Context: Finance Minister announced proposal for reform of power tariff policy  announced as part of the stimulus package following the pandemic.

About the new power tariff policy

  • Privatization: India will privatize electricity distribution companies (discoms) in all its eight union territories.It will lead to better services to consumers and improvement in operational and financial efficiency in distribution.
    • Unlike discoms in states governed by the respective state governments, those in Union territories are directly administered by the central government.
  • The proposed national tariff policy; includes penalty on unjustified power cuts, not allowing losses of more than 20% as a pass-through in tariff, and limiting cross-subsidies. 
    • Objectives: The policy will help reduce the cost of power and has been cleared by the empowered group of ministers and will be taken to the next meeting of the Union cabinet.
  • The government is also exploring public-private partnerships for power distribution in some states.

Proposed reforms in the power sector

Draft Electricity Act (Amendment) Bill 2020: 

  • Objectives: The govt. wants to ensure that renewable energy tariffs are not changed by the states after execution of contracts, and electricity regulatory commissions have more teeth to enforce power purchase agreements between projects and distribution companies (discom).
    • The proposal comes after the new governments in Andhra Pradesh and Maharashtra refused to honour power purchase agreements, leaving investors jittery.
  • It seeks privatisation of discoms (distribution companies) by way of sub-licensing & franchisees.
  • According to the draft, state commissions will determine tariff for retail sale of electricity without any subsidy under Section 65 of the Act and the tariff should reflect the cost of supply of electricity and cross-subsidies to be reduced.
  • It proposes greater concessions to renewable power developers.
  • It  seeks to eliminate  the cross-subsidies in retail power tariff. 
  • The State governments will directly subsidise whichever category they want to, through direct benefit transfers. 
  • State regulators will henceforth be appointed by a central selection committee.
  • The establishment of a centralised Electricity Contract Enforcement Authority whose members and chairman will again be selected by the same selection committee referred to above. 
    • It proposes that the ECEA would adjudicate on matters regarding performance of obligations under a contract related to sale, purchase or transmission of electricity. 
    • It proposes to empower load dispatch centres to oversee the payment security mechanism before scheduling dispatch of electricity, and suggested a National Renewable Energy Policy for the promotion of generation of electricity from renewable sources.

India’s electricity distribution reforms scheme — tentatively named Atal Distribution System Improvement Yojana (Aditya) -- aims to cut electricity losses below 12%. 

  • India’s average aggregate technical and commercial loss are currently at 21.4%. 
  • Prepaid smart meters will be made mandatory across the power distribution chain, including 250 million households.
  • Aims: The scheme aims to ensure continuous supply of power, by privatizing state-run discoms and negating tariff gaps. 

Electricity Act 2003 

  • It is an Act to consolidate the laws relating to generation, transmission, distribution, trading and use of electricity.
  • For taking measures conducive to development of the electricity industry, promoting competition therein, protecting the interest of consumers and supply of electricity to all areas, rationalization of electricity tariff.
  • Ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benign policies.
  • It provides for constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto.

About Discoms

  • Power distribution companies collect payments from consumers against their energy supplies (purchased from generators) to provide necessary cash flows to the generation and transmission sectors to operate.
  • The Discoms have to purchase and distribute power to fulfil their Universal Supply Obligation (USO) as defined in the Electricity Act 2003 or borrow for capital expenditure to meet load augmentation and growth requirements.

Expected benefits of the reforms:

  • PPP models: Privatisation of Power distribution in UTs will assist in generating private sector appetite amongst Indian and international investors; various PPP models will be tested; and quick demonstration of possible efficiency improvement and customer engagement models. 
  • It will provide confidence to larger states and utilities to undertake privatisation based on improvements achieved here," said Sambitosh Mohapatra, partner, power and utilities

Concerns with reforms

  • Cooperative fedaralism: If implemented, they will weaken the control of States over an industry supplying a basic human necessity such as electricity. Concurrent status accorded to electricity in the Constitution. 
    • It also arms the Centre with power which could choke the distribution utilities/companies (DISCOM) and jeopardise the country’s energy security.
  • Continuing centralisation of control over the sector
    • High prices: It has driven up the cost of power purchase to 80% of the total costs of State DISCOMs. 
    • Two-part tariff policy: As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA), committing to pay a fixed cost to the power generator, irrespective of whether the State draws the power or not, and a variable charge for fuel when it does.
    • Issue with PPAs: The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA), a central agency. 
  • Renewable energy: From 2010, solar and wind power plants were declared as “must-run”, requiring DISCOMs to absorb all renewable power as long as there was sun or wind, in excess of mandatory renewable purchase obligations. 
    • This means backing down thermal generation to accommodate all available green power, entailing further idle fixed costs payable on account of two-part tariff PPAs.
    • The Centre’s ambitious target of 175 gigawatts of renewable power by 2022, offered a slew of concessions to renewable energy developers, and aggravated the burden of DISCOMs. 
    • Incidentally, China benefited by as much as $13 billion in the last five years from India’s solar panel imports.
  • Privatisation: Going by past privatisation experiments, private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction. 
  • Issues with the draft Electricity Bill 2020 
    • It is silent on whether a private sub-franchisee would be required to buy the expensive power (averaging out the idle fixed costs) from the DISCOM or procure cheaper power directly from power exchanges. 
    • Greater concessions to renewable power developers, will have a cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.
    • Eliminating cross-subsidies in retail power tariff: This means each consumer category would be charged what it costs to service that category. 
      • Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses will pay the steepest tariffs. 
      • State governments are already struggling with direct power subsidies so direct benefit transfer may aggravate the problem.
    • Central selection committee may affect regulatory autonomy and independence but also the concurrent status of the electricity sector.
  • The Electricity Contract Enforcement Authority: This may force States saddled with high-priced PPAs and idling fixed costs, to keep increasing the share of renewables.

The center must take all stakeholders into confidence to find a just way for much needed power sector reforms in the spirit of cooperative federalism .