Electricity Bill (Amendment) 2021 – A Review – Balaji Vaidyanath and Devang Patel
Balaji Vaidyanath (@nbalajiv) and Devang Patel – Nafa Asset Managers Private Ltd
The Energy Ministry has proposed amendments to the Electricity Law (2003) – in the form of a bill pending approval – which will trigger the next round of reforms in the electricity sector and resolve some of the major issues plaguing the industry.
Electricity bill (amendment) – main deadlines:
– Apr-20: Bill circulated to other ministries and to the public for consultation
– January 21: a note requesting Cabinet approval was issued
– Jul-Aug-21: the bill could be presented to Parliament after Cabinet approval.
Cost-reflecting tariff – to reduce cross-subsidies and replace them with DBT
SERCs should determine retail tariffs on the basis of actual cost or fair cost of provision and without subsidy compared to those currently determined on the basis of state subsidy commitments. Any subsidy must be provided directly to consumers through DBT. Currently, cross-subsidy rates on the average cost of supply are above 50% in some states, compared to the maximum 20% prescribed in the 2016 National Tariff Policy, hurting industrial and commercial users who end up paying. very high tariffs.
National Renewable Energy Policy – to better enforce renewable energy targets
The central government, in consultation with state governments, will notify and prescribe a minimum requirement for the purchase of renewable energy and electricity and impose penalties for shortfalls. Currently, the goals are prescriptive and left to various state governments on their own initiative. In order to ensure strict compliance with RPOs, penalties will be increased
Establishment of the Electricity Contract Enforcement Authority (ECEA) – to enforce PPAs
The ECEA will be the competent authority for contract / APP related disputes, as the CERC / SERC have limited enforcement power. This aims to alleviate some of the uncertainty caused by the actions of some state governments in the recent past, by attempting to renegotiate enforcement.
Unique ERC / APTEL member selection committee – to ensure timely appointments
A common national selection committee will be formed to select the president and members of APTEL, ERC and CEA instead of separate and separate committees at state level, which will reduce the time required to fill vacant positions which takes up to 2 years and hinders the functioning of ERCs. State power can be drastically reduced with rotational representation on the national committee. Alternatively, state committees can continue to function as standing committees reporting to the national committee.
LDC empowered to oversee payment security – to ensure timely payments to gencos
Regional and national load balancing centers will be banned from distributing electricity if adequate payment guarantee is not provided by the distribution concessionaire, which will help reduce collection delays by gencos.
Allow distribution outsourcing – to help with privatization
A distribution licensee will be able to authorize a distribution franchise or sub-licensee to distribute electricity on its behalf with prior authorization from SERC, which will help reduce barriers to entry for the participation of the private sector to distribution.
Why the need for these changes:
Despite multiple rounds of reforms since 2003, the electricity sector still faces problems of operational inefficiency and financial solvency which have repercussions on other sectors and manufacturing competitiveness.
Huge and growing grants paid off balance sheet:
Direct tariff subsidies from state governments in FY19 amounted to Rs 1.1 billion, compared to Rs 0.75 billion in FY16. Cross-subsidies are not well reported but estimated at An additional $ 0.75 billion. As there are borrowing limits on state budgets, this burden is shared with discos and gencos. Powermin estimates the income due to Discoms but not received due to inadequate tariffs (total regulatory assets) at Rs 1.4 tn. Debts to Gencos and Transcos reached 2.26 billion in March 2019. About 75% of the subsidies are intended for agriculture. Agri’s share of 17% of electricity is much higher than that of other countries. (see exhibition).
Weak discoms and under-investments:
Due to the increase in subsidies, the gap between the average cost and the realization remains high. The Discoms continue to accumulate losses and go into debt. This in turn affects the investments by them. AT&C losses at around 20% are on the decline, but regularly miss reduction targets after each bailout and are twice the world average. (see exhibition)
Impact on other sectors and competitiveness:
The burden of cross-subsidization borne by industrial and commercial consumers has increased from Rs 67,785 crore in FY16 to Rs 75,027 crore in FY19 – their tariffs have increased during this period. (see exhibition). Stronger companies take captive power, leaving weaker companies at higher rates. Industrial tariffs are more than twice those of China under the PPP according to the IEA. (see exhibition). Discom’s problems are delaying adoption of distributed generation and net metering.
DBT for better targeting and discipline:
Currently, there is no upper limit on subsidized consumption, resulting in poor targeting of subsidies. Food and fertilizer subsidies have been rationalized through DBT and the same can be achieved in the electricity sector. The DBT will lead to better accounting and better targeting of subsidies. This can ensure that state governments release grants faster. There will be no restrictions on state grants, but states will be required to disburse them upfront through DBT, which will reduce sub-collections and improve the health of DISCOM – leading to better quality of supply for industrial and residential consumers.
Despite several attempts and regular bailouts, Discom’s debt continues to accumulate and is expected to reach $ 6 billion in FY22. Electricity being on the competitor list has led to a slow pace of reforms in the sector. Subsidies are a political hot potato – what happens and what happens and how quickly the government can push through reforms – remains to be seen.
– Lenders, mainly REC and PFC
– Equipment manufacturers, including meter companies, solar and wind component manufacturers, cable and transformer companies on power separation.
– T&D franchisees like Torrent, Adani, Tata Power