From UPSC perspective, the following things are important :
Prelims level : Electricity Act 2003.
Mains level : Paper 3- Problems of DISCOMs.
Despite several policy measures, DISCOMs continue to suffer from various issues. This article focuses on the comprehensive proposal to amend the Electricity Act 2003. But here’s a catch, we will be discussing some issues with proposed amendment. Let’s dive into our DISCOMs analysis.
Two-part tariff policy
- At the core of DISCOM woes is the two-part tariff policy.
- Two-part tariff policy was mandated by the Ministry of Power in the 1990s at the behest of the World Bank.
- As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA).
- Under PPA, DISCOMs were committed to pay- 1) a fixed cost to the power generator, irrespective of whether the State draws the power or not, 2) a variable charge for fuel when it does.
How Over-optimistic projection led to losses?
- The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA).
- The 18th Electric Power Survey (EPS) overestimated peak electricity demand for 2019-2020 by 70 GW.
- The 19th EPS published in 2017, by 25 GW, both pre-Covid 19.
- Thus, DISCOMs were locked into long-term contracts, ended up servicing perpetual fixed costs for power not drawn.
- Due to the CEA’s overestimates, the all-India plant load factor of coal power plants is at an abysmal 56% even before COVID-19.
- This means that coal power plants are generating electricity only 56% of what maximum these power plants are able to generate.
Renewable energy factor
- Renewable impacted the power sector in the following 3 ways-
- 1) From 2010, solar and wind power plants were declared as “must-run”.
- This required DISCOMs to absorb all renewable power as long as there was sun or wind, in excess of mandatory renewable purchase obligations.
- This means backing down thermal generation to accommodate all available green power.
- This resulted in further idle fixed costs payable on account of two-part tariff PPAs.
- 2) Power demand peaks after sunset.
- In the absence of viable storage, every megawatt of renewable power requires twice as much spinning reserves to keep lights on after sunset.
- DISCOMs, especially in the southern region, have had to integrate large volumes of infirm power, mostly from solar and wind energy plants.
- These renewable energy plants enjoy must-run status irrespective of their high tariffs.
- The tariff is ₹5/kwh in Karnataka and ₹6/kwh in Tamil Nadu for solar power.
- All this even as the demand growth envisaged in the 18th EPS failed to materialise.
- 3) In 2015 the Centre announced an ambitious target of 175 gigawatts of renewable power by 2022.
- This followed with a slew of concessions to renewable energy developers, and aggravating the burden of DISCOMs.
- Incidentally, China benefited by as much as $13 billion in the last five years from India’s solar panel imports.
So, what are the proposals in the Electricity Act-2020?
1. Sub-franchisees and issues with it
- The amendment proposes sub-franchisees, presumably private, in an attempt to usher in markets through the back door.
- Issue: Private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction.
- The Electricity Bill 2020 containing the proposed amendments is silent on whether a private sub-franchisee would be required to buy the expensive power from the DISCOM or procure cheaper power directly from power exchanges.
- If it is the first, the gains from the move are doubtful since the room for efficiency improvements is rather restricted in the already profitable regions attractive to sub-franchisees.
- If it is the second, DISCOMs will then be saddled with costly power purchase from locked-in PPAs and fewer profitable areas from which to recover it.
2. Concession to renewable
- The amendment proposes even greater concessions to renewable power developers.
- This would have a cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.
3. Elimination of cross-subsidies
- The most controversial amendment proposed, seeks to eliminate in one stroke, the cross-subsidies in retail power tariff.
- This means each consumer category would be charged what it costs to service that category.
- Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses will pay the steepest tariffs.
- The proposed amendments envisage that State governments will directly subsidise whichever category they want to, through direct benefit transfers.
- Cross-subsidy is a fact of life in even private industries, soap, newspapers, or even utilities such as telecom.
- But eliminating them in one stroke is bound to be ruinous to State finances.
- There are also myriad problems with Direct Benefit Transfer.
- This proposal is practically infeasible; if forcibly implemented, it will lead to chaos.
4. Selection of the State regulator
- State regulators will henceforth be appointed by a central selection committee.
- The composition of which inspires little confidence in its objectivity.
- This could result in jeopardising not only regulatory autonomy and independence but also the concurrent status of the electricity sector.
5. Electricity Contract Enforcement Authority
- Its members and chairman will also be selected by the same selection committee referred to above.
- The power to adjudicate upon disputes relating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority.
- This is being done ostensibly to protect and foster the sanctity of contracts.
- This is also to ensure that States saddled with high-priced PPAs and idling fixed costs, yet forced to keep increasing the share of renewables in their basket, have no room for manoeuvre.
Consider the question “Despite various policy interventions, DISCOMs continue to suffer from financial woes. Analyse the reasons for their woes. Examine the proposals in the Electricity Act (Amendment) Bill 2020.”
Beyond a doubt, the Electricity sector requires change but we must try to bring holistic and participatory approach to find solutions.
Back2Basics: Electricity Act 2003
- The act covers major issues involving generation, distribution, transmission and trading in power.
- Before Electricity Act, 2003, the Indian Electricity sector was guided by The Indian Electricity Act, 1910 and The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998.
- The Electricity Act 2003 consolidates the position for existing laws and aims to provide for measures conducive to the development of electricity industry in the country.
- The act attempted to address certain issues that have slowed down the reform process in the country and consequently had generated new hopes for the electricity industry.