New Direction

Draft amendments to the Electricity Act reflect changed sector realities

In a move that could be a potential game changer for the power sector, the government recently released the draft Electricity (Amendment) Act, 2018, which seeks to fill the gaps in the existing framework and provide a coherent vision for the future.

Of the changes proposed, the biggest, undoubtedly, is the separation of the content and carriage business in distribution. The separation is proposed to be achieved by making a distinction between the wires business and distribution business activities. The move, if implemented, would essentially usher in competition in the distribution segment.

A slew of other reforms have also been proposed. These include making the provision of 24×7 power obligatory from March 2019; a stronger push to renewable and hydropower generation, including a significant obligation for thermal power producers to establish renewable capacity; introducing direct benefit transfers for subsidy disbursals; stricter penalties for load-shedding; and a time-bound reduction in cross-subsidies, among others.

To recall, the Electricity Amendment Bill, 2014 was first introduced in the Lok Sabha in December 2014. However, it was subsequently referred to the Parliamentary Standing Committee on Energy, which submitted its report in 2015. The revised bill has now been circulated on the basis of the recommendations of the panel and a series of consultations.

A synopsis of the key amendments proposed to the Electricity (Amendment) Act, 2018…..

Changes proposed

Separation of carriage and content: The amendments introduce the term supply licensee, to undertake the distribution or supply of electricity in a specified area, within the area of distribution or area of supply of the licensee. On how this would be implemented, the amendment notes that the distribution licensee would be deemed to have the authorisation to supply electricity as a supply licensee till the transfer scheme is implemented in the area of the distribution licensee. After vesting the supply of electricity to another company, the distribution licensee would cease to undertake the supply of electricity. The amended provisions also stipulate the establishment of a forum for addressing consumer grievances.

24×7 power supply obligation: The amendments stipulate that the distribution licensee or supply licensee shall have the obligation to supply 24×7 power to its consumers. To do so, the amendments note that the distribution licensee or supply licensee shall tie up long-term/medium-term power purchase agreements (PPAs) to meet the annual average demand for power in the area. A biennial review would be carried out to assess whether the distribution/supply company has tied up adequate sources of supply, whether it is maintaining the distribution system in good order so as to ensure reliable 24×7 supply, and whether consumer complaints are being addressed promptly.

Strengthening of the PPA mechanism: According the amendments proposed, all sale or purchase of power shall be through long, medium or short-term PPAs. It adds that PPAs cannot be cancelled, except with the approval of the appropriate commission. Any violation of the PPA would lead to penalties extending to Rs 10 million per day and, in the case of licensees, could also extend to the suspension and cancellation of their licence.

Direct benefit transfer: The amendments note that if the central or state governments desire to grant subsidy to any consumer or class of consumers in the tariff determined, such subsidy needs to be transferred directly to the beneficiary, by direct benefit transfer, into the bank account of the beneficiary.

Renewable energy: A number of provisions have been included in the amendments to give a boost to the renewable energy segment. First, the amendments remove the licensing requirements and state that no licence would be required for renewable energy generation and supply. Further, they have introduced a concept of renewable generation obligation, which requires existing and upcoming coal/lignite-based stations to establish/procure/purchase renewable capacity. The amendments also mention a national renewable energy policy to be prepared by the central government. The terms renewable purchase obligation (RPO) and renewable energy service company (RESCO), which were missing from the Electricity Act, 2003, have also now been included. Further, the amendments include the introduction of penalties for non-compliance with RPOs. These are specified as a minimum of Re 1 per unit and a maximum of Rs 5 per unit to the extent of the shortfall in compliance with the RPO. Another important change is the inclusion of hydropower in the definition of renewable energy sources (however, the capacity of hydro stations has not been defined).

Compensation for load-shedding by discoms: As per the amendments, in case of power cuts other than for reasons attributable to the distribution or supply licensee or technical faults, an appropriate penalty as determined by the state electricity regulatory commission (SERC) shall be levied on the discom and credited to the account of the respective consumers. The minimum penalty and the compensation for each default specified in the standards of performance of a licensee or a class of licensees would be 2 per cent of the bill amount of the previous month or the previous billing cycle, and the amount would get adjusted in the next billing cycle. In the case of prepaid metering consumers, 2 per cent of the total amount of the electricity that has been consumed during the previous month would be credited to the consumer’s bill in the next month.

Reduction in cross-subsidies: The amendments talk about a reduction in cross-subsidies to zero within three years. It adds that the cross-subsidies should not exceed 20 per cent and the appropriate commission shall determine the trajectory for the reduction of cross-subsidies. Further, the reduction in cross-subsidies should not be less than 6 per cent in one year.

SERCs’ performance review: According to the amendments, the Forum of Regulators would constitute an independent committee to review, once in three years, the performance of the SERCs, including compliance with the tariff policy, the RPO and the obligation to supply 24×7 power to consumers.

Constitution of power transmission committees: The amendments talk of establishing three power transmission committees at the national, regional and state levels. The national committee will be set up by the central government for facilitating the integrated operation of the power system at the national level. A regional power committee would also be set up by the central government for a specified region, for facilitating the integrated operation of the power system in that region. Lastly, the state government would establish a state power committee for facilitating the integrated operation of the power system in the state.

Smart meters: The amendments have added the term smart and prepaid meters. Further, it states that no licensee shall supply electricity without the installation of such meters. Smart meters would be installed at each stage for proper accounting and measurement of metering and consumption from the point of generation up to such consumers that consume more than the specified quantity of electricity in a month. Time-of-day tariffs also find mention in the draft amendments, as do smart grids.

Capping open access charges: An amendment to the act proposes that the SERCs should allow open access on payment of wheeling charges and surcharge, provided that the surcharge is not more than 20 per cent of the wheeling charges. It adds that such surcharges would need to be eliminated over a period of two years.

Stricter penalties for grid violation: Non-compliance with the grid by gencos will now attract a penalty of Rs 10 million as opposed to Rs 1.5 million earlier.

Charging of EVs: The draft amendments clarify that all transactions involving the charging of electric vehicle (EV) batteries will not be considered as distribution, supply or trading of electricity. This reinforces the power ministry’s earlier clarification that setting up of charging infrastructure does not need a separate licence under the act.

Conclusion

The past few months have seen some encouraging policy developments. Recently, the draft amendments to the Tariff Policy have been circulated for comments. Amendments have proposed for a uniform tariff structure to be adopted. They, moreover, suggest that tariff design and cross-subsidy should no longer be based on differential tariffs for different types of use but be based solely on sanctioned load and consumption.

There is a compelling rationale for bringing in deeper and broader reforms in order to make the Electricity Act, 2003 more up-to-date, given the uncertainty prevailing in the sector. Thus, the proposed amendments have been keenly awaited by the industry. However, the scale and complexity of executing these reforms are daunting (the earlier 2014 effort had failed). Further, the success of these reforms will hinge on the implementation by the state governments, as many of the changes proposed could face major resistance and have political repercussions. The key question now is, how to best move forward and implement the vision effectively and with urgency.

Reya Ramdev

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