Compound interest on carrying cost upheld in power dispute

Adani Power had to install a pollution control unit. The bill came due — with interest on interest. A coal-fired power plant in Mundra, Gujarat, had just received an environmental clearance that came with a costly condition: install a Flue Gas Desulfurization (FGD) unit — a system that scrubs sulphur dioxide from emissions — or face shutdown. The year was 2014. The plant had been running since 2008, selling electricity to a state utility in Haryana under a long-term contract. Now, the economics of that contract were about to be rewritten.

The question that would travel all the way to the Supreme Court was deceptively simple: when a power generator spends money it never planned to spend, and the buyer is contractually obligated to repay that cost, does the repayment include compound interest — interest on the interest the generator itself had to pay to its bankers?

When the environmental clearance changed the deal

Adani Power (Mundra) Limited had signed Power Purchase Agreements (PPAs) with Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) in 2008. The deal: Adani would supply 1424 megawatts from its Mundra plant, and UHBVNL would pay a tariff calculated on agreed costs. Both sides knew the regulatory landscape could shift. So the PPA contained a standard "Change in Law" clause — Article 13 — which said that if a new law or regulation altered the generator's costs, the tariff would be adjusted to compensate.

In 2010, the Ministry of Environment, Forest and Climate Change imposed a new condition on the plant's environmental clearance: install an FGD unit. This was a classic Change in Law event. Adani Power spent heavily on the equipment. By 2014, the unit was operational. But the money to build it had come from banks, at commercial interest rates — and those rates were compound, meaning interest accrued on unpaid interest.

Adani Power went to the Central Electricity Regulatory Commission (CERC) — the central regulator for inter-state power sales — seeking compensation for the FGD cost. The CERC, in March 2018, allowed the compensation but denied something called "carrying cost" — the cost of having your money tied up while waiting for reimbursement. Adani appealed to the Appellate Tribunal for Electricity (APTEL).

Why the regulator said no to carrying cost

The CERC's reasoning was procedural. It said that the Change in Law compensation would be determined and paid from the date of its own order — March 2018 — not from 2014 when the FGD was actually installed. In the regulator's view, until it had quantified the amount, there was no "cost" to carry. Adani had simply spent money and waited; that waiting, the CERC implied, was a normal business risk.

But APTEL disagreed. In August 2021, it reversed the CERC on this point. The Tribunal held that the restitutionary principle embedded in Article 13.2 of the PPA — the clause requiring restoration of the affected party to the same economic position as if the Change in Law had never happened — meant that carrying cost must run from the date the expenditure was actually incurred, not from the date of the regulator's order. And crucially, APTEL said that carrying cost must include compound interest, because that is what Adani Power was actually paying to its banks.

UHBVNL accepted that it owed carrying cost. But it argued that the interest should be simple interest — a flat rate on the principal amount — not compound interest. The state utility appealed to the Supreme Court under Section 125 of the Electricity Act, 2003 (the provision allowing appeals from the electricity tribunal to the Supreme Court).

The Supreme Court's reading of the PPA

The Supreme Court bench — Justice N.V. Ramana, Justice Krishna Murari, and Justice Hima Kohli — delivered its judgment on August 24, 2022. The core of the dispute turned on the language of Article 13.2 of the PPA, which stated that the impact of a Change in Law "shall be computed… so as to restore the affected party to the same economic position as if the Change in Law had not occurred."

The Court held that this language was not merely a procedural instruction. It was a substantive restitutionary principle. Restitution, in law, means putting the wronged party back where they would have been. Here, the "wrong" was the regulatory change that forced Adani to spend money it never planned to spend. To restore Adani to its original economic position, the Court said, the compensation must account for the actual cost of the money Adani had to borrow — and that cost was compound interest.

"The generator had borrowed at compound interest rates from banks," the Court observed. "Simple interest would not restore it to the same economic position. It would leave a gap — the gap between what Adani paid its bankers and what UHBVNL repaid."

The Court also rejected UHBVNL's argument that compound interest should be limited to cases where the contract explicitly provided for it. The PPA did have a separate clause — Article 11.3.4 — that dealt with late payment surcharge (a penalty for delayed payments). But the Court distinguished that clause, saying it governed a different situation: a buyer's failure to pay an already-determined amount on time. The carrying cost here was not a penalty. It was restitution — a way to make Adani whole for money it had already spent.

Why the date mattered as much as the rate

A second question was equally contested: from what date should the carrying cost run? UHBVNL argued that it should run only from March 2018, when the CERC first determined the compensation amount. Before that, the argument went, the amount was uncertain — how could interest accrue on an unquantified sum?

The Supreme Court rejected this too. The restitutionary principle under Article 13.2, the Court said, requires restoration from the date the additional expenditure was actually incurred — in this case, 2014, when the FGD unit was installed and the money was spent. The fact that the exact amount was later determined by a regulator did not change the economic reality: Adani had been out of pocket since 2014. The regulator's order did not create the liability; it merely quantified a liability that already existed.

The Court cited its own earlier judgment in the same dispute — Uttar Haryana Bijli Vitran Nigam Ltd. v. Adani Power Ltd. (2019) 5 SCC 325 — where it had already held that carrying cost is an integral part of Change in Law compensation. That 2019 judgment had not specifically addressed whether the interest should be simple or compound. Now, the Court closed that gap.

What this means for power contracts

For every power generator operating under a PPA with a Change in Law clause, this judgment changes the arithmetic of compensation. It means that when a regulatory change forces a generator to spend money, the buyer cannot simply repay the principal years later and call it even. The buyer must also pay the time value of that money — and if the generator borrowed at compound rates, the buyer must match that rate.

For state utilities and distribution companies, the message is equally clear: delaying the determination of Change in Law compensation does not reduce the ultimate liability. The interest clock starts ticking from the date the generator actually incurs the cost, not from the date a regulator gets around to quantifying it.

THE PLAY: When drafting or litigating Change in Law clauses in power purchase agreements, ensure the restitutionary language explicitly ties compensation to the generator's actual cost of funds — including compound interest — and specifies that carrying cost runs from the date of expenditure, not the date of regulatory determination.

The Supreme Court dismissed UHBVNL's appeal as "meritless." The FGD unit had been running since 2014. The bill, with compound interest, was finally due.