Distribution reforms to recharge India’s power sector

The Bill empowers SERCs to fix RPO trajectories and also provides for penalties if such RPOs are not met. In 2019-20, only four states—Andhra Pradesh, Karnataka, Rajasthan and Tamil Nadu—achieved their RPO targets.

By Somesh Kumar

To implement power-sector reforms announced in Budget FY22, the Electricity (Amendment) Bill has been proposed. The country now has a unified electricity grid and, in the form of unbundling of the power sector utilities, most of the states have achieved a key milestone in the reform process. Electricity has been traded on power exchanges since 2008. The share of electricity traded through exchanges in overall consumption has reached 4.5% in FY20. Nearly 100% of the Indian population now has access to electricity. India’s electricity supply deficit has come down from more than 10% in 2008 to less than 1% in 2021. The global threat of climate change is more real than ever before with electricity at the epicentre of this issue. To address the climate change issue, the Centre set out ambitious targets for renewable energy capacity addition in the past decade. The share of renewable energy in the capacity terms has grown from nearly 7.7% in 2007 to 23.5% in 2020 and sharper rise is envisaged hereon. The next logical step in power-sector reforms would be to delicense the distribution segment and let market forces play. The proposed Electricity (Amendment) Bill is expected to do this. Its provisions aim to bring in consumer freedom, privatisation and efficiency, by covering four key areas:

De-licensing of distribution & portability: Currently, discoms work as a monopoly in their territory. The Bill would enable multiple companies to operate in a region and bring in more competition and private-sector participation. By reducing entry barriers, it may attract large private-sector investment in the distribution space and help relieve the latter’s distress. For consumers, it will bring in portability similar to the telecom sector. However, it may not be as smooth, given asset ownership of the network will continue to remain with the existing discom.

Strengthening of the despatch centre: Load Despatch Centres will be empowered to halt schedule and despatch of any power if agreed payment security has not been provided by the discom. This is expected to compel discoms to submit relevant payment securities as agreed in their PPA. This would benefit many renewable energy developers; in a few cases, payment securities have not been submitted by their counterparties. It will also provide comfort to the lenders and increase the bankability of PPAs. The amendments also provide for strengthening and adding responsibilities to the National Load Despatch Centre to supervise and control interregional grid and inter-state transmission networks, improving the security and reliability of the national grid.

Reinforcement of climate agenda: The Bill empowers SERCs to fix RPO trajectories and also provides for penalties if such RPOs are not met. In 2019-20, only four states—Andhra Pradesh, Karnataka, Rajasthan and Tamil Nadu—achieved their RPO targets. Another seven states achieved more than 55% RPO compliance. Penalties, even if nominal, would help create a large demand for RE projects in the next few years. It also provides an assurance to the global and domestic investors across the RE value-chain.

Institutional reforms for regulatory bodies: A couple of institutional reforms are also introduced, including strengthening of the Appellate Tribunal for Electricity by increasing the number of members, which would enable quicker resolution of the pending petitions and reduce queues, mandatory appointment of a member from law background, which would ensure proper and timely resolution of disputes which are legal in nature. Both amendments would strengthen investor confidence as they would bring in efficiency as well as make the dispute resolution process more structured and transparent.

A number of these amendments focus on improving the efficiency of discoms, hence buy-in of discoms is paramount for effective implementation of these amendments. The amendments also bring in a complex maze of challenges for them. Discoms already struggling with operational issues may have to strategically plan for the upcoming challenges.

The success of the reforms would largely depend on important aspects such as: ensuring quality players register as discom licensee, logical penalties for non-fulfilment of RPO targets for discoms that lack sufficient renewable energy sources in their state and largely depend on the bilateral purchase of green electricity.

Barring a few sections, a large part of the industry welcomes these reforms. The future of electricity is believed to be decarbonised, decentralised and democratised. These amendments address each of these three areas.

The author is Power & utilities leader, EY India