoordinated rush by the private sector to venture out into the seas and put up wind turbines. They would jostle with each other to build on the best sites. Each wind turbine would have to face the problem of transmitting energy to the mainland. There are three areas where policy makers can be useful:

1. Ownership of the sea-bed and property rights: In a world without clarity on property rights, the private sector would experience conflicts when building wind turbines. There is a negative externality as multiple construction projects which are physically near each other impose a certain amount of chaos upon each other, and the presence of a windmill diminishes the energy production of nearby windmills.The sea-bed should be treated as a scarce natural resource, akin to the electromagnetic spectrum. There is a role for the state in establishing property rights, and auctioning off ownership of the sea-bed to private persons. The coercive power of the state would be used to create property rights for private persons, following which private persons would trade in blocks of sea-bed (akin to transactions in privately owned land or on the electromagnetic spectrum), and the government would enforce against encroachment. The negative externality problem during construction can be addressed by modified property rights which decongest each construction site for the construction period, by expanding the notion of property rights associated with each geographical location, to exclude other persons for the period of construction.
2. Economics of transmission: Each wind turbine would have to face the problem of transmitting energy to the mainland. Every generation company would benefit from more convenient access to high capacity transmission lines. There is a natural monopoly problem in the transmission infrastructure - it is likely that a single transmission company will emerge within each geographical area. There is merit in using state power to coerce this firm on open-access rules (so it cannot deny transportation to any private person) and on price regulation.
3. Data as a public good: The government can add value by spending taxpayer money to construct a dataset on wind speed and releasing this into the public domain. This activity involves no use of coercive power, other than the coercion that undergirds taxation. The government would merely release data on a website as a public good, and in no way preclude private persons from expending resources to create data on their own. For the government released data to be credible, it would have to be collected by trusted agencies, experienced in offshore wind data collection; the role for the government should be one of only contracting-out the construction of the data.

While electricity in India is largely a state subject, the sea-bed falls under the union government jurisdiction through Article 297 of the Indian Constitution through which the Parliament has enacted the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976. Thus we can envision a two-part policy story for offshore wind, where the union government auctions off blocks of sea-bed, and the state government deals with everything connected with electricity. Once the energy reaches landing stations at the shore, it is just ordinary electricity and fits into the mainstream electricity market exactly as with onshore wind turbines.

How the Indian journey has unfolded

The union government has decided that offshore wind production will commence in Gujarat and Tamil Nadu. A union government agency named the National Institute of Wind Energy (NIWE) plays an important role in this field including that of being the designated counterparty for contracts. It plays a expansive role, akin to an offshore wind central planner. Transmission will be run by a union government PSU, the Power Grid Corporation of India Limited (PGCIL). No role is envisaged for state governments.

In 2018, NIWE published its first tender for an offshore wind block auction off the Gujarat coast. However, it did not receive bids and consequently had to be called off after multiple extensions (Deshpande, 2021). Since 2022, the Union Government has released (i) a national Strategy Paper for the Establishment of Offshore Wind Energy Projects and (ii) a draft tender for Sea bed leasing for offshore wind energy projects which pertains to locations off the coast of Tamil Nadu. These releases help improve policy predictability.

The proposed contracting model

Project costs in offshore wind are high, particularly in contrast to developing renewable energy plants onshore. Costs also vary as per the depth of waters and distance from shore. Operating offshore wind turbines involves higher maintenance requirements (Koch, 2012). First movers face higher costs on account of uncertainty and the inevitable mistakes.

NIWE has proposed three alternative contracting models in its strategy paper. Model A is for projects where surveys and assessments have been completed, and the site is ready for development. Model B is model A without viability gap funding ("VGF?). Model C is a fully bundled model with end-to-end responsibility placed upon the project developer, including site identification. The tender released (for the sea bed off the coast of Tamil Nadu) follows model A (NIWE, 2023). Table 1 summarises this proposed contract design.

Table 1: Risk-responsibility allocation across proposed offshore wind contracting models

Factors	Risks/responsibility	Model A
Government support	Bridging financing gaps	VGF (Union; unallocated)
	Transmission charges	Waived
Strategic and commercial risks	Identifying sites for offshore wind farms	Gov (Union)
	Site assessment surveys	Gov (Union)
Local factors	Transmission infrastructure	Gov (PGCIL)
	Evacuation of power	Gov (PGCIL)
	Licenses	Private
	Power offtake guarantees	None

Site characteristics have a substantial impact upon the prospective return on equity. The MNRE/NIWE supplies its assessment of each site. A careful examination of the data released by MNRE/NIWE is required. Potential developers may invest significant time and resources in constructing private sector data if there are limitations in the government-released data.

The selected bidder must set up the turbines offshore and connect each turbine to the offshore agglomeration facility (which will be constructed and managed by PGCIL). While the model mentions accessing VGF from the union government, the mechanism is not adequately spelled out. Is this policy strategy conducive to investibility?

i. Site selection and exclusivity:

Site selection is best done by potential wind farm developers. Developers face the consequences of, and are best placed to take decisions on sites when faced with a certain amount of data. They will commission the creation of additional data optimally. Under Model A, sites have been selected by NIWE. We expect that serious developers will construct their own datasets and may chafe at the locations pinned down by NIWE.

The next issue is that of exclusivity. Developers like to have a certain exclusive period, where no other construction takes place, in order to reduce the complexities of coordination across multiple construction projects. The exclusivity period for the sea-bed is set to five years, with a maximum extension of one year. The average time taken to set up a mid-size offshore wind farm, globally, is four years. In India, this is likely to attain a higher value (MOSPI, 2023).

Auctioning the exclusivity period itself can be a way to decide what a 'sufficient' period should be. In countries where confidence in offshore projects has been high, auctions are witnessing site tenures being awarded based on an auction in which the highest bidder wins the site (Exeter, 2022). For example, the Round 4 auction for sites (held in 2021) in England and Wales saw the highest bidder paying Euro 1bn upwards in option fees, payable annually (for ten years) for exclusive sea-bed rights on an 8 GW of offshore wind.

ii. The problem of transmission:

In offshore wind contracts in Northern Europe, the evacuation infrastructure for the electricity is generally created by the developer (and in some cases such as in the UK, later carved out and sold to a third party) or contracted out (separate from the offshore windfarm contract) to a private transmission service provider. Under Model A, this function has been assigned fully to the state-owned transmission company - PGCIL. PGCIL has no prior experience in developing transmission for offshore wind and it carries the burden of being a public sector organisation.

Whether managed by PGCIL or some other firm, regulation is required so that future developers are provided access to non-discriminatory evacuation infrastructure and services, perhaps using common carrier principles. While one block / site is up for auction today, numerous offshore plants will come up in the future in close vicinity. There may be shortages or exorbitant pricing of transmission, particularly in the absence of non-discriminatory access.

In addition to the risks from power evacuation, risks from unscheduled downtimes can induce losses, and contract terms will determine who bears this risk. For example, in Germany, the costs of curtailments/incapacities were transferred to the consumer. In contrast, costs remained with the project owner in China despite their lack of control over the risk (Gatzert, 2016). The government's decision to manage the complete evacuation responsibility may prove problematic in the event that higher transmission losses or shutouts imposes important risks upon the developer. If the preference is for power evacuation to be managed by PGCIL, contractual provisions on liquidated damages must adequately cover for downtimes that are not caused by the fault of the developer and other transmission losses.

iii. Regulatory burdens

Unlike transmission and distribution, power generation has no market failure problem. It is hence important to envisage a contract design that harnesses private sector expertise, without added layers of government involvement. At present, establishing an offshore wind farm will require a set of seventeen different clearances and licences from a host of ministries, including the prerequisite of block approval from the Ministry of Defence. Seven of the seventeen clearances are necessary even before one can make a bid, and the rest are post-award. The sector also includes a specific licensing regime that extends to how new offshore assets connect and interact with the grid. This requirement for multiple permissions detract from the vision of property rights in the hands of a private person.

Further, approvals and no-objection certificates may be required from State Governments for transmission and evacuation infrastructure-related provisioning and any other clearances as may be legally required to establish and operate offshore power plants - as in the case of oil and gas pipelines (NIWE, 2022a, NIWE, 2022b).

It might be useful to consider if some project-related (as opposed to bidder related) approvals can be obtained ahead of time and made part of the bid package. This will reduce risk for bidders and may lead to more attractive bids.

Lastly, as with any nascent industry, policy and regulatory frameworks are likely to evolve and change over time - and existing concessionaires should be contractually protected from this through adequate 'change in law' and 'change of scope' provisions.

Under the present policy strategy, offshore wind generation requires the firm to have a high level of government engagement, and exposure to policy risk. This problem may encourage foreign firms to find local partners and enhance the required rate of return, i.e. hamper investibility.

iv. The role of the union government:

The present policy strategy suggests a offshore wind industry that is run out of the union government. This vision will sit uneasily with the primary role of the state government in electricity regulation and the electricity business once the energy hits the shore. Since vessel availability and transport infrastructure are critical to offshore wind farm development and often contribute to delays, cost overruns ((Koch, 2012), and litigation, the State's port infrastructure can be adapted to facilitate project management. Proximity of the Thoothukudi port to the proposed site is an advantage, and logistics facilities such as (i) storage areas for component assembly and manufacturing, and (ii) berth infrastructure can be developed to support upcoming offshore wind plants (Auroville Consulting, 2022). Such thinking is downplayed in a union-dominated policy process.

Assessing the outlook

Our analysis suggests that there is a considerable gap between the natural resource potential for offshore wind in South Asia and its tangible translation into RE capacity. The sea-bed lease tender was released in September 2023 with a deadline of 28 November 2023. In our knowledge, no bids have emerged.

Electricity is a concurrent list subject under the Indian Constitution, with both the union government and the state government having the right to make law over aspects of the sector. Sea-bed jurisdiction appears to clearly lie with the union. It would make sense to rely on the state government to a greater extent.

There are significant manufacturing and transportation challenges associated with the bulky parts of offshore wind facilities. Both Tamil Nadu and Gujarat are strong in manufacturing, and are natural sites where a private industry could develop that will undertake this manufacturing, and play a role in offshore wind sites hundreds of kilometres away.

The arguments presented earlier in this article show that thinking from first principles, the role of the state in this field is (a) Establishing property rights with auctions of chunks of sea-bed, including a special kind of exclusivity during construction; (b) Ensuring open access and price regulation for the natural monopoly of transmission; (c) Possibly adding value by constructing and releasing a robust dataset with wind speed. There is merit in evolving the policy strategy towards these three pillars.

References

American Geosciences Institute. 2023. What are the advantages and disadvantages of offshore wind farms?, National Academy of Sciences.

Deshpande, T. 2021. Why India's Offshore Wind Energy Potential Remains Untapped, IndiaSpend. 26 November 2021.

NIWE. 2023. Strategy for Establishment of Offshore Wind Energy Projects, Ministry of New and Renewable Energy, Government of India. September 2023.

Koch, C. 2012. Contested overruns and performance of offshore wind power plants, Construction Management and Economics, 30:8, 609-622.

Infrastructure and Project Management Division, Ministry of Statistics and Programme Implementation. 2023. Quarterly Report on Mega Projects.

Laido et al. 2022. Impacts of Competitive Seabed Allocation for Offshore Wind Energy, University of Exeter. April 2022.

Gatzert et al. 2016. Risks and risk management of renewable energy projects: The case of onshore and offshore wind parks, Renewable and Sustainable Energy Reviews, Volume 60. July 2016.

Auroville Consulting. 2022. Unlocking Offshore Wind in Tamil Nadu. Sustainable Energy Transformation Series.

Subramanian, A. 2023. Answers in the offshore wind.The Indian Express. 23 March 2023.

Akshay Jaitly and Renuka Sane are Co-founder and Research Director, respectively, at TrustBridge Rule of Law Foundation; Charmi Mehta and Ajay Shah are Research Associate and Co-founder, respectively, at XKDR Forum.