From UPSC perspective, the following things are important :
Prelims level : CERC
Mains level : Paper 3- India's power sector and issues
Reforms in power sector in the UK were extensive and offers some important lessons for India. This article elaborates on the issue of reforms the challenges in introducing such reforms in India.
Background of the power sector reforms in UK
- After living with vertically integrated utilities till 1989, they unbundled.
- Unbundling created markets both at generation and retail end.
- Today, they are back to a situation where 70% of the power generated is sold outside the wholesale market.
- The Electricity Act, 1989, which paved the way for the appointment of a regulator and thereafter, leading to unbundling, both vertical and horizontal.
- Twelve distribution utilities were set up (called RECs) along with three-generation companies and also a national wires company (called NGC).
- All of them were privatised barring Nuclear Electricity.
- Retail competition was introduced in 1990 and was extended to all consumers in 1998.
- A wholesale market was set up for generators.
- The next major step was to fragment the generators because the regulator felt that they were colluding.
- NETA in 2001 was primarily a tie-up between gencos and their consumers with long-term power purchase agreements.
- The Energy Act, 2012, was enacted, which envisaged further changes.
Issues with Power sector reform in India
- The Electricity Act, 2003 is a very cautious and timid exercise compared to what has been done in the UK.
- Through the Act, we have merely unbundled and ring-fenced our utilities so that there is transparency in the accounts; this itself took us several years.
- There has been no attempt to create a wholesale market or a full-fledged retail market where the consumer chooses the supplier.
- Large consumers, having loads in excess of 1 MW, however, have the option of open-access where they can opt to receive supply from some other entity, instead of his incumbent utility.
- The road to open access though has been bumpy, and discoms have opposed it tooth and nail.
- Besides what was possible in the UK may not be possible in India.
- The UK did not have a regime of cross-subsidies where the commercial and industrial sectors subsidise agriculture and low-end domestic consumers and also did not have high commercial loss levels.
- Moreover, in the UK, all consumers were metered, unlike India.
- There is yet another factor: ‘Power’ falls in the Concurrent List.
- The Centre and states rarely see eye-to-eye on several issues concerning the sector, especially on matters relating to distribution.
- Consequently, any major change does not get accepted.
Issues in introducing reform in India
- The CERC floated a discussion paper in December 2018 about the creation of a wholesale market in India.
- This amounts to retrofitting, and retrofitting in an existing architecture has its limitations.
- But the issue is whether India should attempt creating a wholesale market or for that matter a full-fledged retail market in India, especially after the experience of the UK.
- The UK is almost back to the era of vertically integrated utilities, and consumers barely switch their retailer.
- We need to privatise our distribution sector by creating joint ventures with the government.
- the government will have to undertake initial hand-holding till such time commercial losses are wiped out.
- This is the model which was followed in the case of Delhi and has proven successful.
- Commercial losses have come down from 50% to single-digit figures within a span of 10 to 12 years.
- Once we reach that stage, we can think of creating a full-fledged retail market where a consumer can choose her supplier.
Consider the question “Despite several reforms in the power sector, India still lacks full-fledged retail. What are the challenges in the creation of such a market. Suggest the ways to deal with the challenges.”
The Indian consumer is only interested in good quality power supply at a reasonable price. We only need to take policy measures so that the incumbent utilities can provide this, since, this will be the least costly path.