India’s power system is entering a more demanding phase of renewable energy integration. While the policy focus over the past decade has largely been on rapidly adding renewable energy capacity, the growing share of variable renewable energy is shifting attention towards operational efficiency and grid reliability. As renewable penetration increases, grid operations are becoming increasingly sensitive to forecasting accuracy, scheduling discipline, balancing capability, storage integration and overall operational predictability.
Reflecting this transition, the Central Electricity Regulatory Commission (CERC) has issued the draft CERC (Deviation Settlement Mechanism and Related Matters) (Third Amendment) Regulations, 2026. The draft amendments introduce important changes to the demand-side mechanism (DSM) framework, including a shift to daily market reference prices for deviation settlement, alignment of deviation charges for future wind and solar projects with conventional generators, and dedicated provisions for energy storage systems and pumped hydro projects. These measures seek to improve market efficiency, strengthen grid discipline and support the integration of emerging technologies.
Background
The DSM Regulations, 2024, came into force in September 2024, replacing the earlier deviation settlement framework. The first amendment, notified in December 2024, primarily dealt with the treatment of infirm power. Subsequently, the second amendment, issued in June 2025, addressed concerns raised by thermal power generators regarding fuel cost recovery during testing and trial operation.
Following these amendments, the CERC received representations from renewable energy associations, energy storage developers, hydro developers and other stakeholders on various provisions of the regulations. It also issued directions in its suo motu proceedings regarding the future treatment of renewable energy deviations.
Further, Grid Controller of India Limited suggested modifications relating to the schedule for payment of deviation charges in line with the detailed procedures prepared by the National Load Despatch Centre (NLDC) for implementing the National Deviation and Ancillary Services Pool Account. Against this backdrop, the CERC has recently proposed the third amendment. The elements of third amendment are as follows:
Reference charge rate
Under the DSM Regulations, 2024, the contract rate and reference charge rate for captive generating plants (CGPs) and third-party open access transactions are linked to the weighted average area clearing price (ACP) of the integrated day-ahead market (IDAM) for each time block. The CERC noted that since CGPs do not have a regulatory-approved contract price, linking the applicable rate to market prices is appropriate.
To simplify the methodology and provide a uniform basis for DSM settlement, the draft amendment has proposed to determine the applicable rate based on the daily weighted average ACP of the IDAM segments of all power exchanges instead of the time-block-wise market price.
The use of a daily average price may also moderate the impact of short-term market volatility and reduce settlement uncertainty for captive generators and open access consumers.
Deviation charges for WS sellers
The CERC has observed that the challenges associated with the variability and intermittency of renewable energy are expected to be progressively addressed through improvements in forecasting techniques, scheduling practices, operational experience and enabling technologies.
As the renewable energy sector matures, new renewable projects should demonstrate the same level of forecasting accuracy, scheduling discipline and grid compliance as conventional generators. Based on this, the commission has proposed to align the deviation charges applicable to wind and solar (WS) sellers with those applicable to general sellers.
Accordingly, the revised deviation charges will apply to projects awarded through bidding processes with tendering or bid submission dates on or after January 1, 2027, and to other projects commissioned on or after January 1, 2029. Existing projects will continue under the current framework, ensuring a gradual transition to the revised regime. The amendment seeks to provide regulatory certainty to developers and procurers by clearly specifying the applicability criteria and timelines. Further, the move is expected to strengthen grid discipline, improve scheduling accuracy and support the reliable integration of larger shares of renewable energy into the power system.
Deviation charges for pumped hydro storage
The CERC observed that stand-alone pumped storage plants (PSPs) operating under the cost-plus tariff regime do not have an applicable contract rate or reference charge rate, as their annual fixed cost is recovered entirely through fixed or capacity charges. Further, the energy required for charging these projects is arranged by the beneficiaries, resulting in the absence of an associated energy contract rate. In the absence of a suitable reference rate under the existing provisions, the commission has proposed to use the energy charge rate specified under the tariff regulations for the calculation of deviation charges.
The CERC has also proposed to specify the energy charge rate under Regulation 66(3) of the CERC (Terms and Conditions of Tariff) Regulations, 2024, for the computation of deviation charges for standalone PSPs whose tariff is determined under Section 62 of the Electricity Act, 2003. The proposal follows representations from hydro generators seeking clarity on the applicable rate for such projects under the existing DSM framework.
The amendment is expected to provide regulatory clarity and ensure that deviation charges for such projects remain aligned with the applicable energy charge rate under the cost-plus tariff framework.
Charges for injection of infirm power
The existing DSM Regulations, 2024, do not contain specific provisions for the treatment of infirm power injected into the grid by stand-alone energy storage systems (ESS) during the period between first synchronisation and successful completion of the trial run. Renewable energy associations and ESS developers have represented to the commission that stand-alone ESS projects are required to draw energy from the grid or other sources for first-time charging and testing before the commencement of commercial operations. Any energy injected during this period involves an underlying cost for the developer, but the existing regulations do not provide any compensation mechanism.
The CERC noted that grid security and reliability remain paramount and that scheduling of infirm power should not be permitted before the successful completion of trial operations. At the same time, it recognised that stand-alone ESS projects incur costs during testing and first-time charging. The commission also observed that any compensation for such injections would be recovered through the DSM pool and could impose additional costs on other grid participants. Therefore, the need to support ESS developers had to be balanced against the interests of other stakeholders.
Accordingly, the commission has proposed to provide compensation for infirm power injected by stand-alone ESS projects during the testing period. The payment would be linked to the normal rate of deviation charges and would be subject to a ceiling of Rs 2 per kWh. The proposal is based on an analysis of integrated day-ahead market prices between April 2025 and March 2026, which showed that prices during solar hours generally remained below this level. The proposed amendment is expected to provide reasonable compensation to ESS developers, while limiting the financial impact on other grid participants.
Flexible payment timelines
Under the existing regulations, payments must generally be made within 10 days of the issuance of deviation charge statements by regional power committees.
However, Regulation 9(4) of the DSM Regulations requires the National Load Despatch Centre (NLDC) to prepare detailed procedures for implementation, maintenance and operation of the National Deviation and Ancillary Services Pool Account.
Since these detailed procedures have now been issued, the commission has proposed to replace the fixed 10-day payment period with timelines specified in the detailed procedures. The proposed changes aim to ensure consistency between the DSM Regulations and the detailed procedure issued by the NLDC, while also providing greater operational flexibility in the settlement and payment process.
Conclusion
The draft DSM Third Amendment Regulations reflect the evolving nature of India’s electricity sector. The proposed amendments seek to accommodate emerging technologies such as energy storage systems, strengthen scheduling discipline among renewable generators and improve the operational efficiency of deviation settlements.
The gradual alignment of renewable generators with conventional generators represents an important regulatory signal regarding the future direction of the power market. Similarly, the recognition of storage-specific operational requirements indicates the growing importance of flexibility resources in the electricity system.
As renewable penetration increases and new technologies gain prominence, the DSM framework is likely to continue evolving to support grid reliability, market efficiency and equitable treatment of all market participants.
Aastha Sharma
