Power sector reform still a distant dream

21 September 2018 |

The Ministry of Power has proposed a number of progressive ideas for the electricity sector in the form of draft amendments to the National Electricity Act and National Tariff Policy. Proposed amendments include obligating DISCOMs to supply 24X7 power, a new penalty mechanism for non-compliance with renewable purchase obligations (RPOs), penalties for PPA violations, tariff rationalization and elimination of tariff cross-subsidies in three years. The new proposed amendments follow several rounds of earlier drafts which included other fundamental reform measures including separation of content and carriage, elimination of tariff subsidies and renewable generation obligations for all thermal power generators.

  • The proposed amendments are highly desirable but simplistic – they do not address key reasons for many of the underlying failures;
  • The reform timetable is unclear because of impending general elections;
  • India needs urgent power sector reform but it remains an elusive goal for the foreseeable future;

The proposed amendments are radical in many respects and conceptually sensible for the most part. However, the proposed mechanics are highly dubious and almost impossible to implement. For example, the proposal to obligate DISCOMs to ensure 24X7 power supply is planned to be implemented through annual assessment of adequacy of their future long-term power procurement arrangements against expected annual demand. Forcing DISCOMs to enter into long-term PPAs is highly undesirable in our view. Instead, the thrust should be on creating a vibrant and liquid short-term trading market.

The other fundamental shortcoming in some of the new plans is that it is not clear how they would be implemented. For example, the underlying problem with RPOs is that they have not been enforced by regulators because of DISCOMs’ poor financial condition, and as a result, the renewable energy certificate (REC) market has never really taken off. If there is no enforcement, the proposal to levy fixed penalties of INR 1-5/ kWh, instead of relying on REC mechanism, would suffer the same fate.

The pathway to implementation also remains uncertain. The electricity act amendments need to be approved by the Parliament and individual states. But there is little likelihood of any progress in the coming winter session or even next year due to general elections due in May 2019. The tariff policy is, in any case, non-binding and hence unlikely to be adopted by states.

We agree that there is an urgent need for Electricity Act amendments. The Indian power sector is undergoing a major transformation and needs a completely new framework. The government has shown good intent but actual reform remains elusive for the foreseeable future.

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