Mapping the Vitality of Environmental Impact Assessment in Renewable Energy Projects: An Indian Perspective

– Simran Lunagariya and Niveditha R

Introduction

Foreign Direct Investment (“FDI”) operations, which are defined by foreign management and control of a commercial firm in another state, can create environmental issues, particularly in developing countries. FDI projects and environmental goals often clash leading to severe implications on the environment. Environmental Impact Assessment (“EIA”) plays a crucial role in achieving the environmental objectives in such investments. Essentially, it is a pre-investment technique for appraising probable environmental impacts induced by an investment project. In the Indian context, environmental laws demand strict compliance. However, the draft EIA notification 2020 under Environment Protection act, 1986 (“EP Act”) is significantly liberal. This can prove to be detrimental to environment protection and the investors’ interest. One of the instances can be seen in the value chain of the Renewable Energy (“RE”) sector.

RE sector is considered to be one of the most sustainable sectors of energy production. The primary goal of India is to be carbon-free by 2070. This goal can be traced back to cases of power outages in October 2021 caused by a lack of coal in several states of India. For attaining its goal, the Government of India has allowed 100% FDI through an “automatic route” to the RE sector which has led to significant foreign investment in the sector. However, a fundamental question about the environmentally harmful value chain of the renewable energy sector remains unaddressed. The purpose of this blog is to highlight the value chain disruptions in the RE sector and to emphasize the need for EIA in RE sector projects. It also attempts to analyze how EIA works as a mechanism to prevent investment disputes in the RE sector.

The Conundrum of EIA in the RE Sector

While RE companies are often included in investment portfolios owing to their environmentally friendly activities, RE projects may be derailed because of supply chain issues. RE sector’s value chain may harm local biodiversity. The said environmental harm includes; changes harming the ecosystem and social well-being, water-related conflicts like groundwater depletion in case of solar panel operation and mismanagement of allocation of wasteland. The adverse effects of RE projects may cause losing the confidence of stakeholders (including investors and employees) and the general public residing in the vicinity of the project. Consequently, an apprehension is raised as to how the RE sector will remain sustainable in long term.  The quandary surrounding EIA in the RE sector can be understood by referring to the following case studies.

Case Study 1: The local farmers around the Pavagada Solar Park were apprehensive about the changes in the quality of the land. The disruption caused entailed cement beds being put 8 feet underground to support the solar panels. The agreement was silent about taking the cement beds after the end of the solar panel’s use. The estimated budget for the solar plant was a whopping sum of Rs. 16,500 crores. When such significant money is invested, liberal EIA proves to be detrimental to the investors and public.

Case Study 2: The building of wind farms near forest areas is also controversial. The subsequent report of Offshore Wind Feasibility Studies conducted for Gujarat and Tamil Nadu suggest that wind farms are installed without the approval of people in the area and necessary safeguards. The communities that use the land for livelihood are also prohibited to enter the area. Moreover, the construction affects endangered species and the offshore wind harms marine biodiversity.

Legal Underpinning for EIA in India

The laws that foster the development of the RE sector are three-fold.

Firstly, the Land Acquisition, Rehabilitation, and Resettlement Act, 2013 (“LARR Act”) deals with the environmental and social consequences of land acquisition. The Right to Fair Compensation and Transparency is enshrined in the LARR Act.  It imposes strict compliances on private landowners and mandates the completion of Social Impact Assessments (“SIAs”) within 6 months from the start of the purchase process. Additionally, it calls for securing consent from the land owners before starting the project. The process of SIA and updating the land records after receiving consent from land owners takes up to 4 years and causes a delay in the implementation of the project. Therefore, Central Government has permitted states along with NITI Aayog to explore alternate channels of acquisition for RE initiatives.  One such example is the Karnataka Solar Policy wherein the District Commissioner has the authority to reclassify agricultural land.  This authority in the form of an alternate channel has enabled RE actors to circumvent the LARR rules.

Secondly, the EIA notification of 2006 and 2020 provides rules for environmental approvals for projects. It is pertinent to note that on-shore wind, small hydro (up to 25 MW), biomass (up to 15 MW) and waste to energy projects may avoid conducting an EIA provided that they are not situated in an eco-sensitive area, which is mostly the case. However, the exemption does not apply to the manufacturing of RE equipment. Furthermore, the EP Act, 1986  ensures compliance with environmental pollution standards and the prevention of environmental harm that needs to be followed by all RE projects. By bringing other legislation like the Clean Air Act and Water Act under the umbrella legislation of the EP Act,  contradictions, if any, are removed and compliance is made easier.

Thirdly, infrastructure users in RE projects are obliged to get a No Objection Certificate before extracting groundwater. Particularly, operators and maintainers of the solar panels. The Central Ground Water Authority (“CGWA”) established under the Ministry of Jal Shakti is the appropriate authority to check compliance. Therefore, it can be observed that there lies a strict contradiction between the draft EIA and notification and the relevant laws.

Resolution of Investment Disputes in the RE Sector

The Bilateral Investment Treaty (“BIT”) dispute resolution process in India is based on the principle of exhaustion of local remedies (“ELR”). Before having recourse to international arbitration, investors are expected to exhaust the domestic remedies available to them under the Model BIT. In the absence of a BIT, investors may approach international ad hoc arbitration where compliance requirements of the host country are usually analyzed. Again, proper implementation of EIA would help in preventing investment disputes in the RE sector.

EIA Mechanism as Investment Dispute Resolution Mechanism

EIA is mandated by a variety of jurisdictions. These include the National Environment Policy Act 1969 in the US, and developmental processes in Canada, Australia, Columbia, Philippines and New Zealand. The legislations allow EIA to act as a dispute-prevention and legal instrument. Furthermore, EIA includes consultation with local communities to ensure that the negative repercussions of such investment activities do not hurt the host state and its residents. The purpose of public consultation is to solicit feedback from important stakeholder groups, such as NGOs, agencies, and interest groups, on the proposed development.

Agreement on the laws regulating foreign investment normally occurs at the national level, and the participation of local players depends solely on the policies of the host country. Developing countries like India often include weak policies and regulations to attract more foreign investors.

In India, laws like LARR Act and EP Act call for environmental compliances under SIA and consultation from local communities. On the contrary, the EIA notification exempts all B2 category industries from public consultation. Additionally, the 100% automatic route under the FDI policy for the RE sector exempts the investors from environmental compliances. The exemption from public involvement and pre-clearance processes is largely responsible for the repercussions that renewable energy projects have on the environment, biodiversity, and local communities’ way of life. Thus, the setting up of windmill and solar power projects should include public participation and pre-clearance mechanisms as a part of EIA.  Public involvement helps solve socioeconomic challenges by allowing decision-makers to prioritise environmental compensation measures based on public facts and viewpoints. Lastly, EIA acts as a pre-investment protection regime for the investor in case of any investment dispute resulting in future. As a result, no project can prove to be detrimental to investors, the environment and the public at large.

Environmental Cost-Benefit Analysis

Valuing resources can indicate how valuable it is to safeguard them. For the same, environmental considerations are to be included while conducting an Economic Cost-Benefit Analysis (“CBA”). A CBA ensures accountability and reduces uncertainty. If a project has negative environmental impacts, a strict EIA would help in assessing these impacts and mitigating them. As a result of certainty, investor confidence is boosted.

Thanks to the automatic route policy, renewal energy projects in India attract numerous foreign investments. Owing to the policy, FDI inflow grew by 168% in the first quarter of FY 2021-22 compared to corresponding period in FY 2020-21. In the recent times, Ayana Renewable has invested Rs. 1200 cr. in wind and solar projects, Torrent Power has acquired a 50 MW solar plant for Rs. 416 cr. and GEF Capital Partners has raised over $200 mn. to invest in clean energy. In India, where $196.98 bn worth projects are underway, for conducting a CBA, a stringent EIA is imperative.

Conclusion

Even though foreign investment in the RE sector will help India go a long way in attaining its zero carbon emission goals, its environmental consequences should not be ignored. The dichotomy of law and policy in the Indian RE sector can be avoided by efficient and transparent EIA and public engagement. Furthermore, CSR regimes of investor and developer companies help in incorporating environmental concerns into economic activity. In light of the repercussions of the RE projects, a more rigorous strategy is indispensable. An ounce of prevention is better than a pound of cure. Thus, developing countries like India shall promote state and investors to include EIA while advocating FDI in the RE sector to avert future investment conflicts and environmental consequences.

Simran Lunagariya and Niveditha R are law students at Institute of Law, Nirma University, Gujarat.