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Proposed reforms can light up the power sector | Analysis

Book by sumant sinha

They will discipline discoms, strengthen regulation, enhance private sector participation, push clean energy

Universal and round-the-clock access to affordable electricity is a prerequisite for India’s sustained economic growth. India is currently the world’s third-largest producer of electricity with an installed capacity of 371 GW. Going ahead, rapid growth and urbanisation will drive up the demand for electricity manifold, necessitating a healthy, efficient and consumer-centric power sector. It is in this light that an overhaul of The Electricity Act 2003 has been proposed. Many provisions of the 2003 Act are now archaic, given the sector’s rapid evolution, and this has resulted in several inefficiencies and challenges creeping in, hampering further growth.

Foremost among these is a cash-strapped distribution sector, the weakest link in the value chain. Most distribution companies (discoms) today are beset with operational inefficiencies and acute financial crunch, with high Aggregate Technical and Commercial (AT&C) losses (averaging around 22%). Unsustainably designed tariff structures coupled with collection inefficiencies have played havoc with discoms’ cash flows, leading to their delaying payments to generators and also curtailing power purchase, both dampening investments in the sector.

Over the last few years, we have been seeing a transition from fossil fuels to cleaner sources such as renewables, and the power sector must be future-ready to handle the interplay of distributed energy resources, storage, electric vehicle (EV) charging requirements and other emerging technologies. While these technologies have set the stage for next-generation technology reforms, legislative reforms are required to boost the sector’s viability while promoting transparency and accountability.

Recognising this, even amid Covid-19, the government refocused its attention on power sector reforms, with landmark measures including a Rs 90,000 crore liquidity infusion to help discoms service overdue payments. However, it is the government’s draft Electricity Amendment Bill (2020) that has generated maximum interest, as it promises sweeping structural reforms to fix the health of distribution companies, boost investor sentiments and ensure the long-term sustainability of the power sector. The amendments proposed are forward-looking and impactful, which should pave the way for a thriving power sector.

Some of the key positive tenets of the Bill include the following:

One, it aims to help liquidity-starved discoms by mandating determination of tariffs purely on costs basis, without taking into account subsidies, which would be directly paid to consumers. This could solve discoms’ chronic cash-flow woes, enabling them to invest in improving infrastructure and clear outstanding dues. This will also boost transparency, as discoms will no longer be able to mask their inefficiencies. In parallel, rationalisation of tariff will ease the burden on industries making them competitive and support the atma nirbhar Bharat (self-reliant India) initiative. This should also ensure financial discipline across the value chain of the power sector.

Two, the strengthening of the regulatory ecosystem for dispute resolution is also a welcome step. The proposal to bolster the strength of the appellate tribunal will help in speedy resolution of cases. A 60-day window for adopting tariffs post bidding is also a positive step to check unnecessary delays that bother investors. The Electricity Contract Enforcement Authority (ECEA) with civil court powers will help uphold contract sanctity, and should inspire confidence among private investors hamstrung by delayed payments, unilateral tariff and renegotiations on power purchase agreements, and random curtailments in offtake. However, to avoid complexities, the jurisdictional boundaries of Electricity Regulatory Commission and the proposed Electricity Contract Enforcement Authority need to be clearly defined.

Three, enhancing private sector participation in the distribution sector by allowing sub-licensees will help attract capital, boost efficiency and improve service delivery. We have already seen public-private partnership models running successfully in Delhi and Mumbai. However, further clarity is required on structure, responsibilities and compensation mechanisms, and there must be adequate grievance redressal avenues to handle friction arising from possible rent-seeking behaviour.

Four, the National Renewable Energy Policy will provide impetus to clean energy transition by creating a conducive investment climate and enabling market mechanisms. This will usher in a uniform, unambiguous regulatory ecosystem across the nation for promoting renewables at the state-level that is fully aligned to the Centre’s vision. High penalties for dishonouring Renewable Purchase Obligations should improve compliance and accelerate renewables’ adoption. As a next step, the government should consider an integrated National Clean Energy Policy focusing on resources and technologies including storage, energy efficiency, EVs and grid integration.

The proposed reforms reflect the Centre’s intent to create a robust power sector for fuelling post-pandemic economic recovery. It is critical that these amendments see the light of day. Not surprisingly, it has met with resistance from some states, expressing concerns about the centralisation of powers, increasing privatisation and questioning the efficacy of the direct benefit transfer model for subsidising consumers. At the same time, there are states that have already started to move in the right direction, even in absence of the amendments.

The proposed reforms can infuse much-needed momentum into the power sector if properly implemented and this needs the Centre and states to work in unison. This is an opportunity for the central and state governments to bury political motives and cooperate in the larger national interest for a vibrant power sector.

Source: Hindustan Times