A bird's-eye view of Proposed Reforms to the Power Sector

A BIRD'S-EYE VIEW OF PROPOSED REFORMS TO THE POWER SECTOR

Once the Bill is promulgated into law, private distribution entities will be able to enter other states (under the de-licensing provisions of the Bill), and consequently, competition will increase in the power sector

Power is among the most critical components of infrastructure, crucial for the economic growth and welfare of nations. India was ranked fourth in wind power, fifth in solar power and fifth in renewable power installed capacity in 2018. India ranked sixth in the list of countries to make significant investments in clean energy estimated at US$ 90 billion.¹

The Indian power sector consists of the value chain which can be broadly segmented into generation, transmission, and distribution sectors. The distribution sector consists of Power Distribution Companies ("Discoms") responsible for the supply and distribution of energy to the consumers of all sectors such as industry, commercial, agriculture and domestic. However, Discoms are struggling with high levels of losses and debt. Due to poor financial health, Discoms have been unable to meet their payment obligations to transmission companies, generators, and financial institutions. Cash strapped Discoms have failed to meet their payment obligations to generators with dues of nearly ₹700 billion (March 2021). As a result, creating stress across the value chain. This has prevented the modernization of their infrastructure and investment in technology such as smart meters².

Despite several reforms to the Electricity Act, 2003 ("Act"), the power sector has been facing various operational inefficiencies and financial insolvency. Thus, the Government introduced the Electricity (Amendment) Bill 2021 ("Bill")³. The Bill has been proposed keeping in mind the objectives of (i) enabling the free choice of electricity to electricity consumers, (ii) appointment of members in the Electricity Regulatory Commission with a law background, (iii) strengthening of the Appellate Tribunal for Electricity ("APTEL") by increasing the number of members for dealing with long-pending cases and delay in deciding the appeals; (iv) to meet India's international commitment for promoting the use of renewable energy.

Consequently, the Bill proposes the following key amendments:

1. Delicensing of power distribution: The Bill proposes an amendment to Section 14 of the Act for delicensing of power distribution. New provisions from Section 24A to 24C are proposed to be introduced which shall provide for qualification, eligibility criteria and registration of power distribution companies. The Bill seeks to delicense power distribution to allow privatization and create competition in the segment, which would enable consumers to choose from multiple service providers.

2. Creation of a Universal Service Obligation Fund (USOF): The Bill proposes the insertion of a new Section 60 A (2) which provides for the provision of a universal service obligation fund, which shall be managed by a Government company. Any surplus with a distribution company on account of cross-subsidiary or cross-subsidiary surcharge shall be deposited in the fund. This fund shall be utilized to meet any deficits in cross-subsidy in the same area or another area of supply.

3. Strengthening of APTEL: The Bill proposes an amendment to Section 84 of the Act. The Bill proposes strengthening APTEL by increasing the number of members. The domains from where the chairperson and members of Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) will come has been prescribed. Further, the amendment to Section 94 proposes that the order passed by the Bench of the Central Commission, or the State Commission, shall be executable as a decree of a civil court.

4. Renewable Purchase Obligation ("RPO"): The RPO is a mechanism by which the obligated entities (mainly power distribution utilities or Discoms) are obliged to purchase a certain percentage of electricity from renewable energy sources, as a percentage of the total consumption of electricity. Compliance with the purchase of RPO is proposed to be introduced to promote the use of renewable energy.

5. Increased penalties: Penalties for the contravention of the provisions of the Act have been increased up to ₹10 million. Consequently, non-fulfillment of RPO will attract stringent penalties under the Bill. Such an increase will accelerate compliance with RPO requirements and thereby enhance the use of electricity from renewable energy sources.

In India presently, a few cities such as Delhi, Mumbai and Ahmedabad have private entities operating power distribution and in the rest of the country, power distribution is controlled by state-owned distribution companies. A few states have raised concerns that the Bill allowing privatization could lead to "cherry-picking" with private entities providing power to only commercial and industrial consumers and not residential and agricultural consumers⁴. Another concern raised by states is the stringent penalties for failure to meet RPO obligations as states have failed to meet earlier RPOs and have requested a rationalization of penalties for not meeting RPO requirements.

Conclusion

Once the Bill is promulgated into law, private distribution entities will be able to enter other states (under the delicensing provisions of the Bill), and consequently, competition will increase in the power sector. Electricity consumers will have the option to choose their supplier and buy electricity as a commodity like other sectors such as telecom. This will facilitate private companies entering and competing with the Discoms. This should attract fresh capital, novel practises, and the latest technology, boosting efficiency and reducing losses.

The Bill also proposes to help in handling issues like cross-subsidy losses, poor infrastructure, and losses. This will enhance the competitiveness of domestic industries in the power sector. The reforms under the Bill will provide financial relief to the states burdened by their Discom's financial losses. Finally, the adoption of compliance with the RPO is a positive change for the increase in the utilization of green energy. The Bill is a critical step in the right direction considering India's international commitment to the use of renewable energy.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.