Planning for the Future

Will the draft NEP, 2021 succeed in bridging the gaps in the system?

In April 2021, the Ministry of Power (MoP) released the draft National Electricity Policy (NEP), 2021, in accordance with Section 3 of the Electricity Act, 2003. The policy is being updated after a long gap of 16 years since the notification of the NEP, 2005. The 28-page detailed draft document outlines the government’s overall perspective on the power sector and lays down the guidelines for its future development.

The draft NEP lays emphasis on distribution reforms, power quality and reliability, large-scale integration of renewable energy, flexibility of existing and future generating plants, empowering load despatch centres, light-touch regulation, expansion of power markets, creation of electric vehicle (EV) charging infrastructure, and greater overall reforms at the state level.

The government has constituted an expert committee to finalise the draft NEP, headed by Gireesh Pradhan, Former Chairperson, Central Electricity Regulatory Commission (CERC), with representatives from the state governments, the Ministry of New and Renewable Energy, NITI Aayog and the Central Electricity Authority (CEA). The draft policy has been put up for stakeholder feedback. The expert committee is mandated to submit its report within two months (by June 12, 2021). The draft is open to stakeholder comments for 21 days from its date of notification.

Power Line presents the key highlights of the draft NEP…

Progress since NEP 2005

The draft begins with a report on the progress made since the previous edition of the NEP. There have been phenomenal changes across various segments of the power sector over the past decade and a half. In the generation sector, an addition of close to 252 GW, including renewables, took place up to March 2020, with the installed capacity reaching 370 GW, including 87 GW of renewable capacity. While there was an increase in the installed base, the share of hydro capacity declined from 26 per cent in March 2005 to

12 per cent in March 2020. The share of renewable generation increased to 10 per cent from less than 1 per cent in 2004-05. The per capita consumption of electricity almost doubled to 1,208 units in 2019-20 from 631 units in 2005-06.

In the transmission segment, over 252,000 ckt. km of lines at 220 kV and above voltages were built and the interregional transmission capacity was ramped up to over 102 GW from 10 GW. The process of village electrification was completed in April 2018. The quality of power has improved substantially and so has grid management, with the average frequency of the grid hovering between 49.98 Hz and 50.02 Hz most of the time. The regulatory framework at the central and the state level has brought discipline in grid operations, introduced efficiency in generation, transmission and distribution, and enabled the development of power markets through the power exchanges.

While significant progress has been made, further work needs to be done to improve the accessibility of electricity 24×7, especially in rural areas, as well as the financial health of distribution companies. The government has set an ambitious target of achieving 175 GW of renewable capacity by 2022 and is committed to achieving 40 per cent of installed capacity from non-fossil-fuel-based energy sources by 2030. In this scenario, the balancing and ramping requirements are expected to increase substantially as more renewable capacity is integrated into the grid. The draft NEP intends to address some of these issues with suitable policy interventions.

Key goals

Broadly, the key objectives of the NEP, 2021 are:

  • Promotion of clean and sustainable electricity generation
  • Development of an adequate and efficient transmission system
  • Revitalisation of discoms
  • Development of efficient electricity markets
  • Supply of reliable and quality power of specified standards in an efficient manner
  • Move towards lighter-touch regulation
  • Promotion of domestic manufacturing of goods and services under the Make in India initiative and the Aatmanirbhar Bharat Abhiyaan,

Areas covered

The draft NEP covers proposals under 15 different areas:

Optimal generation mix: Some of the options for meeting the country’s peak demand efficiently are adequate hydro capacity, combined cycle power plants, battery storage and emerging technologies such as hydrogen storage, which are capable of quickly ramping up and down and storing energy with higher efficiency for a long duration. Coal-based stations may have to resort to two-shift operation and be operated at reduced generation levels to provide flexibility to cope with variable renewable energy generation. The true value of peaking power must be reflected through differential tariffs for peak and off-peak hours for consumers and generating stations by the regulators, as specified in the Tariff Policy. The CEA must develop a regulatory framework for the determination of adequate reserves to meet demand at all times and maintain frequency at 50 Hz.

The draft policy notes that coal-based capacity addition will still be required as it continues to be the cheapest generation source. It recommends the adoption of ultra-supercritical and supercritical technology for thermal stations. Adequate fuel availability is important to ensure that capacity is not stranded. It calls for minimising the use of imported coal in power stations and only utilising domestic coal, given that India has the world’s fourth largest reserves.

The policy calls for exploring the possibility of utilising the existing gas-based capacity (which accounts for 6.7 per cent of the installed base and operates at an average plant load factor of 22 per cent due to fuel availability issues) for peaking and balancing needs.

The policy recognises that special efforts have to be made to promote more storage and pondage-based hydro generation units to meet peaking and balancing requirements. For faster development of pumped storage plants (which have a potential of 96.5 GW), the policy recommends expeditiously identifying and developing such schemes on existing hydro stations that are likely to be more cost effective and have fewer environmental issues. Other recommendations for hydropower development are expeditious completion of basin-wise cumulative environment impact assessment and carrying capacity studies; creation of land banks by states; facilitation of land acquisition and maintenance of law and order in states; availability of softer loans for longer durations; introduction of hydro purchase obligations; implementation of a pre-agreed tariff profile; and preparation of standard bidding documents for hydropower in the medium and long terms. The government plans to increase the nuclear power capacity by 10 GW over the next 10 years, from 6,780 MW at present. The possibility of flexible operation of these stations also needs to be explored.

The policy recommendations for renewables include promoting hybrid renewable energy generation; ensuring all future power procurements take place through tariff-based competitive bidding; implementing a two-part tariff mechanism; notifying a long-term growth trajectory for renewable purchase obligations (RPOs) beyond 2021-22; moving towards market-based mechanisms from the current RPO-renewable energy certificate-based system; and introducing a mechanism for sharing the costs of variability across states.

Transmission: While planning the transmission system, economic signals in the form of the variable cost of generators, congestion, transmission losses and incremental investment in transmission must be considered for achieving optimal capacity addition. There is a need to streamline the approval process for transmission projects. At the central level, the National Committee on Transmission approves the plans drawn up by the CTU. A similar mechanism is recommended at the state level. The state regulators are recommended to adopt a transmission pricing framework similar to that implemented at the central level, which is sensitive to distance, direction and the quantum of flow for intra-state systems. The policy suggests that India could play a major role in ensuring effective utilisation of regional resources and to this end, must promote cross-border electricity trade for the mutual benefit of the region.

Distribution: The draft policy recognises that the distribution segment is marred with many inefficiencies, such as high aggregate technical and commercial (AT&C) losses, inadequate system planning, poor discom financial health, and customer dissatisfaction. It emphasises the need to strengthen the distribution system to ensure 24×7 reliable supply. It calls for a unified scheme for the development of adequate distribution infrastructure, wherein central assistance to states is linked to reform milestones. The policy suggests encouraging public-private partnerships, including the franchise model and sub-licensing, for improving operational efficiency, enhancing consumer satisfaction and reducing financial losses. This also requires the introduction of competition through the separation of the carriage and content business. The tariff determined by the SERCs must be able to finance the capex required by discoms to improve supply quality. It recommends the introduction of distribution system operators (DSOs) for real-time operation of distribution systems.

The policy lays special emphasis on consumer indexing and asset mapping in a time-bound manner. It recommends that the SERCs adopt the model smart grid regulations notified by the Forum of Regulators (FoR), or bring out their own regulations. Further, it recommends that the discoms strictly enforce standards of performance and harmonise these standards.

Most importantly, integrated planning by discoms for the optimum utilisation of assets and demand forecasting under various time horizons are essential to decide on short-, medium- and long-term procurements. Further, the SERCs must ensure, through annual reviews, that adequate supply is tied up to meet the anticipated demand. Discoms must take measures to achieve 100 per cent metering of all consumers within one year of the notification of the policy. Within three years, 100 per cent prepaid metering must be achieved. The SERCs may introduce incentives for demand response. Consumers with smart meters must be given a choice to offer part or full load for interruptions in case of grid exigencies in lieu of a lower tariff.

Discoms must connect all feeders to the national power portal (to which about 70 per cent of the feeders are linked) by replacing non-communicating meters with automatic meter reading meters by December 2022. The policy notes that the poor status of distribution transformer (DT) metering (at 37 per cent) needs to be taken to 100 per cent within three years. The state governments should grant subsidies to consumers in the form of direct benefit transfer.

Grid operation: System operators must be adequately equipped with modern technologies to ensure supply safety and security. To deal with the increasing variability of generation, measures such as expansion of the balancing areas, combined operation of renewable energy sources with conventional generation/ storage systems, development of ancillary services, and assessment of transfer capability are required. The SERCs must make forecasting and scheduling of renewables generation mandatory, along with a margin for error, beyond which deviation charges would become applicable.

The states must implement automatic demand management systems and a scheme for intra-state deviation settlement to improve grid reliability and safety. The state load despatch centres must be converted into independent institutions to ensure non-discriminatory open access. They must be technically upgraded to ensure the availability of real-time data and requisite analytical tools.

Power markets: The policy recommends that the relevant personnel in the state discoms be specifically trained to optimise the power procurement portfolio through the short-term power market, among other things. The government aims to increase the share of power traded in the spot markets to 25 per cent by 2023-24. For this, capacity markets or auction mechanisms that help do away with the rigidity of the present long-term power purchase agreements may be introduced. Another product under consideration is longer-duration forward contracts and derivatives on the power exchanges. Further, the participation of renewable energy sources needs to be facilitated in the day-ahead market. A new entity called aggregators can be created to aggregate demand, renewable power generation and demand response to help small consumers, prosumers and producers to reach the market.

Regulatory process: The regulatory commissions must move towards light-touch regulation, particularly with the reduction in their tariff-setting responsibilities as more power is procured on a competitive basis either through the power exchanges or through bidding. Even in cases where the tariff is to be fixed by the regulatory commissions, they should follow the multi-year tariff regulations. There should be a greater focus on tasks such as market monitoring, resource adequacy, balancing and demand response.

R&D and adoption of new technologies: The key focus areas for research and development identified by the policy include the commercialisation of renewable energy technologies, retrofitting of existing coal-based power plants to make them flexible, energy storage systems, smart grid technologies, communication systems and cybersecurity.

Power quality: The policy calls for greater attention to power quality aspects such as interruptions, voltage variations, harmonics and flickers. It also proposes the enforcement of penalties for the violation of existing CEA standards.

Energy conservation and energy efficiency: The SERCs must mandate a utility-driven demand-side management programme and customer engagement for peak load management, energy conservation and power cost savings.

Environmental issues: India is working towards achieving its Nationally Determined Contribution commitment of reducing its emission intensity per unit GDP by 33-35 per cent below the 2005 level by 2030 through various schemes.

The policy recommends minimising land usage, using gas-insulated substations in urban areas and installing megawatt-scale batteries at substations to save  land. It calls for water conservation, use of treated sewage water and air-cooled condensers in coal-based plants and robotic dry cleaning. It suggests allowing the costs associated with compliance with new emission norms as a pass-through or change of law. It recommends the formulation of a disposal policy for electronic waste, particularly waste generated by solar PV projects, as well as a recycling or disposal policy for batteries.

Skill building and human resource development: In addition to the skill building of power sector institutions, the policy recommends a review of the roles/ functions of personnel in statutory bodies such as the CEA, the CERC, SERCs and other organisations such as central and state transmission utilities and system operators to align with the new requirements.

Coordinated development: The policy calls for an important role to be played by the FoR, which provides a common platform for all regulators to deliberate on the policies and regulations that can be uniformly applied across the country.

Creation of EV charging infrastructure: The policy recommends certain tariff-related measures for public charging stations (PCSs) including the creation of a separate consumer category and implementation of time-of-day tariffs to avoid charging load during peak hours. Quick charging stations are expected to come up in malls, metro stations and office complexes. The SERCs must fix the rules for EV charging including those for the injection of power back into the grid. They should approve augmentation measures identified by the distribution licensees for EV charging on a priority basis. Aggregators may be allowed to aggregate the demand across several PCSs to purchase renewable energy using open access in order to realise the full potential of the environmental benefits of electric mobility.

Make in India and the Aatmanirbhar Bharat Abhiyaan: Given that power is a sensitive and strategically important sector involving critical infrastructure, the government issued an order in July 2020 to encourage, adopt and use only Make in India equipment and materials in the power sector. Until the policy on equipment and materials for which domestic capacity is not available is finalised, imported goods are to be tested in certified labs to check for the presence of any embedded malware/ Trojans, as well as adherence to Indian standards. Only equipment and components not manufactured in India will be allowed to be imported. Foreign manufacturers should be invited through the technology transfer route, and provided suitable incentives to establish manufacturing units for items that are currently not being manufactured in India. An approved list of models and manufacturers is planned to ensure the quality and reliability of equipment.

Disaster risk reduction: The draft policy recommends the incorporation of measures for the reduction of disaster risks in the planning, design, construction and operational aspects of power projects.

The way forward

Industry reaction to the draft NEP has been mixed. Experts have appreciated several aspects of the policy as forward-looking. However, they believe the policy lacks an overall theme and bold visionary statements. It should be more concise, with the details being provided separately in an explanatory memo. “The policy could revolve around the four key themes of resilience, reliability, economy and sustainability,” suggests S.K. Soonee, adviser, POSOCO.

Sectoral planning must be done for the long term so as to give clear signals to investors. The roadmap for dealing with coal-based generation must be clearly articulated, including even banning new coal-based plants other than those that have already been planned or are beyond a certain date. The generation mix cannot be altered frequently as it involves huge long-term investments and national resources. As the country is committed to promoting clean energy, it should also focus on emerging technologies such as offshore wind, for which India has enormous potential, and green hydrogen, in addition to promoting hydropower and nuclear. Most developed economies are drawing up long-term energy and climate plans, with specific targets for up to 2050. India must clearly state its long-term vision and prepare a roadmap for the power sector in conjunction with other related energy sectors at least for the next 10-15 years. Greater coordination and synchronisation between the central and state governments are a requisite for effective and timely implementation of plans. The NEP provides an opportunity to the government to steer the future growth of the power sector and make a major contribution to the post Covid-19 economic recovery.


EXPERT VIEW


Anish De, Partner, Global Sector Head, Power and Utilities, KPMG, and National Head, Energy Natural Resources & Chemicals, KPMG in India

The proposed draft NEP at the outset highlights the achievements that the sector has witnessed. Building on that, it attempts to comprehensively address the large number of issues that the power sector faces. While an appreciable effort, it needs sharpening to make it more directionally clear for sector participants and remove ambiguities, providing a clear call for action.  Hence, structurally, a crisper and actionable version is needed for providing directional clarity. To this end, it also needs to be made brief, with all the historical content going in as an explanatory memorandum for the policy. Further, for matters within the remit of the MoP, actionability should be brought in. Matters outside the remit of the MoP/electricity sector should be clearly identified and cause for action established on those along with the mechanism.

In terms of goals, these should be few and overarching. In line with the times, decarbonisation, financial viability of the sector, and customer value could be the overarching goals. These goals need to be circumscribed by the principles that would guide the policy. These could include light-handed regulation of markets and competition in line with the competitive market focus, integrated planning for directional messaging to sector/market participants, duly considering climate change effects, and efficiency and transparency. Basing on these overarching goals and principles, the specific policy initiatives could be formulated. This would provide a strong construct to the various initiatives indicated in the draft policy.

The policy formulated should also be evidence based. At this time, there are several conjectural elements (for example, it mentions that “coal-based capacity may be required to be added since it is the cheapest source”) without evidence in support. Such mentions dilute the directional effects of the policy, which otherwise points to clean energy development and decarbonisation as the principal objectives. Some other key aspects that would align with goals instead need mention. These would include more robust principles of transmission open access and pricing (basis GNA), specificity on distribution tariff reforms/tariff adequacy, payment security, and concepts/structures such as DSOs, which are essential when there is distributed generation. Also, smart grids need to go beyond smart prepaid meters and include other necessary functionalities such as distribution system operations, resilience, reliability and efficiency step-ups.

In summary, the policy needs sharpness in the definition of goals, consistency with them, brevity, actionability in line with emerging global and national priorities, and specificity on actions and timelines.


Sabyasachi Majumdar, Senior Vice-President, ICRA Limited

The draft NEP, 2021 proposes to focus on improving the quality and reliability of supply, along with the promotion of clean and sustainable generation of electricity, development of efficiency markets for electricity and augmentation of the transmission system. More importantly, the policy proposes the revitalisation of the discoms to make them financially viable. It also focuses on promoting domestic manufacturing in the power sector.

The policy lays emphasis on the development of renewable capacity including hybrid sources such as wind-solar. It also proposes the adoption of energy storage, including battery storage, pumped hydro and other emerging technologies, to enable round-the-clock supply from renewable energy sources. Further, the policy states that the risk of grid curtailment for reasons other than grid security or transmission constraints should be mitigated for renewable energy plants through a two-part tariff mechanism. Given the intermittent nature of renewable generation and its concentration in certain regions, the policy proposes that the cost of generation variability be shared by the concerned entities. The draft policy also proposes differential pricing for generators and consumers based on the time of day to enable efficient grid operations.

With respect to coal-based capacity, the policy focuses on the use of supercritical/ultra-supercritical technology for new projects and enhancing the flexibility of operations for coal-based plants in view of the growing share of renewable sources in the generation mix. Given the long delays witnessed in the past in the case of hydro projects, the policy highlights the importance of expediting their execution by the central and state governments.

Given that the distribution segment remains the weakest link in the power sector, the draft policy underlines the importance of measures such as feeder separation, metering at the distribution transformer level, enhancing of consumer metering to 100 per cent and the adoption of solarisation of agriculture pumps for reducing subsidy dependence. It proposes that the subsidy payment should be made directly to consumers through direct benefit transfer. It talks about the adoption of PPPs to improve operating efficiencies and reduce financial losses in the segment. It also highlights the need to separate the wires and the supply business to bring in competition.

Further, the draft NEP focuses on the importance of timely approval of tariff orders without any major regulatory assets and moving towards lower regulatory intervention in the tariff-setting process. It also talks about energy conservation, energy efficiency measures, compliance with environmental norms and the development of EV charging infrastructure.

In our opinion, these policy measures are positive for sector development. However, effective implementation of the proposed policy measures would require coordination between the central and the state governments with power being a concurrent subject. Moreover, distribution reforms require a strong political will on the part of the state governments, which remains a key challenge for the sector.


S.L. Rao, Former Chairman, CERC

An NEP for India should normally cover aspects that have created serious problems in national electricity grid operations. For example, in generation, one of the main issues has been the contribution of inefficient and ageing plants in some states. These should have been shut down or improved with investments. Unfortunately, the Indian constitution may not allow such powers to a central agency. The NEP must consider how to deal with this problem.

In transmission, we have a situation where the national company, Power Grid Corporation of India Limited (Powergrid), is doing a fine job of managing interstate transmission. But we need to find a way to integrate the work of intra-state transmission, which is controlled by the state governments, with that of national transmission.

Electricity distribution, which is controlled by the state governments, is the worst issue we have had to deal with. Distribution companies or discoms are allowed to remain overstaffed with inefficient staff. In addition, discoms are influenced by the state governments to set tariffs that are politically or electorally desired. Many discoms are making losses, with the deficit being made up by the state governments. Discoms should be able to cover their actual cost. Any subsidy to local consumers must be separate from discom operations.

Open access has been left to the state governments’ authority. In many cases, customers are compelled to buy from local generation, although they can get cheaper electricity from other states. This is related to the ambiguous powers given to the state governments, which need to be corrected.

Fuel is another major issue. As a country, we are committed to bringing down environmental pollution. This requires using non-polluting fuel. Instead, we are using domestic coal, which in most cases is not as efficient as coal in other countries. The pricing of coal should be more reflective of its net contribution after deducting the cost of cleaning up the pollution.

Along with this is the commitment by India in international fora to use renewable energy. However, we do not have adequate provisions for the storage of excess renewable power produced in many states, which must be a part of the NEP. Storage could be in lakes where water becomes the storage medium. Other storage mediums, have been developed in the US and elsewhere. We must explore their use, incorporate them in our policy and provide for their costs.

Even more relevant is the electrification of transportation, which requires developing methods for pricing electricity charged to vehicles and taking back any excess electricity into the grid. This requires the use of existing technology. The capital costs of such technology and running expenses must be provided for as a part of the NEP.

We must find a way for electricity regulators to consider efficiency in the use of electricity by various equipment. For example, agricultural pump sets are highly inefficient and there are many kinds of equipment that use electricity inefficiently, or are polluting. Regulators should use their power to intervene in such cases.

 

 

Swarna Kesavan

 

 

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