Investment in Renewable Energy Projects: Key Legal Due Diligence Considerations

Investment in Renewable Energy Projects: Key Legal Due Diligence Considerations

India has been at the forefront in adoption of clean energy over the last decade. As of September 30, 2025, ~51% of India’s total installed power generation capacity is contributed by non-fossil fuel sources. The installed renewable energy capacity has grown from 76.37GW in March, 2014 to 247.31GW in September, 2025. Globally, India ranks fourth in renewable energy installed capacity, third in solar power capacity and fourth in wind power capacity.

It is estimated that 85% of increase in global electricity demand over the next three years will arise from emerging and developing countries, and India’s share in global energy consumption is projected to double by 2035. India’s green energy transformation will continue to reach new heights with 176.70GW renewable energy projects under implementation of which 72.06GW is in bidding stage.

An enabling policy framework has ensured increased participation of private players (both, domestic and foreign given that 100% foreign investment is permitted under the automatic route for renewable energy sector). Notably, Ernst & Young has ranked India as the seventh most attractive country for renewable energy investment and deployment opportunities. India was the world’s largest recipient of development finance funding in 2024, receiving approximately USD 2.4 billion in project-type interventions in clean energy. In 2024, 83% of power sector investment in India went to clean energy and, as of March 31, 2025, India has received nearly USD 12.67 billion as foreign direct investment in the renewable energy sector.

Power plants that generate electricity from renewable sources of energy, such as solar, wind, biomass and municipal waste, are considered renewable energy-based power plants. Solar and wind energy form the bulk of the present as well as planned renewable energy capacity in India – as of June, 2025, out of the total renewable energy capacity of 226.79GW, solar capacity accounts for 110.90GW and wind energy accounts for 51.3GW.

In this note, we have set forth key legal due diligence considerations in the context of a proposed acquisition of, or investment in, a solar or wind-based power plant (RE project).

STAGES AND TYPES OF RE PROJECT

The scope of legal due diligence and the investment risks involved depend on the stage of the RE project and the type of power purchaser / off-taker (government-controlled or private).

The lifecycle of an RE project consists of:

• Stage I (pre-commissioning and construction stage): In this stage, a detailed techno-economic feasibility study is undertaken to determine the suitability of a site for power generation and availability of evacuation facilities for transportation of power. Depending on the findings of such study, the developer acquires the site, usually through aggregators. After the acquisition, the developer (either by itself or through one or more services providers or contractors) designs, engineers, procures equipment and materials, and constructs the RE project, subject to receipt of relevant environmental and other approvals. The acquisition and construction are usually funded by a mix of equity and debt. At this stage, the developer also enters into power purchase agreement(s) (PPA) with off-taker(s) and applies for grid connectivity.
• Stage II (commissioning stage): After the construction of an RE project is completed and necessary tests are undertaken, the RE project is commissioned (i.e., it is ready for commercial operations). At this time, the RE project is connected to the grid and the PPA comes into effect.
• Stage III (operations and maintenance stage): Upon successful commissioning of the RE project, a contractor with expertise in operations and maintenance (O&M) services is typically engaged (an O&M contractor) for operating and maintaining the RE project. To ensure smooth transition between Stage II and Stage III, at times, the engineering, procurement and construction services and the O&M services are often obtained from the same contractor.

Generally, investors participate closer to the end of Stage II when the construction risks are minimal, the land is tied-up, necessary permits and registrations are obtained, PPAs are executed and the project is close to being connected to a grid.

Further, RE projects are classified as ‘utility’ or ‘C&I’ depending on the type of off-taker:

• Utility RE Project: In this case, the off-taker is a government-controlled entity, such as a public sector undertaking or a state distribution company. Interested parties participate in a competitive bid process and the successful bidder enters into the off-taker’s standard form PPA. In earlier bidding processes, the off-taker would also facilitate land acquisition. However, such projects are now scarce.
• C&I RE Project: In this case, the off-taker is a private commercial or industrial entity, such as corporations. Unlike utility RE projects, the terms of PPA are negotiated. India is witnessing an increasing number of corporate RE projects being executed on ‘captive consumption’ model, i.e., the off-takers are owners of or equity investors in the RE project. This is due to the exemption from cross subsidy surcharge on the transmission of power available to the captive off-taker. Under this model, off-takers pool their resources to set up an RE project and consume power for their own use. If an investor is interested in opportunities for captive consumption of power (i.e., self-consumption), the proposed corporate structure of the target entity becomes a crucial consideration in order to determine minimum levels of investment and consumption of power by prospective investors for captive status.

Under Indian electricity laws, a power plant qualifies as a captive generating plant and therefore exempted from payment of cross subsidy surcharge if: (i) not less than 26% of the ownership is held by the captive user(s); and (ii) not less than 51% of the aggregate annual electricity generated in identified captive units is consumed for captive use, subject to certain conditions. Given the legal requirements, it becomes critical that the investment documents and power supply agreement that relate to a target entity with a captive generating plant have adequate provisions aimed at preserving the captive status of the project. Accordingly, these documents tend to include obligations on the investors to purchase the committed quantity of power and maintain adequate shareholding proportionate to the committed off-take obligation, and provisions that enable other investors to purchase power if one of the investor defaults on its obligation to purchase power such that the captive status of the project is not affected. Further, it is common to see transfer restrictions on securities, such as lock-in period, requirement to obtain prior consent of promoters before transferring securities after the lock-in period, mandatory sale and purchase of securities once the period of commitment to off-take power is complete. These obligations are usually backed by adequate indemnities. A careful review of these documents is crucial to determine the rights and obligations of various stakeholders and their alignment with legal requirements while undertaking a legal due diligence of a captive generating plant.

Largely, the scope of legal due diligence for utility and corporate RE projects remains the same, however, there are a few differences on how these projects are implemented. For instance, utility projects may be implemented as a part of a larger government-sanctioned solar or wind park with government support on land procurement and grid connectivity. However, utility projects do not offer the benefit of negotiating terms of PPA and are prone to litigation risks and late payments.

LEGAL DUE DILIGENCE: KEY CONSIDERATIONS

The scope of legal due diligence of an RE project typically consists of a review of the following:

• PPA: Following key terms are generally evaluated:

o What is the term of the PPA – whether it is a long-term arrangement?

o How much capacity is tied-up and whether there is a provision to sell excess capacity to a third party?

o Are there minimum guarantees for purchase or sale?

o Are there any conditions to be fulfilled prior to sale of power (generally, financial closure, land availability and grid connectivity) and what is the status of fulfilment?

o What is the scheduled commercial operations date by when the project is required to be commissioned and is the project on-track to achieve commissioning? What are the penalties (generally, liquidated damages) for late commissioning?

o Whether the tariff under the PPA is fixed? Are there situations in which tariff may change? Generally, PPAs have fixed tariffs which may be adjusted due to a ‘change in law’ event, i.e., a change in legal framework that may increase or decrease the project cost thereby necessitating tariff adjustment. For RE projects, this may include change in customs duty on import of solar modules or wind turbine generators.

o Is there an adequate payment security mechanism (such as a letter of credit, a bank guarantee or an escrow mechanism)?

o Are there any force majeure provisions? Is there a provision that excuses performance in such an event and is there a right to terminate the PPA if the project does not remain viable?

o Are there any measures to address change in applicable law?

o Are there any consent triggers for the proposed investment (change in shareholding or directors or management)?

o Termination events and consequences including provisions relating to the shareholders’ agreement in case of captive off-takers.

o Any special provisions regarding metering.

• Engineering, Procurement and Construction Contract (EPC contract): Following key terms are generally evaluated:

o Are all aspects of commissioning covered within the EPC contractor’s scope of work (such as design, supply of equipment and spares, land and grid connectivity) and whether the scope of services, operating standards and other relevant obligations are back-to-back with similar provisions under the PPA?

o Is the timeline for commissioning in line with the obligation to commence sale of power under the PPA? Are the liquidated damages for late commissioning sufficient to cover the obligations under the PPA and other project agreements? Are there adequate tests before the project would be considered commissioned?

o Whether there are any payment or performance securities?

o Is the contract price fixed? Similar to a PPA, EPC contracts are also generally entered on fixed prices with adjustments in certain unforeseen events such as ‘change in law’ or ‘force majeure’.

o Is there a guaranteed performance and what are the remedies available for shortfall in performance? Are there any limitations or caps on the liability of the EPC contractor?

o Are there industry standard warranties and protection against latent defects in equipment and spares? Is the defect liability period adequate?

o Is there a provision for early termination by the EPC contractor and are there any termination payments?

o Are there circumstances in which the EPC contractor can be excused from performance (force majeure) and are such provisions worded similarly in the PPA and other project agreements?

o Is sub-contracting allowed and whether the EPC contractor is liable for work that is sub-contracted?

o Is the EPC contractor required to maintain industry standard insurances and whether the contract price factors the premiums to be paid?

If the RE project is already commissioned at the time of the proposed investment (i.e., Stage III), the EPC contract would be reviewed from the limited perspective of surviving provisions, such as defect liability period, warranties, latent defects and supply of spares.

• Operations and Maintenance Contract (O&M contract): The scope of legal due diligence of an O&M contract is similar to an EPC contract. In addition, the term of the O&M contract is also reviewed to determine whether it covers the entire term of the PPA. If not, are there provisions for renewal? A key component of O&M contracts are service levels which measure standards of performance, such as energy performance ratio and response times, which should be reviewed to ensure guaranteed performance.
• Connection to Grid: An RE project requires connection to a grid to transport power to the delivery point. Generally, grid infrastructure is already available in the form of sub-stations and distribution/transmission lines to which the project is connected. At times, a project may require a dedicated electrical line to connect to the grid infrastructure, in which case the construction work may be outsourced to the EPC contractor with an obligation to obtain connectivity from state transmission utilities. The connectivity is documented in the form of connectivity letters or detailed agreements. Following key terms are generally evaluated:

o Whether the connectivity period corresponds to the term of the PPA?

o What is the timeline for commencing supply of power – does this correspond to the timeline for supply of power under the PPA and the commissioning date under the EPC contract?

o Are there any penalties for non-supply or over-supply of power?

o Is there a provision for early termination by the state transmission utility or central transmission utility?

o Conditions of withdrawal or termination.

• Permits and Registrations: Indian electricity laws do not have any licensing requirements for generation of power. However, a scheme is to be submitted for concurrence of the Central Electricity Authority (CEA) under Section 8(1) of the Electricity Act, 2003 for hydroelectric projects that exceed capital expenditure of: (i) INR 25 billion if the project is included in the National Electricity Plan (NEP) notified by the CEA from time to time or if the site for setting up the generating station has been allocated through a transparent bidding process in accordance with guidelines issued by the Central Government; or (ii) INR 10 billion for any other projects outside the purview of (i) above. Generally, following permits and registrations are required for setting up and operating an RE project (typically obtained in Stage II):

o Letters of award (in utility RE projects);

o Commissioning certificates issued by the off-takers;

o Energization certificates issued by electrical inspectors to power the equipment and electrical lines;

o License to work a factory; and

o Registrations under applicable labor legislations (such as provident fund and contract labor).

o Environmental permits and consents.

It is critical to review the term and validity of the permits and registrations. Whether they contain onerous conditions or obligations, and whether there have been instances of past or current breaches of the terms. Further, state-specific requirements must also be considered and verified – for instance, RE projects in Rajasthan, Gujarat and Haryana are required to be registered with the specified state agency.

• Real Estate: RE projects are set up on: (i) freehold land owned by the project proponent; (ii) leased land owned by government or a private party; or (iii) land for which a right to use permission has been granted by the government. In instances where an RE project is set up on freehold land, a title diligence must be conducted to establish clear title and to confirm whether any encumbrances exist. If any encumbrances have been created, consent requirements must be verified. It is also necessary to verify the category of freehold land – whether it is an agricultural land or industrial land. If the freehold land is agricultural, it would need to be converted to an industrial land.

In cases of leased land or where a right to use permission has been granted by the government, following key terms are generally evaluated:

o What is the end use of the land – has the land been made available for setting up an RE project? If not, the land use will need to be changed.

o If the project is being developed on leased land, what is the term of lease and whether it corresponds to the term of the PPA? If not, is there an option to renew the lease?

o If a right to use permission has been granted for the land on which the project is developed, what are the conditions for continued use and consequences of non-compliance with such conditions? Have there been any violations of any prescribed conditions?

o What are the decommissioning obligations upon expiry of the lease?

o Are there any consents required from the lessor for the proposed investment? Are there any transfer charges applicable pursuant to the proposed investment?

In addition, a right of way for setting up connectivity lines to connect the RE project to the grid may also be required.

• Financing: Generally, large scale RE projects are commissioned on 70:30 or 80:20 debt to equity ratio. In line with national priorities, the Reserve Bank of India has classified bank loans up to INR 350 million to RE-based power generators as priority sector lending to ensure ease of financing.

To fund the debt portion, the project proponent enters into term loan arrangements with banks and financial institutions. The security package could consist of a charge over the project assets, pledge over shares of the project proponent entity and corporate guarantees to be issued by the promoter entity. Following key terms are generally evaluated:

o Is there a prescribed debt to equity ratio that needs to be analyzed for the proposed investment?

o Is there a pledge over shares that are proposed to be purchased?

o What is the security package on the basis of which the loan is obtained?

o Is there any outstanding payment default and what would the consequences of such default be – does the lender have a right to step in and replace the project proponent?

o Are there cross-default provisions triggered by any of the project documents such as the EPC contract, O&M contract or the PPA?

o Whether all project proceeds and investments are required to be deposited in an escrow or trust and retention account?

o Are there any consents required from the lender for the proposed investment or other conditions under the financing documents, such as nomination of directors or other such privileges?

• Litigation: Generally, industry-wide disputes and litigations around tariff and change in law events form bulk of the litigation in RE projects. In addition, there may be disputes relating to land or contractual payments or even intellectual property infringement where cutting-edge technology is used (as seen most recently in the First Solar-Adani Green case). The implications of, and compliance with, applicable environmental protections directed through court orders (such as the Supreme Court order to protect the critically endangered Great Indian Bustard from power lines) should also be considered. It is critical to review the litigation documents to understand the risks and legal implications. In addition, it is advisable to conduct a public litigation search to get a comprehensive sense of the disputes that may impact the RE project.
• Corporate: Following key areas are generally covered – verification of the incorporation details, the charter documents, share capital and shareholding pattern of the entity (including title to shares), filing of returns with the jurisdictional registrar of companies and the Reserve Bank of India (in case of foreign investments), maintenance of statutory registers and other corporate compliances.

The list above is indicative and not exhaustive and there may be further information required to be reviewed based on the particular RE project or otherwise necessitated by the structure of the investment or commercial considerations.

CONCLUSION

The scope of legal due diligence and risk-assessment of an RE project depends on the stage and type of RE project and entails evaluation of, among other things, the project agreements, underlying land, permits and registrations, litigation and financing. Legal issues that are identified during diligence are addressed in the investment documents by including appropriate provisions in the form of representations and warranties, general and specific indemnities and actions to be undertaken prior to or post completion of the proposed investment, including price adjustments. A careful review of the information during the due diligence process and due addressal of identified issues is a key measure to mitigate any investment risk.