Electricity Act Amendment Draft Addresses Strict Enforcement of Contracts, RPO

The Ministry of Power (MoP) has issued a draft proposal for the amendment of the Electricity Act 2003 to address contract enforcement, among other vital issues.

The Ministry has invited for comments, suggestions, and objections from stakeholders. The last date for the submission of opinions is May 8, 2020.

Among the list of proposed amendments, below are some which will have a bearing on the renewable energy sector.

Electricity Contract Enforcement Authority


The MoP recognizes that the Electricity Act 2003 dealt with the supply and purchase of electricity but did not address the issues regarding the enforcement of a contract. Especially after the Andhra Pradesh episode, where the state decided to renegotiate solar and wind power purchase agreements, the ministry realized its limitations when it comes to enforcing any state to honor a contract. They could, at best, only advise states with matters related to electricity. The adverse effects of this incident were felt throughout the renewable energy industry in the country, severely denting investor confidence.

The ministry has realized that the strength of contracts enables investment in the electricity sector. Also, the existing electricity regulatory commissions in the states and center are assigned with multiple responsibilities under the Electricity Act, including regulatory functions, tariff adoption issues, granting of licenses with limited powers for settlement of disputes.

As a solution, the draft amendment proposes establishing an “Electricity Contract Enforcement Authority (ECEA).” The ECEA will be the exclusive authority with the original jurisdiction to settle matters related to specific performance of obligations under a contract related to sale, purchase, or transmission of electricity between a generator and licensee or between licensees. However, the Enforcement Authority will have no jurisdiction on any dispute involving tariffs.

In case of violation or breach of obligations under the contract, the ECEA will have the authority to direct the party to perform their obligation under the contract immediately. It may also direct the party for the payment of costs on account of breach of contract or non-fulfillment of obligations of the contract.

Sharing his observation on the proposed amendment, Aditya K Singh, Associate Partner at HSA, Advocates, said, “Initial years of implementation of the proposed amendment will see various litigation on the issue of jurisdiction. A lot of clarification will be required from the ministry to understand the intention behind the proposed amendment.”

Aditya further added, “Appointment and dismissal of the Enforcement Authority will be by the Central Government. Developers may welcome this proposition; however, licensees will have difficulty in accepting this proposition. The proposal also suggests that this Authority will normally sit in Delhi; this will also pose a logistic challenge for small developers and state licensees.”

According to the Ministry of Power, the ECEA will dispose of the matter within 120 days from the date of its receipt.

The orders of the Electricity Authority will be executable as a  decree of a civil court. The Appellate Tribunal for Electricity will hear the Appeal against orders of the Electricity Tribunal.

National Renewable Energy Policy

The draft also states that the central government in consultation with the state governments come up with a National Renewable Energy Policy for the promotion of electricity generation from renewable energy sources. Here, the government can also prescribe a minimum percentage of the purchase of electricity from renewable and hydropower sources. The draft has proposed to expand the scope of renewable power purchase obligations to include hydro sources.

Renewable and Hydro Power Purchase Obligation

Section 142 of the Electricity Act 2003 earlier stated that, if a person is found to be not complying with the directions of any regulatory commission, he has to pay a penalty of ₹100,000 ($1,318) for each violation, and in case of continuing failure, an additional penalty of ₹6,000 ($79) has to be paid each day. The proposed amendment has hiked the penalty to ₹10 million ($13,180) in place of ₹100,000 ($1,318) and ₹100,000 ($1,318) in place of ₹6,000 ($79).

Further, another sub-section is added to address the non-compliance of renewable and hydropower purchase obligation. The penalty proposed is ₹0.50 (~$0.006)/kWh for the shortfall in purchase in the first year of default. If the shortfall in purchase continues in the second, then the person is liable to pay ₹1 (~$0.013)/kWh. The penalty will be ₹2 (~$0.026)/kWh, for the shortfall in purchase continuing after the second year.

Further, the draft proposes that the National Load Despatch Center (NLDC), which is responsible for the optimum scheduling and dispatch of electricity in different regions, will also supervise and have control over the inter-regional and inter-state transmission network. It will also have the overall authority for carrying out real-time operations of the national grid.

Open Access

The Electricity Act states that open access can be provided to a consumer on payment of a  surcharge, and wheeling charges set by the state commission. Now, the amendment proposed adds to the existing charges, the charges for intra-state transmission, and inter-state transmission where applicable.

According to the proposed amendment, open access surcharge and cross-subsidies will be “progressively reduced” by the state commission according to the tariff policy. Earlier Act had no mention of the tariff policy.

Payment Security Mechanism  

Another addition suggested for the Act is to allow the load dispatch center to manage the payment security mechanism before scheduling dispatch of electricity and to be made mandatory. This is to protect the sanctity of the contracts. The payment security mechanism can be waived if the parties to the contract mutually agree. The ministry is trying to address the huge accumulation of unrealized revenues, causing hurdles in the sector.

Cost reflective Tariff

The ministry has understood that the tariff determined by the state distribution companies is not reflective of the actual cost, which is the leading cause of their weak financial health. So, it is proposing that state commissions set the tariff for the retail sale of electricity without any subsidy. In case any subsidy has to be given to any specific category of consumers, the government can directly pay it. The amendment also emphasizes that the tariff has to reflect the cost of the supply of electricity, and cross-subsidies and surcharges levied on industrial consumers should be reduced.

Adoption of Tariff

For tariffs determined through competitive bidding, the appropriate commissions have to adopt the tariff on time, which is not late than 60 days from the date of application. If the commission does not decide within 60 days, then it will be deemed to have been adopted. This proposal is a reiteration of what was earlier amended in the guidelines of competitive bidding by the Ministry of New and Renewable Energy (MNRE).

Distribution sub-license and Franchise

It is proposed that the distribution companies (DISCOMs) can engage franchisees or sub-distribution licensees to distribute electricity on their behalf in a particular area within its area of supply. However, the DISCOM will remain the licensee and will ultimately be responsible for ensuring the quality of the distribution of electricity in its area of supply.

In 2018, Mercom reported that the Ministry of Power issued a revised proposal for amendments to the Electricity Act 2003.

Earlier, it was reported that the union government had proposed an amendment to the Electricity Act to ensure that the companies applying for power distribution rights also sign the requisite Power Purchase Agreements (PPAs).

 

Image credit: Dmitry Makeev / CC BY-SA