RCO vs RPO: Muddling Regulatory Waters

By – Avijeet Lala, Devank Maheshwari and Asmita Narula

Table of Contents

Introduction

The Renewable Consumption Obligation (“RCO”) framework, introduced by way of 2022 amendment to the Energy Conservation Act, 2001 (“EC Act”) marked a significant step towards greening the industrial energy (“RE”) consumption in India. However, the recently issued ‘Revised Draft Gazette Notification on Renewable Consumption Obligation (RCO) under the Energy Conservation Act, 2001’ (“Draft RCO Notification”)¹ by the Ministry of Power (“MOP”) reveals important policy misalignments and practical concerns. 

From the one-size-fits-all treatment of designated consumers, to the lack of clarity on feedstock and buyout price, and the frictions with existing RPO regulations, the RCO framework risks imposing disproportionate burdens and creating regulatory uncertainty. This piece examines the Draft RCO Notification through that lens, highlighting statutory gaps, inconsistencies with legislative intent, and potential compliance challenges for the industry. Not only does the Draft RCO Notification make substantive changes to the current RCO Notification dated 20.10.2023, it also enforces them retrospectively with effect from 01.04.2024. 

One-Size-Fits-All Approach: Who Are the ‘Designated Consumers’?

The RCO framework specifies the minimum share of electrical energy that must be consumed from renewable energy sources as percentage of total electrical energy consumption, also referred to as the RCO. 

As per the Draft RCO Notification, RCO extends to the following classes of entities/ consumers, that are specified as ‘designated consumers’:

1. Distribution licensees
2. Open access consumers
3. Captive users

In the context of open access consumers and captive users, it has been clarified that the RCO requirement would only apply to electricity consumption from sources other than distribution licensee. 

It is important to note that the Ministry of Power has specified the list of designated consumers in terms of S.O. 394 (E) dated 12.03.2007, as amended from time to time.² The list includes a total of 26 notified sectors, while also specifying the yearly threshold energy consumption for triggering the compliances under the EC Act (“DC List”). The Draft RCO Notification specifies uniform renewable energy consumption percentages for broad sectors / categories of consumers with no sector specific or unit specific variations. This categorization of designated consumers is problematic due to a variety of reasons:

1. Ignores heterogeneity within broad sectors

Given India’s diverse industrial base, there are wide variations within a sector that the DC List overlooks for uniform RCO targets. Take the example of textile sector. a modern composite mill with access to capital may install captive solar or wind, but a smaller unit in a different region may struggle with costs or grid limitations. These two units may also vary massively in their baseline RE consumption. A low baseline would imply a harder, and presumably more expensive path to incorporate RE. 

Some other variables that would contribute to intra-sector variations are usage of technology, scale, geography, financial capacity, grid connectivity, nature of processes of sub-sector activity, degree of automation/ manpower intensity, exposure to markets and global policy shifts etc. 

This non-consideration of differences at the unit level is clearly unreasonable, manifestly arbitrary and in the crosshairs of Article 14 of the Constitution. The Draft RCO Notification, read with the DC List, treats fundamentally unequal entities in the same manner for meeting the RCO targets, thereby a conspicuous absence of rational classification and lack of intelligible differentia in designating the industrial units as designated consumers.

The law is settled that a regulation that ignores relevant differences among regulated parties can be struck down for failing the test of reasonable classification. 

2. Non-compliance with statutory criteria for specifying designated consumers under Section 14(e)

Treating all designated consumers as a single homogeneous class for the purposes of RCO targets is inconsistent with the statutory scheme of the EC Act. Section 14(e) expressly requires the Central Government to have regard to the intensity of energy consumed, the amount of investment needed to switch to efficient technology, the financial capacity of the industry, and the availability of energy-efficient machinery in specifying a user or class of users as designated consumers. 

These criteria are designed to ensure that obligations imposed on designated consumers remain rational, proportionate, and tailored to sectoral and unit-specific realities.

By imposing a uniform, sector-wide obligation without reflecting these considerations, the Draft RCO Notifications fail to apply the statutory tests built into Section 14(e).

It is significant that such individual consumer specific norms have been previously specified under the Energy Conservation (Energy Consumption Norms and Standards for Designated Consumers, Form, Time within which, and Manner of Preparation and Implementation of Scheme, Procedure for Issue of Energy Savings Certificate and Value of Per Metric Ton of Oil Equivalent of Energy Consumed) Rules, 2012 (“2012 Rules”). 

Rule 3 of the 2012 Rules specifically provides that “the energy consumption norms and standards shall be specific for every designated consumer and shall be determined as under….”.³ Therefore, this provision not only casts a duty to prescribe designated consumer specific norms, but also then lists out the methodology to arrive at the same. This is correctly in deference to the legislative intent of undertaking unit level analysis in terms of the criteria provided in Section 14(e). 

3. Denial of Differentiation: Section 14(x) and the “May” vs “Shall” Debate

Section 14(x) of the EC Act empowers the Government to prescribe different shares of non-fossil consumption for different designated consumers and even for different types of non-fossil sources. This reflects the legislative intent to allow flexibility and differentiation across designated consumers. 

A blanket imposition of RCO obligations runs contrary to this legislative design. It is our view that the power to specify separate RCO targets must be seen in the mandatory sense. Even the word ‘may’ appearing in Section 14(x) of the EC Act should be read in a mandatory sense, and not as a matter of discretion. 

The Supreme Court in Smt. Bachahan Devi & Anr v. Nagar Nigam, Gorakhpur & Anr [Appeal (Civil) no. 992 of 2008] has observed the following regarding interpretation of ‘may’ as a mandatory obligation:

“In some cases, the legislature may use the word may’ as a matter of pure conventional courtesy and yet intend a mandatory force. In order, therefore, to interpret the legal import of the word may’, the court has to consider various factors, namely, the object and the scheme of the Act, the context and the background against which the words have been used, the purpose and the advantages sought to be achieved by the use of this word, and the like. It is equally well-settled that where the word may’ involves a discretion coupled with an obligation or where it confers a positive benefit to a general class of subjects in a utility Act, or where the court advances a remedy and suppresses the mischief, or where giving the words directory significance would defeat the very object of the Act, the word may’ should be interpreted to convey a mandatory force.”

As noted above, if “may” in Section 14(x) were to be treated as purely permissive, the consequence would be that the Government could, as it has in the Draft RCO Notification, impose a blanket uniform obligation across all designated consumers. This would defeat the object Section 14(x) read with 14(e), allow arbitrary treatment of unequals, and undermine the broader scheme of the EC Act. It is therefore essential that the Government specifies unit specific RCO targets having due regard to the factors mentioned in Section 14(e) of the EC Act. 

The Feedstock Confusion: Missed Opportunity in the Draft RCO Notification

Section 14 (x) of the EC Act stipulates that the Central Government has the power to specify minimum share of consumption of non-fossil sources by designated consumers as energy or feedstock. Thus, Section 14 (x) allows a designated consumer to meet its RCO compliance from non-fossil sources, which includes renewable sources of energy as well as non-fossil feedstock.

The Draft RCO Notification neither refers to ‘feedstock’ nor ‘non-fossil sources’, which have been statutorily contemplated under Section 14 (x). Even within ‘non-fossil’ energy, the Draft RCO Notification seems to equate it to renewable energy only, excluding other non-fossil options. It is important to state that Section 2 (h) of the EC Act defines ‘energy’ as any form of energy derived from fossil fuels or non-fossil sources or renewable sources, which clarifies the intention of the legislature to treat these terms as distinct from each other. All renewable sources are non-fossil sources, but all non-fossil sources are not renewable sources. The term ‘non-fossil sources’ will encompass all the conventional renewable energy sources, and also include other renewable alternatives like biogas, biomass, steam, municipal waste, bagasse etc., which can be utilized as feedstock / fuel in the industrial processes.

Furthermore, the Draft RCO Notification should be in furtherance of the purpose and objective of introduction of RCO targets under the EC Act. The purpose and objective of utilising the sources stipulated in the Draft RCO Notification and other renewable alternatives, which have not been included, is the same i.e., more efficient utilisation of energy, environmental sustainability, preservation of resources and reduction in the emission intensity. In this light, the designated consumers should be allowed to meet the specified total RCO from any ‘non-fossil source’ and not only from ‘renewable energy source’.

Even though certain clauses of the Draft RCO Notification [Note 5 and Clause 7] deal with feedstock in a limited manner, it requires more inclusivity and clarity. In the above-mentioned provisions, there is lack of clarity with respect to consideration of the following kinds of feedstock for meeting the RCO compliance, namely solid sludge from textile and municipal waste, ETP (effluent treatment plant) sludge, tail gas, and steam generated from waste-heat-recovery from the blast furnace and coke oven.

Group Compliance: Promise Without Clarity

The Draft RCO Notification provides that RCO compliance for multiple designated consumers under common control, as defined in the Companies Act, 2013, may be considered on an aggregate basis at the Holding Company level. However, the same requires further clarification.

There may be a case where the Holding Company has both designated consumer units and non-designated consumer units under common control. Under Clause 10, the Holding Company should be permitted to consider the consumption of non-fossil and renewable sources as energy or feedstock by its non-designated consumers for its RCO compliance as well.

Similarly, what if a firm’s plants are spread across different states and regulatory jurisdictions? In such cases, can the compliance be aggregate, or unit specific? The absence of guidance could create interpretative disputes. It must also be noted that although the RPO mechanism prescribed under the regulations issued by the State Commissions have lately been aligned with the RCO targets, it does not allow for cross-entity fungibility.

The result is a regulatory inconsistency as the RCO framework explicitly envisages aggregation of obligations across entities under common control, while RPO mechanism under the regulations framed by the State Commissions insist on compliance at the unit level. This divergence risks creating both confusion and uneven enforcement.

Uncertainty Around Buyout Price Mechanism

Under the Draft RPO Regulations, one of the ways designated consumers may make up for the shortfall in complying with RCO targets is through payment of buyout price fixed by the CERC. 

The Draft RCO Notification introduces the concept of buyout price without providing any clarity on the methodology for fixing such a price, the frequency of its revision, or the benchmarks that will guide the same. Several questions remain unanswered- will it be linked to the prevailing REC market, the average cost of renewable procurement, or to the penalties prescribed under the EC Act?

It may also be argued that the very concept of buyout price may be in teeth of the EC Act as it does not explicitly empower CERC to determine a buyout price for non-compliance with RCO.

Retrospective Applicability: A Legal and Compliance Minefield

One of the more contentious aspects of the Draft RCO Notification is its retrospective applicability with effect from 01.04.2024, effectively dating back several months to the start of the last financial year. 

At the very outset, it must be noted that the parent statute, the EC Act does not contain any enabling provision that expressly empowers the Central Government to issue subordinate legislation with retrospective effect. In the absence of such authority, the retrospective operation of the Draft RCO Notification can be argued to be ultra vires the EC Act.

Courts have consistently held that subordinate legislation cannot operate retrospectively unless the parent statute explicitly permits it. The Supreme Court in Hukam Chand v. Union of India and Ors. [AIR 1972 SC 2427] has held the following with respect to retrospective application of subordinate legislation:

“Likewise, if there was nothing in the language of section 40 to empower the Central Government either expressly or by necessary implication, to make a rule retroactively, the Central Government would be acting in excess of its power if it gave retrospective effect to any rule. The underlying principle is that unlike Sovereign Legislature which has power to enact laws with retrospective operation, authority vested with the power of making subordinate legislation has to act within the limits of its power and cannot transgress the same. The initial difference between subordinate legislation and the statute laws lies in the fact that a subordinate law making body is bound by the terms of its delegated or derived authority and that court of law, as a general rule, will not give effect to the rules, thus made, unless satisfied that all the conditions precedent to the validity of the rules have been fulfilled (see Craies on Statute Law,p. 297 Sixth Edition). The learned Solicitor General has not been able to refer to anything in section 40 from which power of the Central Government to make retrospective rules may be inferred. In the absence of any such power, the Central Government, in our view, acted in excess of its power in so far as it gave retrospective effect to the Explanation to rule- 49. The Explanation, in our opinion, could not operate retrospectively and would be effective for the future from the, date it was added in February 1960.”

Apart from the above, the Draft RCO Notification introduces substantive changes compared to the earlier notification dated 20.10.2023 including changes in definitions, treatment of feedstock, aggregation provisions, fungibility rules, and compliance mechanisms etc. Applying these revised norms to the last fiscal year would expose designated consumers to obligations they could not have anticipated at the time. Such a measure would be highly unfair and arbitrary, let along ultra vires the parent statute. 

Finally, the retrospectivity clause itself is self-contradictory and vague. While it deems the RCO notification effective from 01.04.2024, it simultaneously states that all “actions or things done during the existing notifications shall be protected.” If actions under the earlier framework are fully protected, the practical utility of giving the new notification retrospective force is unclear. Does it mean that consumers are expected to retrospectively re-calculate compliance for FY 2024–25 under the revised framework, or are they immune because their prior actions are protected? The drafting creates uncertainty, which is particularly problematic in a regulatory regime that is compliance intensive.

RCO vs. RPO: Two Parallel Regulatory Universes

India now runs two overlapping regimes that both require minimum uptake of clean energy: 

1. Renewable Purchase Obligation (“RPO”) under the Electricity Act, 2003 implemented by State Commissions through their own RPO regulations; and 

2. RCO under the EC Act read with RCO notifications issued thereunder.

It is to be noted that with the fixing of the RCO targets through FY 2029-30 under the RCO Notification dated 20.10.2023, several State Commissions such as those in Maharashtra⁴, Bihar⁵, Assam⁶, Gujarat⁷, Jharkhand⁸, Meghalaya⁹ and Uttarakhand¹⁰ have aligned their RPO targets with the current levels of RCO targets. Other states such as Tamil Nadu¹¹ and Andhra Pradesh¹² have currently released draft notifications to the same effect.

However, the alignment with the RCO regime has merely been in terms of the yearly consumption targets and broader harmonization between RPO and RCO mechanisms remains wanting. 

For the sake of illustration, the following table shows the differences in the RCO regime and the recently issued RPO regulations in Bihar:

Issue	EC Act + Draft RCO Notification	Bihar RPO Regulations, 2025
Statutory anchor	Section 14(x) of Energy Conservation Act, 2001	Section 86(1)(e) of Electricity Act, 2003
Covered Entities	Designated consumers include distribution licensees, open access consumers, and captive users.Also, a list of designated consumers in the form of notified sectors with minimum yearly power consumption is specified in terms of S.O. 394 (E) dated 12.03.2007, as amended from time to time.	Obligated entities including:I) Distribution licenseeII)Any other person consuming electricity:(a)generated from conventional Captive Generating Plant having capacity of 1MW and above for his own use.(b)through cogeneration from sources other than renewable sources.(c)By procurement from conventional electricity generation through Open Access and for third party sale.
Source fungibility	Obligations under Wind, Hydro, and Other renewable energy components are fungible (shortfalls in one can be met by surpluses from others), while distributed renewable energy is non-fungible for its shortfall but its surplus can offset other components.	Shortfall in wind component can b met only with hydro component and vice versa. It also does not provide that excess DRE can be counted towards other components.
Group Compliance	Allows compliance to be aggregated at Holding Co. level for multiple DCs under common control	Compliance at entity/unit level and no provision for group-level set-off or compliance.
Compliance Routes	(i) Direct RE consumption; (ii) REC purchase (including under VPPAs); (iii) Buyout price fixed by CERC	(i) Direct RE procurement; (ii) REC purchase per CERC REC Regs; No buyout clause
Monitoring Agency	Bureau of Energy Efficiency (BEE)	Bihar Renewable Energy Development Agency (BREDA) as State Agency
Penalty Provision	Non-compliance penalty under Section 26 of the EC Act post adjudication by Adjudicating Officer under Section 27	Non-compliance penalty under Section 142 of the Electricity Act and payment into penalty fund created by BERS under the Bihar RE policy 2025.

Therefore, in terms of the above table, it can be seen that the RPO and RCO mechanisms may differ significantly, inviting issues of compliance. Even at the most fundamental level, the scope of ‘designated consumers’ under the RCO mechanism does not perfectly coincide with the ‘obligated entities’ under the RPO regime. Unlike the DC List under the purview of the EC Act, that includes certain specified sectors, coupled with minimum consumption thresholds, the RPO regime casts a wider net and includes all entities irrespective of the sectors they belong to or the minimum level of consumption.    

This fundamental asymmetry means that the two regimes will never map perfectly. An establishment could be outside the scope of RCO because it is not a ‘designated consumer’ under the EC Act yet simultaneously fall within the RPO regime as an ‘obligated entity’ under State Commission regulations. Conversely, a large industrial consumer listed as a designated consumer under the EC Act may face different obligations under RCO and RPO with presumably separate rules around RE sources and their inter-se fungibility, group compliance etc. This will essentially force the industry to maintain two ledgers for separate RCO and RPO compliances. 

This shall cause dual compliance exposure that is hostile to effective regulation as well as ease of doing business.  It is not far fetched to imagine a situation wherein an entity is compliance under one of the mechanisms but non-compliant under the other one. Therefore, it is imperative that the divergences in the RPO and RCO mechanisms are acknowledged and steps taken to harmonize the same.

FAQs

References –

1. Notification no. 09/13/2021 – RCM Part (1) dated 05.08.2025. Note that the last date for submission of stakeholder comments to the Draft RCO Notification was 19.08.2025.
2. As amended by S.O.3542(E) dated 29.12.2015; S.O 1388(E) dated 02.052017; S.O 3600(E) 15.11. 2017; S.O. 968(E) dated 22.02.2019; S.O 2147(E) dated 17.06.2020; S.O 3445(E) dated 28.09.2020; S.O.4165(E) dated 07.09.2022; S.O 2523(E) dated 06.06.2023.
3. In terms of S.O. 4552(E) dated 26.09.2022, the Ministry of Power has specified designated consumer – wise energy consumption norms and standards for the period from 2022-23 to 2024-25.
4. MERC (Renewable Purchase Obligation, its Compliance, and Implementation of Renewable Energy Certificate Framework) (First Amendment) Regulations, 2024.
5. BERC (Renewable Purchase Obligations, its Compliance & REC Framework Implementation) Regulations, 2025
6. AERC (Renewable Purchase Obligation and its Compliance) (Fourth Amendment) Regulations, 2024
7. GERC (Procurement of Energy from Renewable Sources) Regulations, 2025
8. JSERC (Renewable Energy Purchase Obligation) (Second Amendment) Regulations, 2024
9. MSERC (Renewable Energy Purchase Obligation & its Compliance) (3rd Amendment) Regulations, 2024
10. UERC (Tariff and Other Terms for Supply of Electricity from Renewable Energy Sources and non-fossil fuel based Co-generating Stations) (First Amendment) Regulations, 2024
11. Draft TNERC (Renewable Energy Purchase Obligation) (Renewable Energy Purchase Obligation) (Amendment) Regulation, 2025
12. Draft APSERC (Renewable Purchase Obligation and its compliance) Regulation (Third Amendment)2025
    
    

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