CERC DSM Order 9/SM/2025: What It Means for Renewable Energy Generators

The Central Electricity Regulatory Commission (CERC) regulates the financial settlement of deviations between scheduled and actual energy flows on India's transmission grid. The mechanism — known as Deviation Settlement Mechanism (DSM) — is a critical piece of grid economics. It maintains grid frequency discipline, compensates the grid for imbalances, and creates financial incentives for accurate scheduling.

For thermal generators, DSM has always been a manageable cost. For wind and solar, however, the inherently variable nature of generation makes DSM exposure a structural risk. The CERC DSM (2nd Amendment) Regulations, 2025, notified through Order 9/SM/2025, tightens DSM norms for renewable generators — with effects taking hold from April 1, 2026.

DSM background — why it exists

India's electricity grid operates at a target frequency of 50 Hz. When generation exceeds consumption, frequency rises; when generation is below consumption, frequency falls. To keep the grid stable, every generator submits a day-ahead schedule (revised intra-day) committing to deliver a specific quantum of energy in each 15-minute time block.

When a generator's actual delivery differs from its schedule, it has caused a deviation. The DSM regulations specify how that deviation is settled financially — usually as a rate that becomes more punitive as the deviation grows, and that depends on the prevailing grid frequency at the time.

For dispatchable generators (coal, gas, hydro), maintaining schedule is operationally straightforward. For wind and solar, however, weather forecasting limits mean that intraday actual output often differs from forecast — and that deviation is fundamentally not under the generator's control. DSM has therefore been an ongoing pain point for renewable IPPs.

The 2nd Amendment — what changed

The CERC DSM (2nd Amendment) Regulations, 2025 introduce several technical changes, but two are commercially important:

1. Revision of the "X" value applicable to wind and solar generators for deviation settlement charging — with effect from April 1, 2026.
2. Tighter alignment of solar/wind DSM with regular generator norms, reducing the regulatory differentiation that wind and solar earlier enjoyed.

The amendment effectively signals that as wind and solar reach larger shares of total generation, the grid can no longer afford to treat their deviations leniently. Renewable IPPs are expected to invest in better forecasting, faster real-time rescheduling, and where economic, storage — to keep deviations within tighter bands.

The revised X value explained

The "X" value in CERC's DSM regulations defines the threshold beyond which deviations attract progressively higher penalty rates. Lower X values mean tighter discipline — generators have less room to deviate before penalty bands kick in.

For wind and solar sellers, the X value has historically been higher than for thermal generators, recognising the variability of renewable generation. The 2nd Amendment narrows this differential. The precise revised X value applicable from April 2026 is set out in the regulation; broadly, it means wind and solar generators face stricter deviation tolerance from that date onwards.

Financial impact on generators

For a typical 100 MW solar plant operating at 22% capacity utilisation, with average forecast error of around 8–12% (which is broadly typical for utility-scale solar in India), the additional annual DSM cost under the revised regime could run into several crore rupees. For wind plants, where forecast errors are typically larger (10–15%), the exposure can be proportionally higher.

The impact varies meaningfully by:

• Forecasting quality: Plants with in-house weather modelling and machine learning forecasting systems see far lower deviation penalties than those using third-party day-ahead forecasts only.
• Geographic concentration: Plants located in regions with stable weather (interior Rajasthan, Tamil Nadu coastal belt) face less exposure than those in transition zones with more variable conditions.
• Storage availability: Plants with co-located BESS can use storage to absorb intraday variability and bring actual output closer to schedule.

How IPPs can protect their margins

Several practical steps can mitigate the impact of the revised DSM regime:

1. Upgrade forecasting infrastructure. Multiple data sources (numerical weather prediction models, satellite imagery, on-site sensors) blended through machine learning can reduce forecast error materially. The cost of upgraded forecasting is typically recovered many times over in reduced DSM penalties.
2. Implement aggressive intraday rescheduling. CERC permits revisions to the schedule at frequent intervals throughout the day. Most renewable IPPs underutilise this — using only the minimum revision frequency rather than continually updating schedules as weather evolves.
3. Consider portfolio aggregation. When multiple plants are scheduled and settled together as a portfolio, individual plant deviations partially cancel out, reducing aggregate exposure. Pool-level DSM is meaningfully lower than the sum of plant-level DSM.
4. Evaluate co-located BESS. For new projects, including BESS at the design stage allows real-time output smoothing. Beyond DSM savings, the BESS opens up firming services and capacity payments under emerging market designs.
5. Restructure PPAs to pass through DSM exposure where possible. For new long-term PPAs, some C&I buyers are willing to take DSM risk in exchange for a slightly lower base tariff. This is a more sustainable allocation of risk than IPPs bearing it entirely.

The CERC DSM 2nd Amendment is not a punitive measure — it reflects the practical reality that as wind and solar scale to 30%+ of India's electricity, the grid simply cannot absorb the same level of variability that smaller renewable shares allowed. IPPs that invest now in forecasting, scheduling discipline, and storage will not only protect their margins under the new regime but will be positioned for a future where firmed renewable supply commands a premium over intermittent generation.

For C&I open access consumers procuring under long-term renewable PPAs, the DSM impact ultimately flows back into PPA tariffs over the long term. Understanding the DSM regime is therefore relevant not just for generators but for consumers structuring multi-year renewable contracts.