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Electricity Amendment Bill 2022: India Needs to Fast-Forward Electricity Reforms – IMPRI Impact and Policy Research Institute

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Electricity Amendment Bill 2022: India Needs to Fast-Forward Electricity Reforms - IMPRI Impact and Policy Research Institute

Saurabh Suman

Introduction

India is the third-largest electricity producer in the world after the US and China. The International Energy Agency (IEA) also forecasts a 6.5% increase in the nation’s power demand between 2022 and 2024. India has a numerical power surplus, but there are problems with the transmission and distribution of the electricity produced.

The newly tabled Electricity Amendment Bill 2022’s Lok Sabha procedures were not entirely smooth. The States consider this new Bill to be an intrusion by the Union government into their control over the electricity sector. The proposal to provide new distribution licenses in an area currently supplied by a distribution company (discoms) is the main reason for resistance to the Bill. The Bill has now been referred to the Parliamentary Standing Committee on Energy.

Climate Change Imperatives

India’s significant position in the global energy transition as the third-largest market for renewable energy and the fight against climate change adds to the necessity for introducing the Bill. India’s sub-par power sector must change dramatically through increased competition, efficiencies, enhanced financial management, and heightened customer focus across generation, transmission, and distribution.

What is the Electricity Amendment Bill 2022?

The Bill amends the Electricity Act 2003, which regulates India’s power industry. It creates the Central and State Electricity Regulatory Commissions (CERC and SERCs) to control interstate and intrastate concerns.

Key Provisions of the Bill

The Electricity Act 2003 has facilitated the growth of the power sector and attracted sizeable investments. Still, it must be updated in light of emerging challenges such as sustainability, contract enforcement, payment security mechanisms, energy transition, and the need to give consumers options.

An overview of the proposed changes in the Bill is listed below:

Multiple Discoms in the Same Area

The Electricity Act’s Sections 42 and 14 have been proposed to be amended for the benefit of consumers. It will facilitate competition in the retail distribution of electricity by enabling customers to select their preferred electricity suppliers just as they can with their preferred phone or internet service provider. It will “facilitate the use of distribution networks by all licensees under provisions of non-discriminatory open access.” In Mumbai, where private enterprises have long provided power, such a system is already in place. Since most cables are underground, losses are minimal.

Tariff Reform

The Ujjwal DISCOM Assurance Yojana(UDAY) launched by the Union government envisaged a reduction of the gap between the average cost of supply (ACS) and average revenue realized (ARR) to zero by 2018-19 and a reduction in the aggregate technical and commercial loss by 13.50 percent by 2018-19. The primary reason for the failure of this scheme is the inability of the discoms to collect the total cost that they pay for power.

According to the draft Bill, state power regulatory commissions will also be allowed to guarantee that distribution charges progressively account for electricity delivery costs. Discoms owed producers a total of 1.2 trillion dollars ($15.01 billion) in unpaid dues as of August 2022, which is an undesirable and unsustainable condition. Cost-reflective tariffs will support Discoms’ capacity to operate profitably.

Cross-subsidy Balancing Fund

The power distribution companies (discoms) can pay off their record debts to generation companies (gencos) and still have money left over, according to a presentation made at the national conclave of chief secretaries presided over by the prime minister in June 2022. This is provided that the state governments release the promised subsidy and government entities pay their bills, just like regular consumers. As of March 31, 2022, state governments owed their discoms Rs 1.39 lakh crore in subsidy receivables and unpaid payments of government agencies, which was offset by the discoms owing the gencos a little over Rs 1 lakh crore.

The new Bill states that the state government would establish a cross-subsidy balancing fund when granting numerous licenses for the same region. When a marketer charges higher prices to a group of consumers to subsidise lower costs for another group, it is referred to as cross-subsidisation. Cross-subsidy surpluses with distribution licensees will be placed into the fund. The fund will be used to cover any cross-subsidy shortfalls for other discoms in the same region or elsewhere.

Renewable Purchase Obligation(RPO)

The Act gives SERCs the authority to stipulate for discoms renewable purchase obligations (RPO). RPO is the requirement to buy a specific amount of power from renewable sources. According to the Bill, RPO must not go below a minimum percentage set by the federal government. A fine of 25 to 50 paisa per kilowatt of the deficit will be assessed for failure to achieve RPO.

According to the CEEW (Council on Energy, Environment, and Water) research, the intrinsic advantages of a rooftop solar system in the BSES Rajdhani (BRPL) distribution region of Delhi offset the system’s revenue loss. For every kilowatt- hour of power produced by rooftop solar, BRPL stood to receive Rs. 0.22. According to a CEEW report, between April 2019 and November 2020, Delhi discoms might have saved between Rs 1,050 and Rs 1,098 crore if they had not purchased from Dadri Stage I and procured from alternate sources of power, mainly as a result of avoiding fixed expenses.

The government believes that the push for Renewable Purchase Obligations (RPOs) mentioned in the Bill will ramp up India’s electricity needs, which are expected to double in the next eight years, while moving to accomplish green targets fixed as per the Paris and Glasgow Agreements. India aims to achieve 50% of its installed generation capacity from renewable sources by 2030.

Strengthen Regulators

The Bill aims to tighten payment security procedures and give regulators additional authority by amending Section 166 of the Act. In the long run, Discoms and regulators will benefit from the application of artificial intelligence (AI) in system-driven energy accounting, data-based loss monitoring, and substantial IT modernization of distribution infrastructure.

Criticism of the Bill

Several states and the opposition parties have voiced their disagreement with various sections of the new Bill. Unresolved issues include the concentration of too much authority in the hands of the central government, the independence of the regulatory commissions, and the future of agricultural subsidies.

Other concerns with Bill include:

Against Federalism

As electricity is a subject listed as item 38 in the Concurrent List of the Constitution, the Bill violates India’s federal framework. The Center is accused of not consulting the states before presenting the Bill in Parliament. Power falls within the Concurrent List, and consulting the states is “the bounden duty or the mandatory obligation” of the Union government.

There are worries that the changes may lessen the state’s role by giving the Union government more control over who is appointed and removed from regulatory bodies. The Bill has a clause that allows the Centre to instruct the SERCs without going through the States.

Renewable Purchase Obligation

The state governments worry that their authority will gradually diminish if the federal government sets a minimum amount of Renewable Purchase Obligation(RPO) for them.

While the desired percentage should rise each year, some state power regulatory bodies set meager RPO requirements or even keep them constant. Discoms are not penalized when goals are not met. Although a penalty of Rs 1 lakh is allowed, it is either seldom enforced or, when it is, the amount is relatively low. This is the reasoning provided by the Union government for the proposed amendments in the new Bill.

Job Loss

State employee groups are concerned, among other things, that Bill’s passage will cause significant losses to government discoms, job losses, and the creation of a monopoly in the electricity industry by a small number of private corporations.

According to the All India Power Engineers Federation (AIPEF), the national government allegedly promised the United Kisan Morcha in a letter last year that the Bill would not be tabled in Parliament without having in-depth deliberations with the farmers and other stakeholders. It claimed that up to this point, the central government had not undertaken any discussions with the two most significant stakeholders, representatives of customers and employees in the electricity industry.

Less Attention to Loss-making Areas

According to the law, only government discoms would be required to provide a universal power supply. Therefore, private licensees will opt to offer energy exclusively to industrial and commercial clients who generate revenue.

While underserving loss-making locations, the option to promote competition may lead to more businesses in wealthy and urban areas. As a result, government discoms might lose their profitable regions, turning them into loss-making businesses that won’t have the funds to buy power from producers soon.

The Myth of Cheaper Electricity

According to some estimates, power purchase agreements are responsible for 85% of the cost of electricity. Due to the 25-year length of power purchase agreements, the price of electricity is unlikely to decrease. As a result, the assurance that there would be more competition and cheaper electricity rates for consumers might end up being a hoax. A framework must be developed by the Ministry of Power and the CERC for evaluating the need to terminate PPAs and come to a new business agreement, if necessary. Consumers’ access to inexpensive electricity will remain a pipe dream if discoms are denied the right to terminate their power purchase agreements (PPA).

According to a study by the Council on Energy, Environment, and Water (CEEW), Delhi Discoms would have saved between INR 650 and 690 crore in the fiscal year (FY) 2019–20 by terminating the PPA with the Dadri-1 power plant. The structure of existing contracts with thermal power generators has to be actively redesigned if the industry is to be decarbonized and made more shock-resistant.

Subsidy

Farmers are worried that it would ultimately result in the elimination of subsidies. As it has done with the PM KUSUM Yojana, the government should vigorously encourage the use of solar pumps. The solarization of agricultural pumps would lessen their reliance on conventional energy, thereby minimising the need for subsidized electricity for agriculture and giving farmers another source of revenue since they could sell the excess electricity to the utility.

Way Forward

“Power” is a topic in the Concurrent List of the Indian Constitution. Thus, the Union government should address the states’ concerns and engage them in discussion with other stakeholders. Structural reforms espousing cooperative federalism are essential for root-and-branch overhauling of the under-performing power sector.

The government should ensure that both public and private discoms compete on an equal footing to ease worries about monopolies. Additionally, appropriate regulatory mechanisms must be in place to guarantee that services are provided evenly across the country.

For the electricity industry to play its critical part in launching India’s next 25 years of progress toward becoming a developed country and combating climate change, the Electricity (Amendment) Bill 2022 must be approved.

References

  1. Will the bill on Electricity Amendment change the power sector for the better? Sapna Gopal, 2022, September 9, Down To Earth
  2. Pass Electricity Bill now Sumant Sinha, 2022, September 19, The Hindu BusinessLine
  3. Valuing Grid-connected Rooftop Solar: A Framework to Assess Costs and Benefits to Discoms Kuldeep, Neeraj, Kumaresh Ramesh, Akanksha Tyagi, and Selna Saji, 2019, September, Council on Energy, Environment and Water
  4.  How can Discoms Optimise Power Procurement Costs? The Case for Delhi to Exit the Power Purchase Agreement with NTPC Dadri Stage-I Aggarwal, Dhruvak, Harsha V. Rao, and Disha Agarwal, 2022, May 16, Council on Energy, Environment and Water
  5.  TURNING AROUND THE POWER DISTRIBUTION SECTOR Prasanth Regy, Rakesh Sarwal, Clay Stranger, Garrett Fitzgerald, Jagabanta Ningthoujam, Arjun Gupta, Nuvodita Singh, 2021, August, NITI Aayog, RMI, and RMI India 

About the Author

Saurabh Suman, Research Intern, IMPRI

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