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2021 | OriginalPaper | Chapter

The Genesis of Electricity Reform in India and the UK, its Repercussions and the Way forward

Author: Somit Dasgupta

Published in: Sustainable Development Insights from India

Publisher: Springer Singapore

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Abstract

This is a short essay tracing the origin of power sector reforms in India, how it evolved and what was the architecture that was followed. A comparison has been made with the power sector restructuring program followed in the UK with specific reference to competition. Does the Indian restructuring program really usher in competition or is it merely unbundling into separate entities which makes no material difference in terms of efficiency and growth? The essay briefly describes how the power sector performed in India, post-restructuring and what has been the contribution of the regulatory bodies, if any. Have the regulatory bodies been proactive as in the case of UK or have they degenerated into passive organisations only doing the government’s bidding? The essay finally suggests a way forward on how to improve the functioning of the distribution sector and the recommendation that is being made is privatisation of the distribution companies. It is strongly felt that public-owned distribution companies can never deliver since there is a clear lack of accountability which gets further complicated on account of government interference. Despite restructuring, the government still feels that the distribution companies are no better than its own backyard.
Footnotes
1
This is equivalent to about US$ 400 million on the basis of today’s exchange rate of Rs 75 to US$1.
 
2
The peak deficit in the 1990s was about 10%, and energy deficit was about 7%.
 
3
This was followed up by a high-level delegation led by the Cabinet Secretary to the USA, Europe and Japan for seeking foreign investments in the Indian power sector.
 
4
Apart from changing the policy for seeking investments in the power sector, other measures initiated during this period include measures to free currency and capital markets, reduce government control on banks, cut back on licensing requirements for industry, etc.
 
5
The Powergrid Corporation of India (PGCIL) was the designated CTU, and it is felt that the PGCIL did not really allow private entities to come in fearing loss of its own monopoly position (Rao 2002).
 
6
The eight projects were Dabhol (740+1440 MW), Bhadravati (1072 MW), Jegurupadu (235 MW), Godavari (208 MW), Vishakapatnam (1040 MW), Mangalore (1000 MW), Ib Valley (420 MW) and Neyveli (250 MW).
 
7
To give an example, in Madhya Pradesh, the SEB had signed PPAs aggregating to 6500 MW, whereas the ‘escrowable capacity’ was fixed at 2561 MW by the financial institutions (D’sa, Murthy and Reddy, 1999).
 
8
Countries like Indonesia, Pakistan and the Philippines are other examples where tariff from IPPs were relatively high leading to social unrest (Rao 2002).
 
9
Today the stipulation is that only the hydro projects above Rs 1000 crore need to get a techno-economic clearance from the CEA mainly because it has interstate issues.
 
10
Some of these states also availed of loans from multilateral development banks, such as, Andhra Pradesh, Haryana, Uttar Pradesh and Rajasthan.
 
11
Maharashtra, Punjab, Tamil Nadu and Delhi are some of the states which have set up their regulatory commissions under the Central Act.
 
12
The first draft of the bill was prepared by the NCAER on behalf of the Ministry of Power.
 
13
The states were Orissa, Haryana, Andhra Pradesh, Uttar Pradesh, Karnataka, Rajasthan, Delhi, Madhya Pradesh and Gujarat.
 
14
Just to give an instance, in UK, just after passing the act in 1989, retail competition was introduced for big consumers in 1990, followed for medium consumers in 1994 and for all consumers in 1998. The wholesale market (called the Pool) was replaced by NETA in 2001, and this was replaced by BETTA in 2005. In between 1989 and 2005, several other measures were taken which clearly points to a keen regulatory oversight.
 
15
This appeared in the Electricity (Amendment) Bill 2014. This bill was sent to the select committee for scrutiny which had submitted a report but nothing happened thereafter. It is said that the states had objected to various provisions of the bill, especially on the ‘carriage and content’ issue. The concept of ‘carriage and content’ which was the central subject of the bill has been dealt with later on this essay. The government in its budget speech for FY22 again spoke of having more than one discom in an area but details were not disclosed.
 
16
Draft Electricity Act (Amendment Bill) 2020.
 
17
There is a sizeable number of IPPs in India today and their share in capacity is as high as 47% today.
 
18
Between 1947 and 1990, different governments followed different policies in respect of the power sector. The Labour Government in 1970s forced the electricity industry to curtail prices to control inflation, whereas in 1980s, the Conservative Government raised prices to reduce public borrowings (from the website of the Department of Energy, USA).
 
19
The CEGB was established by the Electricity Act 1957. In 1983, the government had also passed the Electricity Act 1983 which was designed to encourage the growth of independent power producers. This act required the CEGB to purchase electricity from the private producers at avoided cost, something similar to PURPA, 1978 of USA.
 
20
The X factor varied across segments of the industry with transmission companies assigned an initial value of zero. For the 12 RECs, the X value ranged from zero to 2.5. There has been criticism from certain quarters that the X factor has been favourable to the industry, allowing them to have excessive profits.
 
21
For several reasons, the rate of return regulation was rejected in the UK, partly because it required detailed industry data which would in turn require a large bureaucratic structure (from the website of the Department of Energy USA).
 
22
The Bertrand duopoly model examines price competition among firms that produce differentiated but highly substitutable products. Each firm’s quantity demanded is a function of not only the price it charges but also the price charged by its rival.
 
23
There is a case of Jamshedpur, Jharkhand, where the regulatory commission granted a license for parallel distribution.
 
24
Earlier OFGEM was known as the Office of Electricity Regulation (OFFER). OFGEM is said to have more than 750 employees working in the organisation which is many times over the combined manpower strength of the central and state regulatory commissions in India.
 
25
This is a process where the regulated entity is better informed than the regulator, and hence, is in a position to influence the decisions of the regulator.
 
26
On a per unit basis, while the average cost of supply was Rs. 5.60, the average revenue (inclusive of subsidy received) was Rs. 5.33. Thus, for every unit, there is a loss of Rs. 0.27.
 
27
Creation of regulatory assets is strongly discouraged by the Tariff Policy unless there are extraordinary circumstances. The problem of regulatory assets is limited to about six to seven states only. The states/UTs are Uttar Pradesh, Rajasthan, Delhi, Tamil Nadu, Puducherry, Maharashtra and Chandigarh.
 
28
These commercial loss figures relate to 2017–18.
 
29
There have been several schemes which have been implemented by the centre which began in the early 2000s. The first such scheme was the APDRP scheme which was later converted to what is now known as the Integrated Power Development Scheme (IPDS). The outlay for the IPDS was about Rs. 32,600 crores (US$ 4.3 billion) out of which budgetary support was around Rs. 25,300 crores (US$ 3.3 billion). The earlier scheme of APDRP had an outlay of about Rs 44,000 crore (US$ 5.8 billion). In both these schemes, funds are provided for upgradation of infrastructure and also for metering.
 
30
According to the government portal ‘praapti’, as in May 2020, the discoms owed about Rs. 102,000 crores (US$ 13.6 billion) to the generators. Out of the total amount due, about 36% is payable to the central generating stations, about 21% to state generating stations, about 34% to the private generators and about 9% to renewable generators. The renewable generators are also primarily private generators. In order to help the discoms to pay the central generators, the government has started a new scheme under the aegis of ‘Atmanirbhan Bharat’ wherein the discoms will receive soft loans totalling to about Rs. 90,000 crores (US$ 12 billion). These loans will have state government guarantee.
 
31
This has been under implementation since August 2019.
 
32
The CEA has been entrusted with the task of drafting a common performance standard which would be adhered by all discoms.
 
33
In order to help the consumers understand the complex tariff petitions, some regulatory commissions have in the past appointed officers who would discuss the petitions with interested consumers. One such commission was the Delhi Electricity Regulatory Commission.
 
34
This indiscriminate lending by commercial banks has led the way for creation of non-performing assets (NPAs). It is estimated that there were around 34 projects with an aggregate capacity of 40,000 MW who had been extended loans amounting to about Rs 2 lakh crore (US$ 26.6 billion). About seven to eight such projects have been revived by giving them fuel linkages which they did not have.
 
35
While capacity in the last ten years grew at about 10% per year, the demand growth was only about 5% per year. The growth in the last two years, i.e. 2018–19 and 2019–20 was even lower due to the economic downturn and ever since the total lockdown from late March 2020, the growth was actually negative. The PLF of thermal power stations, due to all these reasons put together has been hovering at less than 50% during Marcj–May 2020. Part of the reason for low PLF is also on account of the coronavirus.
 
36
To overcome the problem of coal linkage, the government introduced the scheme of ‘Shakti’ in May 2017 where coal is provided on the basis of auctions. The beneficiary plants are divided into various categories, such as those having valid PPAs, those not having PPAs, those which are owned by the government, etc.
 
37
According to Brookings, India’s fare to freight ratio is one of the lowest in the world at 0.24. The corresponding figures for Japan, Germany and China are 1.9, 1.5 and 1.2, respectively. Further, coal accounts for about 44% of the revenue earned through freight and about 60% of the coal used in power generation is transported through railways.
 
38
UMPPs are large thermal plants of 4,000 MW which were entitled to certain tax benefits.
 
39
The levelised tariff for the Tata Mundra Plant was Rs. 2.26 per unit, for Sason, it was Rs. 1.196 per unit and for Krishnaptnam, it was Rs. 2.33 per unit.
 
40
The situation had become so acute that the APTEL, in 2011, issued an order that the regulatory commissions should initiate suo-moto proceedings under Section 121 of EA 2003 in case tariff petitions are not filed by the discoms.
 
41
To give a few examples, in the RPI-X regulation (mentioned in par 3.12), there were allegations that the value of X has been made favourable to the industry which allowed them to have excessive profits. Another criticism against the regulator was that the Pool was replaced by the NETA without any detailed analysis.
 
42
The CERC had floated a consultation paper entitled ‘Market-Based Economic Dispatch of Electricity’ in December 2018 for creation of capacity markets by redesigning the day-ahead market in India.
 
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Metadata
Title
The Genesis of Electricity Reform in India and the UK, its Repercussions and the Way forward
Author
Somit Dasgupta
Copyright Year
2021
Publisher
Springer Singapore
DOI
https://doi.org/10.1007/978-981-33-4830-1_7

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