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Government Seeks to Amend the Electricity Act to End the Monopoly of Power Distribution Companies in India

Editor, TRANSFIN.
Feb 8, 2021 6:34 AM 5 min read
Editorial

One of the most consequential reforms originating from Budget 2021, aside from the bad bank, overhaul of the insurance industry etc. May be on the energy side. More specifically, the move to de-license the power distribution space. This seeks to allow any company with the right to supply electricity, post regulatory due diligence of course. Doing so could curb the monopoly of the mostly state-owned discoms, give consumers the power to choose distributors, and invite competition to the sector.

Accordingly, the Centre is reportedly set to introduce a Bill to amend the Electricity Act, 2003 in the ongoing session of Parliament. If passed, the Electricity Bill, 2021 would give shape to the above proposals.

But before we delve into the specifics of the legislation, let’s revisit the basics of the electricity value chain in India...

The Power Sector Value Chain for Dummies

This can broadly be segmented into three categories - generation, transmission and distribution.

Generation is where power is, well, generated. The generators can be coal-fired, nuclear, hydro, oil, natural gas or - increasingly - renewable sources like solar, wind and biomass.

FYI: As of March 31st 2019, India’s total installed generation capacity was 3,56,100.19 MW while the peak load demand in the same fiscal year was 1,75,528 MW. This indicates that power deficits on account of generation capacity shortfalls, something the power sector struggled with for a long time, have been addressed.

The transmission phase involves the tall poles and towers you see along highways. These carry electricity over large distances from source to substations close to regions where there is demand. This phase of the value chain can include transmission across state lines. Presently, mainland India’s regional grids (Northern, Eastern, Western, North-Eastern and Southern) are integrated into one National Grid.

And then there’s distribution. This is similar to the second phase, but involves lower voltages and smaller lines and poles. The distribution lines you see along city streets and roads? They transfer power from the substations to homes and offices.

It is in this stage that discoms come into the picture. They are responsible for energy distribution to consumers - not just homes and apartments but business establishments across sectors.

FYI: The Ministry of Power is the nodal body regulating the electrical energy sector. And electricity is a subject in the Concurrent List of the Constitution, which means both the Centre and the States are involved in framing laws and policies for the sector.

 

The Fault in Our Discoms

The problems faced by discoms are an age-old story. The list is endless: high distribution losses coupled with theft of electricity, low metering levels, old and ageing infrastructure, lack of skilled manforce, binding agreements with solar energy producers, operational inefficiencies and poor financial management.

The COVID-19 pandemic and lockdowns have only made matters worse. Energy demand climbed down in 2020 due to decreased economic activity. Moreover, many consumers were not able to pay their electricity bills on time due to financial stress. These issues added further pressure to discoms’ books.

To be fair, there have been many attempts made to fix the discom dilemma - four schemes in the last 15 years alone. Most notably the Ujjwal DISCOM Assurance Yojana (UDAY). It involved state governments taking up 75% of discoms’ debt and capital to absolve the remaining 25% to be raised by issuing bonds. But UDAY was beset with its own set of challenges and was not particularly a roaring success.

 

The Electricity Bill, 2021 

Off the bat, this Bill proposes many things including appointment of members from law background in electricity regulatory commissions, penalty for non-compliance of renewable energy purchase obligations (RPO), prescribing Rights and Duties of Consumers, and providing more benches in the Appellate Tribunal for Electricity to deal with the huge backlog of cases.

The central proposition, however, is the delicensing of power distribution. To this end, the following changes have been pitched:

  1. Allow any company to supply electricity to an area, as long as it gets regulatory approval, “either using its own distribution system or using the distribution system of another distribution company”. The term “distribution licensee” would be replaced with “distribution company”.
  2. Two more discoms will be able to operate in the same area to encourage competition in the sector and ensure choice for consumers
  3. Allowing cross-border trade of electricity - the Central Electricity Regulatory Commission will make regulations for sale and purchase of power with neighbouring countries. (The National Grid already has synchronous or asynchronous links with Bhutan, Bangladesh, Myanmar and Nepal.)
  4. Empowering the National Load Despatch Centre to stop the dispatch of power to states that don't provide payment security against their contracted supply.

Power and Renewable Energy Minister RK Singh argued the delicensing would empower consumers:

 As we delicensed generation in 2003, we are decreasing distribution [now]...The regulator will fix only ceiling prices.

 

Déjà Vu, Much?

Now, two points here.

One: Spoiling consumers with choice is not a new concept. In fact, the Electricity Act, 2003 theoretically already gives consumers the choice to choose suppliers. However, due to infrastructural challenges, most areas have only one discom they can turn to.

In some cities, like Mumbai, propping up more than one distributor has been attempted - but the results have been less than ideal. This is because in many of these cases, consumers can shift suppliers but they have to pay for the transition ie they have to pay to port. This makes migration relatively unviable. Better the old devil you know than the devil you don’t, as they say!

Two: More choice, more private participation, more competition, decentralisation, deregulation - based on these metrics, the power distribution reforms are the mirror image of the recently-passed farm laws, which sought to end the monopoly of mandis and middlement and usher in the winds of privatisation.

Opposition to the farm reforms by farmers and unions has been immense, to say the least. So much so that the Supreme Court had to intervene and the Government had to cede ground and propose postponing the implementation of these laws by 18 months.

While the power sector can’t be compared to the agriculture sector, which employs half the country and has colossal electoral clout, anathema against privatisation could hinder the implementation of the Electricity Bill, 2021 in the near-term.

In fact, it has already begun. This week, thousands of power sector employees and engineers held protest meetings across the country against the amendment. With the tabling of the Bill, expect opposition to grow in decibels. And while farmers may have relative strength in numbers vis-a-vis power union members, the Government addressing the latter’s concerns would ensure the Bill’s smooth passage and implementation.

FIN.

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