Significant Reform

The Ministry of Power (MoP) recently issued draft amendments to the National Tariff Policy (NTP), 2016, to address a number of challenges with respect to open access, renewable purchase obligations (RPOs), tariff structure and subsidy regime, among other things. The amendments impose stricter penalties on discoms for unscheduled load shedding. They also propose capping cross-subsidies at 20 per cent of the power supply cost. While the industry has hailed these provisions, one of them, pertaining to the exemption from mandatory competitive-based bidding given to central public sector undertakings (PSUs), has raised concern. With the draft currently open for consultation among industry stakeholders, Power Line sought the views of industry experts on the proposed changes and their impact on the sector. Excerpts…

What are your views on the proposed amendments to the National Tariff Policy, 2016? How will they impact the power sector?

Sabyasachi Majumdar, Senior Vice-President, ICRA Limited

    Sabyasachi Majumdar

The MoP has recently issued draft amendments to the national tariff policy. These amendments propose significant reforms in the electricity distribution business, including an emphasis on quality and reliability of supply by distribution licensees (discoms), stricter operating norms for discoms, the adoption of direct benefit transfer for subsidy payment and moving consumers from a post-paid to prepaid basis. In addition, the policy proposes the simplification of tariff categories and reduction in cross-subsidy levels to +/-20 per cent of the average cost of supply by April 1, 2019.

While these proposals are positive from the consumer perspective, the tariff determination by state electricity regulatory commissions (SERCs) with aggregate technical and  commercial (AT&C) loss levels of 15 per cent will lead to a significant dependence for discoms on subsidy/operational funding support from the respective state governments; given that the overall track record in loss reduction by discoms has not been satisfactory so far, with AT&C loss levels ranging from 20 per cent to 35 per cent in many key states. The additional funding support required by discoms from state governments to bridge the under-recovery from higher-than-approved AT&C losses is estimated to be about Rs 400 billion, which is equivalent to around 7 per cent of discom annual revenues at an all-India level, considering an all-India AT&C loss level of 20 per cent. Further, the proposals such as direct benefit transfer and moving consumers from post-paid to prepaid basis would face significant implementation challenges at the state level.

As per the draft amendments, the distribution licensees are required to demonstrate the availability of adequate long-term and medium-term power purchase agreements (PPAs) to meet the average annual power requirement in their licence area. The policy proposes the suspension of a licence in case of non-availability of adequate power supply arrangements and the imposition of a penalty in case of disruptions in supply to consumers, except due to force majeure conditions or technical faults. This is a positive development for power generation companies and if implemented in a timely manner, would enable the signing of long-term and medium-term PPAs by distribution utilities with independent power producers (IPPs).

It should be noted that about 26 GW of thermal power capacity does not have any long-term PPAs in the IPP segment, owing to lack of progress in the signing of long-term and medium-term PPAs over the past four years. About 60 per cent of this capacity is operational and the balance is under implementation.

On the renewable energy front, the draft policy states that all the SERCs must adopt the RPO trajectory issued by the central government. Notably, only six states having stipulated RPO norms meet the target specified by the MoP for 2018-19 so far. This provision, if implemented, would further increase the demand for renewable power generation. The policy offers relief to open access consumers, wherein such consumers shall be liable to pay a cross-subsidy surcharge for a maximum period of one year from the date of opting for open access. On the generation front, the policy appears to exclude the central government-owned generation companies from competitive bidding, which is negative for distribution licensees and consumers. When it comes to the tariff norms, the amendments emphasise the importance of enforcing pass-through of the benefit of reduced tariffs on to consumers, after the assets are fully depreciated.

Rajesh Mokashi, Chief Executive Officer and Managing Director, CARE Ratings

Rajesh Mokashi

On May 30, 2018, the MoP unveiled draft amendments to the NTP 2016. The need for amendments to the policy’s provisions was felt, in view of the dynamic changes in the electricity sector and to carry forward power sector reforms.

Through these amendments, the government has tried to address a large number of issues related to open access, pass-through due to change in law, RPO, simplification of tariff categories, rationalisation of retail tariff and tightening of regulation around discoms.

The proposed amendments to the NTP are consumer friendly except for the proposal that exempts the central power generating companies from mandatory tariff-based competitive bidding. This measure seems to be a retrograde step given the fact that earlier, in January 2011, tariff-based competitive bidding was introduced for all power plants. Another important revision has to do with improving the quality of power supply while avoiding the burden of discom inefficiencies being passed on to consumers.

The draft amendments call for the targeted delivery of subsidies while asking for determination of tariff by the appropriate commission, without taking into account the subsidy components. Any subsidy to be given to any category of consumers shall be given by way of direct benefit transfer (DBT) directly into their accounts.

The amendments also call for a penalty on discoms in case of load shedding other than under force majeure and technical faults. The appropriate penalty, as determined by SERCs, will be levied on the discoms and credited to the account of the respective consumers. Though the provision for penalties in case of non-adherence to service-level conditions was already present (the same was accounted for by SERCs by way of lower annual revenue requirement [ARR] and benefit distributed to all consumers), the proposed amendment merely calls for the distribution of the said penalty amount to specific rather than all consumers.

The other significant amendment also relates to power distribution companies, wherein the SERCs are asked not to consider AT&C losses above 15 per cent for determination of tariff beyond March 31, 2019. For the states that have signed an MoU under the UDAY, AT&C loss levels for tariff determination are to be aligned with targets mentioned in the MoU. Additionally, AT&C losses are to be brought down to a level of 10 per cent within three years of the date on which an AT&C loss level of 15 per cent is to be achieved. It would be interesting to see if this amendment is implemented, as this has the potential to affect the revenue gaps of discoms given that the current national average of AT&C losses is around 23 per cent.

The intent of the proposed amendments is positive and reform oriented and, if implemented in letter and spirit, has the potential to bring about a sea change in the entire power value chain, particularly in power distribution. What remains to be seen, however, is how few of these proposed changes will be implemented given  that electricity is a subject in the concurrent list.

Kameswara Rao, Partner, GRID, PwC

Kameswara Rao

The proposed revisions are encouraging, for they are designed to improve quality of supply and avoid loading consumers with systemic inefficiencies.

The requirement of discoms to contract firm PPAs means consumers, especially outside the main urban centres, can look forward to a more reliable power supply. It also gives hope to distressed generating assets that are waiting for utilities to sign the PPAs.

The proposal to move RPOs from being set as per condition in a state to a uniform norm for all, will expand the overall market for renewable energy. As states will want to buy from the cheapest sources, renewable-rich states are likely to attract more investments.

Subsidy leakages can be finally plugged if the suggestion can be implemented for regulators to determine only the full-cost tariff and extend a subsidy to deserving consumers through DBT.

Sanjeev Seth, Chief Executive Officer, India Power Corporation Limited

Sanjeev Seth

  • Removal of budgetary allocation: The proposed amendment for the removal of the budgetary allocation from the central or state government will stall the capital expenditure required for all segments of the power sector. The provisions of the Power System Development Fund (PSDF) and the National Clean Energy Fund are part of the budgetary allocation. Therefore, utilising the proceeds from them for capital expenditure and subsidy support in the interest of the sector will be restricted. This, in turn, will lead to derailing the growth revival story of the sector.
  • Role of the Forum of Regulators (FoR) in distribution: While SERCs shall be guided by the principles and methodologies specified by the Central Electricity Regulatory Commission (CERC), for the determination of tariff applicable to generating companies and transmission licensees, there is also a need for a common principle for the distribution sector. It is suggested that the FoR be entrusted with the responsibility of developing a common framework, in which distribution-specific issues wii be taken up for policy formulation.
  • Exemption of central and state government companies from competitive power procurement: The proposed modification creates a prejudiced tariff policy framework for private and public utilities across the country. The private sector is an important constituent for the proposed investment that is required for the power sector’s growth, and differential treatment will surely dent the private sector’s investment. Further, in light of the fact that distribution companies (irrespective of them being publicly or privately owned) carry out the functions of a public utility and are conduits to the delivery of power to the public, the principles of procurement of power should be same for both entities.

Apart from this, the amendment mandates adherence to Section 63-based procurement, and negates the statutory and coexistent Section 62 of the Electricity Act, 2003. This raises a question of whether the policy guidelines can overrule the provisions of the statute. It is well known that the fate of competitive bidding projects suffering from various change in law occurred post the execution of the  project, which has led to a tariff scenario that was not envisaged during the bidding.

The power procurement process must be simplified. Instead of stage-wise approval, a ceiling tariff could be fixed and distribution companies could be given the flexibility to purchase within the ceiling.

  • Competitive bidding for the augmentation of transmission projects: The tariff policy has laid special emphasis on competitive bidding in transmission projects. However, it remains silent on the need for system augmentation for existing projects. The true intent of competitive bidding can only be realised when the cost arrived at for competitively bid transmission projects remains competitive for the entire lifetime of the project. This can only be achieved if all future transmission modification or system augmentation projects are arrived at through competitive bidding too.
  • Tariff determination for coal washery projects: Electricity is on the non-concurrent list; however, this modification in the tariff policy mandates that SERCs follow the CERC’s approach, which, in turn, breaches the jurisdiction of the SERCs. To avoid this, the respective SERCs must also frame or modify their respective tariff regulations to be consistent with the approach adopted by the CERC.
  • Exclusion of short-term PPAs from the composite scheme: With discoms not coming forward for long-or medium-term PPAs, the gencos do not have any option but to sell power through short-term PPAs, to more than one state. With the changing scenario, generating stations could be affected due to the composite nature and thus, non-inclusion of short-term PPAs will leave them with no recourse available for jurisdiction.
  • Enforcing a digital framework for open access consumers: The tariff policy must accommodate a transparent approach in facilitating open access, and this can also be achieved by utilising the digital transformation approach. The respective regulatory commissions may, either by notification or through guidelines, specify that respective state load despatch centres revamp their business transactions to include a digital framework.
  • Change-in-law events and reimbursements arising due to it: This is a welcome modification, as the tariff policy warrants predefined procedures and guidelines for the recovery of change-in-law situations and recovery of the same. Regarding reimbursement for excess payments made at the rate of carrying costs, a clause may be added that a rate of carrying costs be fixed by the prevailing benchmark rate for financing the working capital borrowings.
  • Coal procurement: There needs to be certainty around the procurement of coal through e-auctions. It is suggested that a calendar for the e-auctions in a year be formulated. Further, the grant of coal linkage to generating companies having PPAs with distribution companies should be automatic, and its processing could be done in a fast-track manner.
  • Monitoring of performance standards of distribution licensees: The implementation of a framework for performance and its monitoring and evaluation by the regulatory commission should be done on a monthly basis rather than on a yearly basis. If the distribution licensees are allowed to recover their fuel adjustment charges on a monthly basis, then there is no reason why consumers should not be allowed to avail of the benefits of this.
  • Lowering of AT&C losses: A clause should be included that state commissions must undertake an independent assessment to ascertain the baseline loss levels, and thereafter determine the loss trajectory to reach the desired 15 per cent level for losses. Respective state commissions may conduct loss assessment studies initially to arrive at the opening loss levels as on April 1, 2019. Based on the outcome of the studies, an aggressive loss reduction trajectory could be worked out to reach the desired 15 per cent AT&C loss levels.
  • Admission of subsidy through DBT: This is another welcome step, but the source against which the subsidy is to be adjusted needs to be  specified, in line with Section 65 of the Electricity Act, 2003.
  • Amortisation of regulatory assets: The provision for the creation of regulatory assets is more of an exception rather than a rule. It is suggested that the state commission specify a trajectory for the amortisation of the regulatory assets created.
  • Methodology to switch to other distribution suppliers: In the case of multiple distribution licence areas, it is necessary that the regulations and norms for exercising such a right be decided on an immediate basis by the SERC. To prevent loss of revenue, it is necessary to ensure that customers obtain a no-objection certificate and a no-dues certificate from the incumbent supplier.

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