The Electricity Act of 2003 was enacted by the Government of India to govern the country’s power sector with the best interests of all its stakeholders in mind. The Act’s provisions encompass the generation, distribution, transmission, trading, and consumption of electricity within the country at the state and national levels.
However, given the pace at which the Indian power sector has been transforming, the need for a revamp to the Act is overdue. The sector has been held back by the archaic policies and has had to suffer from patchy on-ground implementation over the years.
Power generation, especially renewable power generation capacity, has grown rapidly over the years, but transmission capacity has been struggling to catch up. At the same time, the distribution sector has been cash-strapped for several years now, and bailouts by the government at getting them back on their feet have been ineffective.
Now, the Ministry of Power (MoP) has issued a draft proposal for the amendment of the Electricity Act 2003. The Ministry has also given significant focus to the renewable energy sector in its proposed amendments.
Here is a look at three of the most significant amendments the Ministry of Power has proposed that will directly impact the renewable sector.
National Renewable Energy Policy
The Ministry has proposed to issue a National Renewable Energy Policy periodically to promote renewable power generation in the country and to prescribe renewable purchase obligation (RPO) targets.
Generators and financial institutions have welcomed the idea and have provided their recommendations for the policy.
L&T Financial Services (LTFS), an Indian non-banking financial services company (NBFC), has recommended that the central government should notify the new policy within six months from the implementation of the Act and push out a revised version with any changes, if necessary, once every five years after that.
“The policy should aim to promote renewable energy by creating a conducive investment climate, set out emission reduction targets, foster research, innovation, and create enabling market mechanisms,” LTFS said in its response to the MoP’s request for feedback on the proposed amendments.
Adding to this, Subrahmanyam Pulipaka, Chief Executive at the National Solar Energy Federation of India (NSEFI), said: “We also want the national renewable energy policy to cover the entire gambit of storage as well because today you’re talking about renewable energy purely from the generation standpoint, but later, there will be a point where storage will also be an integral part of it.”
“The main motive of this policy should be to establish a national-level precedent that can be adopted by states as per their requirements,” Pulipaka added.
The National Renewable Policy would be helpful only if it promotes the renewable sector while addressing the shortcomings of existing policies, lack of investments in the sector, the slow pace of technological adoption, and compliance-related issues. At the same time, the policy must also take into consideration the individual requirements of states instead of prescribing a blanket policy.
National Tariff Policy
The central government has also proposed a National Tariff Policy. Some of the issues this intends to address are cross-subsidies and tariff adoption by state commissions.
The provisions of this centralized tariff policy propose to reduce cross-subsidy surcharges based on a centralized mechanism. Currently, state electricity regulatory commissions are responsible for determining these charges.
This proposal has been met with criticism. Stakeholders have argued that a blanket reduction in cross-subsidy surcharges may not be appropriate owing to different factors and nuances at the state level. State commissions tailor these charges on an individual basis based on several factors that a centralized policy may fail to consider.
If implemented, state governments might have to resort to increasing other duties to make up for the revenue loss from the reduced cross-subsidy surcharges. State commissions sought to retain the responsibility of determining these charges based on the needs of individual states.
The center also proposed for commissions to set tariffs without accounting for subsidies, if any, in which case, it will be directly provided to the consumer by the government by way of direct benefit transfer (DBT).
Under the National Electricity Policy, electricity is subsidized for the agricultural sector and domestic consumers below the poverty line. This subsidy is partly recovered through higher tariffs paid by the industrial and commercial electricity consumers (cross-subsidy charges) and direct subsidies from state governments to the DISCOMs. Now, the government proposes that the subsidy to any category of consumers has to be provided through Direct Benefit Transfer.
The government introduced DBT in 2013 crediting subsidies on liquified petroleum gas (LPG) consumers, directly to their bank accounts, to reduce pilferage or delays. The subsidy is generally credited directly to consumers’ bank accounts as soon as they book the first subsidized LPG cylinder before delivery, so they can purchase the next cylinder at a market rate until the cap of 12 cylinders per year is reached.
The DBT program, if efficiently implemented, could result in reducing the cross-subsidy charges, making open access projects more attractive.
State commissions have criticized this proposal by stating that DBT to consumers eligible for subsidies would be premature and might not have the same intended effects as in the case of consumers receiving subsidies on LPG cylinders. They also noted that implementing a centralized tariff policy would reduce state commissions to mere implementing agencies.
One proposal that was welcomed under the tariff policy was setting a time limit for tariff adoption by state commissions. The amendment proposed for a 60-day window for commissions to adopt a tariff discovered through a transparent bidding process, failing which, the tariff will be deemed to have been adopted.
This was proposed in light of issues arising from delays from the state commissions in approving tariffs determined through competitive bidding. In the past, these delays have resulted in challenges when raising capital for projects and have dissuading developers from participating in tenders in certain states.
While some proposals under the centralized tariff policy have been met with criticism, the industry believes that the government is focusing on the right pain points. With the right tweaks, the national tariff policy has the potential to benefit the power sector significantly.
“The government is placing the right structural enablers with the new tariff policy, and the industry is sure to receive the much-needed momentum. A time-bound grant of open access and reduction of cross-subsidy surcharges will bring more investment to the sector. It also complements an essential objective of the Electricity Act, making consumers self-reliant in meeting their electricity demand. Along with this, Direct Benefit Transfer, if properly implemented, would be the game-changer for the sector” said, Sanjeev Aggarwal, Founder and CEO of Amplus Solar, a distributed solar and energy solutions provider.
Electricity Contract Enforcement Authority
The Ministry of Power also proposed to establish the Electricity Contract Enforcement Authority (ECEA) to decide on matters regarding the enforcement of contractual obligations on purchase or transmission of electricity.
The Ministry noted that the ECEA would not have any jurisdiction over regulation related matters, tariff determination, or any tariff-related disputes.
This proposal has also seen mixed reactions. On one side, the industry is skeptical of the need for this body. State commissions argue that contract resolution is one of their responsibilities and that stripping them of this power would make them mere implementing agencies.
On the other hand, industry experts say that this is a good initiative, and this could be used to resolve disputes between distribution companies and power consumers. The ECEA could also play a vital role in reducing redundancies in dispute resolution because of the multiple bodies that the stakeholders have to deal with presently. Petitions have to pass through state commissions, the central commission, the appellate tribunal, Supreme Court, among others, before a resolution is arrived at.
“We support this idea of an enforcement authority, but what we have asked for specifically is that establishing the ECEA should not lead to the multiplicity of petitions especially on issues that could impact tariffs,” said Pulipaka, noting that “state commissions believe that the ECEA would take away their responsibilities, but the government should address these misconceptions.”
Given that some of the biggest challenges faced by renewable project developers and power generators relate to violations or non-fulfillment of contracts and agreements, this would be a welcome addition. In the case of Andhra Pradesh reviewing the power purchase agreements signed between the state’s DISCOMs and power generators to renegotiate tariffs, the central government was powerless in taking disciplinary measures or convincing the state to refrain from such action which adversely affected the sector in the whole country. The investments flowing into the sector saw a huge setback.
A dedicated enforcement authority with well-defined duties could go a long way in helping the sustained growth of the renewable industry.
Ideally, the Electricity Amendment Bill, 2020, should focus on not just adding renewable generation capacity, but fostering existing capacity and developing adequate infrastructure to support it.
Aside from this, the government should also aim to create a conducive investment environment to attract more domestic and foreign players into the market while also continually improving policy inconsistencies, redundancies, and operational issues by power establishments.
These proposed amendments from the central government became inevitable after several states created hurdles for the renewable energy industry and acted in ways that questioned the sanctity of contracts, harming investor confidence in the sector at a time when foreign investments are sorely needed as the industry recovers from the COVID crisis.
“There are some extremely important amendments proposed in the Electricity Act. If adopted, they could foster critical changes that are sorely needed to fix the structural issues that have frustrated the renewable industry for a long time. The amendments, if executed well, could propel the industry forward during these challenging times,” said Raj Prabhu, CEO of Mercom Capital Group.
Nithin is a staff reporter at Mercom India. Previously with Reuters News, he has covered oil, metals and agricultural commodity markets across global markets. He has also covered refinery and pipeline explosions, oil and gas leaks, Atlantic region hurricane developments, and other natural disasters. Nithin holds a Masters Degree in Applied Economics from Christ University, Bangalore and a Bachelor’s Degree in Commerce from Loyola College, Chennai.