Indian Energy Scenario: Sector Reforms

Continued from.....India Energy Scenario: Challanges & Opportunities

The Indian Power sector has made considerable progress over the past few years with significant reforms for progressive development. Major reforms include unbundling of the erstwhile state electricity boards, formation of central and state regulatory commissions, introduction of competition in all segments to enhance efficiency and consumer satisfaction, setting up of an electricity tribunal, forum for redressal of consumer grievances and ombudsman for conflict resolution etc. Also the Government has distanced it with tariff determination and there is greater public participation in Tariff-setting exercise. Tariff gaps and distortions are getting bridged up over a period of time. Despite these and many other measures, the power sector is yet to go a long way to address all issues and problems, including the need for quality and quantity of supply to consumers.

At the time of Independence in August, 1947, the country barely had a total generation capacity of about 1,362 MW which has grown to about 254,650 MW in October, 2014. This of course do not include captive generation plants which are owned by several industrial and commercial establishments in the country. There has also been a commensurate growth in the Transmission and Distribution capacity during the same period. Despite significant increase in electricity generation, significant shortage of Power continues to persist primarily on account of the growth in electrification and demand for Power outsmarting the growth in generation and capacity addition. Even after considerable growth in the Power sector and improvement in the electricity supply, many parts of the country continue to face Power shortages. This necessitates an all-round development and reforms in all segments at a faster pace with a view to augmenting the quality and quantity of supply, particularly because there is an enormous latent demand and nearly 300 million people in India still live without electricity.

Development and Reforms is an ongoing process; the power sector has been perceived for long to be riddled with fundamental problems necessitating the major reforms. Although some reforms were initiated in the last decade of Twentieth Century but the major thrust to reforms started after enactment of the Electricity Act in 2003. This was of course a major milestone with the mission to provide uninterrupted and quality power to all at reasonable rates within a competitive and liberal framework by protecting the interests of consumers. Simultaneously steps are being taken to create a conducive environment in the country for attracting investments in the sector because the Central and State Governments cannot afford necessary funding of this capital intensive industry.

It is obvious that the sector cannot deliver on its social commitments unless it is financially and commercially viable too. Hence the Government is focusing on critical areas for development with its resources while simultaneously opening sector for the public and private companies for investment with enabling provisions. In the following paragraphs, we shall see how major developments and reforms undertaken over the years are faring and to what extent they have met aspirations of energy starved people. Also what needs to be further done to transform the power sector into a robust and healthy sector providing intended deliverables to various stakeholders.

Legislative Reforms

In India till about the early twenty-first century, the electricity (power) sector was governed by the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1949 and the Electricity Regulatory Commission Act passed in 1998.

The Indian Electricity Act, 1910 provisioned for the basic framework for the electric supply industry which was then in its infancy state. The act envisaged inter alia growth of the electricity industry through private licencees who could supply electricity in specified areas. It also created the legal framework for the laying of wires and other works relating to the supply of electricity.

The Electricity (Supply) Act, 1948 paved way for the creation of the State Electricity Boards (SEBs) with the mandate of arranging the supply of electricity in the State. Till then electrification was limited to cities and the underlining idea was that SEB would step in to shoulder the responsibility to extend supply rapidly in all areas of the State. Accordingly, SEBs through the successive Five Year Plans undertook expansion of supply network by utilizing allocated Plan funds.

However, the performance of SEBs deteriorated over a period of time due to various factors. For illustration, though authority to fix tariffs was vested to them but they were generally unable to take decisions in a professional and independent manner which was de facto determined by the State Government concerned. Cross-subsidies too had reached unsustainable levels. With a view to distancing the Government from determining tariff and to address issues effectively, the Electricity Regulatory Commission Act was enacted in 1998. This led to the creation of the Central Electricity Regulatory Commission (CERC) with the enabling provisions through which each State also could create its own State Electricity Regulatory Commission (SERC).

While the Central Government started increasingly taking initiatives for the power sector development and reforms through legislative and policy interventions besides entering into generation and transmission segments through government owned public undertakings and encouraging private sector, some States too started undertaking reformed through their own Reform Acts. These reforms involved unbundling of SEBs into separate Generation, Transmission and Distribution Companies through transfer schemes of the assets and staff into successor Companies. Some of the States like Orissa, Haryana, Andhra Pradesh, Karnataka, Rajasthan and Uttar Pradesh quickly passed their own Reform Acts which inter alia envisaged unbundling of SEBs.

The above developments led to the need of harmonizing and rationalizing the provisions of the various Acts referred to above in a new self-contained comprehensive legislation with a view to replacing the existing laws, preserving its core features, defining the responsibilities of the State Government and SEBs, licensees and other Statutory and Regulatory bodies. Besides, newer concepts like power trading and open access were also emerging. To cater for all these needs and accelerate power sector reforms, the Electricity Act, 2003 was enacted superseding all previous legislation which came in force with effect from the 10th June, 2003.

Following major reforms were undertaken through enactment of the Electricity Act, 2003:

Delicensing of Generation:
Generation of electricity has been delicensed and captive generation freely permitted. Hydro-electric generation would, however, need approval of the State Government and clearance of the Central Electricity Authority (CEA) which would look into the aspects of the dam design and safety as well as optimum utilization of water resources while according concurrence. Small hydro projects (upto 25 MW) have, however, been excluded from this scrutiny.

Unbundling of State Electricity Boards:
As most of the State Electricity Boards (SEBs) were ceased with inefficiency and mismanagement and had been incurring heavy losses in eighties and nineties, to make power sector efficient and financially viable it was provided under law to unbundle all existing SEBs. The enabling provision has been made for a transfer scheme by which companies can be created  by the States from the SEBs. Consequently, all the States, except the majority States of north-eastern region with Electricity Departments, have corporatized their SEBs into separate generation, transmission and distribution companies.While generation and transmission companies are generally doing well but a majority of the distribution companies continue to incur losses under state interference and control. While to make them viable, the government should serve as facilitator but not at the cost of rigid control over their organization and functions lest the main purpose of unbundling will be defeated.

Constitution of State Regulatory Commissions:
With a view to distancing the government from the regulatory responsibilities, the Electricity Act, 2003 provided for the formation of the State Electricity Regulatory Commission (SERC) in all States to independently deal with tariff matters and related petitions from the stakeholders. On date, all the States including the Union Territories have constituted their SERCs, two smaller states of north-east namely Manipur & Mizorum as also the state of Goa & Union Territories (UTs) have each formed a Joint Electricity Regulatory Commissions (JERCs). However, while the State Governments pressurize regulators to keep tariff low as a populist measure, many regulators are also not above the board in exercising their independence for the obvious reasons of quid pro quo. The minimum requirement is that the tariff should be cost-reflective and if the government desires to give concession to consumers, it should be done through upfront subsidy as provided under law.

Transmission Utility:
Provision has been made under law for a Central Transmission Utility (CTU) at Centre and a State Transmission Utility (STU) in each State with the responsibility to develop the requisite transmission network in a planned and coordinated manner. Provision has also been made for an independent load dispatch centre in each State. Such utilities have been created in each State but an unfinished agenda of freeing the STU and the State Load Dispatch Centre (SLDC) from the state control remains to be implemented. Besides, provision has been made for the private transmission licensees by mandating competition in the Transmission segment.

Open Access:
The CTU and STU are mandated to provide non-discriminatory open access to its transmission system to any licensee or generating company on payment of the transmission charges and a surcharge for taking care of the current level of the cross-subsidy. Further, SERCs have been mandated to permit open access in distribution in phases with the provision of surcharge for the current level of cross-subsidy. While open access in transmission has been successfully implemented, similar progress in the distribution segment is far from satisfactory mainly due to poor financials of Distribution utilities. Also the spirit of the Act was that cross-subsidy will be gradually reduced but the stated goal is nowhere in near sight. In a commercial relationship between a high end consumer and a generating company or a trader, the tariff of power is not required to be determined by the regulator who is required to determine only the transmission and wheeling charges but in effect they still continue to do it.

Market Development:
Regulatory Commissions have been mandated to promote the development of electricity market and for this trading has been recognised as a distinct activity. Further, regulators have been authorized to fix ceiling on trading margin, where necessary. Two electricity exchanges are in place but a healthy and robust electricity market remains a distant dream till now.

Appellate Tribunal:
An Appellate Tribunal has been created for the disposal of appeals against the decision of the CERC and SERCs for speedy disposal of such petitions. Besides, provisions for the Consumer Grievances Redressal Forum (CGRF) and Ombudsman have also been made in each State for quick settlement of consumer grievances. A majority of states have institutionalized CGRF, Ombudsman and Special Courts to look into redressal of grievances of consumers, hear appeals and speedy trial of offences relating to theft of electricity.

Grid Security:
Load Dispatch Centres have been mandated to issue directions and exercise such supervision and control as may be required for the stable and smooth operation of the power system. Penal provisions have been made for licensee, generating company or any person who fails to comply these directions. Theft of electricity is treated as cognizable offence and punishable with imprisonment or with fine or both. There were incidents of major grid collapse in July, 2012 and thereafter several steps have been taken to inculcate more stringent grid discipline by tightening frequency band, norms for load dispatch and punitive measures for violations.

Competition &Tariff Determination:
Enabling provisions have been made under the Act specifying the terms and conditions as well as procedure for the determination of tariff under the cost-plus regime and by bidding process. The Act also seeks to encourage competition with appropriate regulatory intervention which is likely to yield efficiency gains and in turn availability of quality supply of electricity to consumers.


Policy Reforms

While the Electricity Act, 2003 provided an enabling framework for accelerated and efficient development of the power sector; further recognizing that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the Central Government notified the National Electricity Policy (NEP) on 12th February, 2005. The chief aims and objectives of NEP are as under:

  • Access and availability of electricity for all households in the country in the next five years.
  • In terms of availability of power, demand to be fully met by 2012. Energy and peaking shortages to be overcome and adequate spinning reserves to be made available.
  • Supply of reliable and quality power of the specified standards in an efficient manner and at reasonable rates to all consumers.
  • Per capita availability of electricity to be increased to over 1000 units by the year 2012 with a minimum lifeline consumption of 1 unit/household/day by the same period.
  • Financial turnaround and commercial viability of the Electricity sector to be ensured.
  • Protection of consumers’ interest on priority all the time.

While framing the National Policy on electricity, a provision has been made for the short term five years plan and the perspective plan for the next fifteen years to be prepared by the Central Electricity Authority. Besides, the National Policy also seeks to effectively and comprehensively address issues like Rural Electrification, Generation, Transmission, Distribution, recovery of the cost and targeted subsidies, technology development, research & development (R&D), competition aimed for consumer benefits, financing Power Sector programmes, Private Sector participation, Energy Conservation, Quality Standards, protection of consumer interests, Cogeneration, Renewal Energy Sources, Environmental issues, Training and Human Resource Development.

Due to various constraints and inefficiencies, most of the stated aims and objectives under the National Policy have not been fully achieved but the Sector is certainly moving in that direction. Massive rural electrification programme had been undertaken during the 10th Plan under the Rajeev Gandhi Gramin Vidyut Yojana (RGGVY) with an objective to secure access of electricity to all rural households, and poor and marginal sections at reasonable rates by March, 2010. As per original estimates, approximately 597,464 villages were identified for rural electrification. As per data available, 571,496 villages (95.65%) had been electrified as on 30th June, 2014. Now the left over villages have been undertaken for rural electrification by amalgamating RGGVY under the new flagship scheme namely Deendayal Upadhyaya Gram Jyoti Yojana (DDUGY) of the NDA Government launched in December, 2014.

The RGGVY recognizes a village as electrified if 10% homes and some public buildings have been wired. Whether they are actually energized or consuming electricity is often not known or ensured. As already mentioned earlier, approximately 300 million people still do not have access to the electricity.

As per National Policy objective, per capita availability of electricity was intended at 1000 units by the year 2012 and as per data available it stands now at 914 units. Even the targeted data is far behind when compared with other developing countries like China, Brazil and South Africa. Besides, there is a lot of disparity among the Indian States itself in terms of distribution where certain States like Gujarat have per capita availability of 1,800 units well above the targeted average 1000 units while States like Uttar Pradesh and Bihar along with north-eastern States are pegged at 500 units or below. Clearly the country has to go a long way to strengthen all segments to ensure adequate and quality power supply.

Similarly as per compiled data, national average of energy and peaking shortages currently range between 4-5%. But this is not actual representation of shortages because it is simply based on the demand and supply gap of the Distribution utilities which are mostly state owned. Due to poor financials and other reasons, many utilities are not in a position to buy power for the 24X7 supply and, consequently, resort to announced and unannounced power load shedding. Of course, effective measures have been taken for the consumer satisfaction and redressal of grievances by creating Consumer Grievances Redressal Forum and Ombudsman in the most of the States.

While Generation and Transmission segments are faring reasonably well, though not as efficiently as expected due to various constraints, the Distribution segment is besieged with problems like poor financials due to significant gap between the cost of supply and revenue realized, high Aggregate Technical & Commercial losses, lack of credible database, aging and dilapidated infrastructure, lack of 100% metering, billing and collection efficiency, lack of energy accounting and metering etc. The Central Government has taken several measures in the past including its flagship scheme R-APDRP for improving accounting and Distribution infrastructure, setting of National Electricity Fund - an interest subsidy scheme for Distribution infrastructure in towns not covered under R-APDRP and Financial Re-structuring Plan (FRP) to enable the turnaround of the state distribution companies.

Tariff Reforms

Consequent to enactment of the Electricity Act, 2003 and notification of the National Electricity Policy, 2005, it was felt necessary to attract adequate investments in the power sector by providing appropriate return on investment because power projects are highly capital intensive and the Central and State Government(s) may find it difficult to provide the requisite funds out of their meagre budgetary resources. Besides, it was also considered necessary to provide electricity to different categories of consumers at reasonable rates to ensure fast economic development and improvement in living standards of the people. Accordingly, the Tariff Policy was also evolved in 2006 in consultation with the State Governments, CEA, CERC and other stakeholders. The objectives of the Tariff Policy, 2006 are broadly as under:

  • Ensuring the availability of electricity to consumers at reasonable and competitive rates.
  • Ensuring the financial viability of the Power Sector by attracting investments.
  • Promoting transparency, consistency and predictability in regulatory approaches across their jurisdictions and minimizing perceptions of regulatory risks.
  • Promoting competition and efficiency in operations, and improvement in the quality of electricity supply.

Due emphasis has been laid for introducing competition in different segments of the power industry as it is likely to lead to significant benefits to consumers in tariff through reduction in capital costs and efficiency in operations. While addressing sector/segment specific issues like Generation, Transmission and Distribution, the Tariff Policy inter alia also effectively deals with the specific issues like return on investment, equity norms, depreciation, cost of debt, operating norms, renovation & modernization, Multi Year Tariff (MYT), linkage of tariff to the cost of service, benefits under Clean Development Mechanism (CDM), Cross-subsidy surcharge, trading margin etc.

Government had permitted 100% foreign direct investment (FDI) in the Power Sector way back. Though this has enabled sizeable investment during the last few years yet many investors are apprehensive due to slow progress of reforms. Though Generation has been delicensed and competition has been encouraged in all segments, issues like statutory clearances from environment and forest angles, transfer of land and fuel linkages continue to remain bottlenecks and are largely responsible for the slow pace of development. Though efforts are on, clearly much more is needed to address these issues with a view to gain Investors’ confidence.

A majority of States have evolved performance norms of operations together with incentives and dis-incentives to bring in efficiency in distribution of electricity. Similarly Regulators in many States have introduced Multi-Year Tariff (MYT) framework for better control over cost so that future consumers are not burdened with the past cost. However, some major States such as Uttar Pradesh, Punjab, Haryana and smaller States of north-eastern region are yet to implement MYT mechanism.
Various State governments provide concessional or free electricity to certain class of consumers like agriculture, rural or those below poverty line. This special support in terms of tariff is cross-subsidized. Similarly open access consumers are levied cross-subsidy surcharge which should not be so onerous that it hinders competition. It was intended that gradually cross subsidy will be reduced so that the tariff increasingly reflects the cost of the supply of electricity. Most of the States have not achieved this objective and continue with high cross-subsidy and surcharge.

There is a provision for the regulators to fix/revise tariff once in a year after due diligence on the annual revenue requirements of the Distribution utilities and hearing all stakeholders. Till about a few years back, tariff had not been revised under the influence of the State Government for several years in many States, leading to huge arrears categorized as regulatory assets. After the intervention of the Centre and continuous persuasion, now yearly tariff revision exercise has been started in most of the States by the regulators and the necessary enabling provision and further reforms are underway through the amendment in the Act and Tariff Policy.

Other Reforms & Development Measures

Power sector cannot deliver on its social obligation and commitments unless it is commercially and financially viable. To improve the investment and financial health of utilities, continuous reforms are essential to strengthen governance standards of Distribution utilities, simplification of procedures of seeking statutory land and environment clearances, tariff rationalization and optimizing the procurement cost of power. The federal government has taken several measures to address these issues and more efforts are in the pipeline. Some of such more important initiatives are briefly indicated in the following paragraphs.

The government is endeavoring to set up several Ultra Mega Power Projects (UMPPs) of 4,000 MW each in the public private participation (PPP) mode. Usually statutory clearances, land, water and fuel linkages for such projects are facilitated by the Government by constituting a Special Purpose Vehicle (SPV) which is ultimately transferred to the Developer selected through the competitive bidding. Four such UMPPs were awarded in the last decade, of which two at Mudra, Gujarat and Sasan, Madhya Pradesh are already in operation while the remaining two at Krishnapatnam, Andhra Pradesh and Tilaiya, Jharkhand are facing problems due to subsequent issues involving change in law leading to significant escalation of the price of imported coal, land acquisition etc. after signing contracts, having significant bearing on the cost of the projects. Besides, about a dozen other UMPPs in different states are under various stages of clearances.

Central Government Flagship Schemes:
(1) The federal government had undertaken a massive scheme namely Rajeev Gandhi GraminVidyutYojana (RGGVY) during the 10th Five Years Plan to take electricity to all villages in the country. The scheme has been continued in the 12th Plan too and as on June, 2014 reportedly over 95% villages had been electrified. Another major scheme R-APDRP referred to in previous paragraphs is addressing the issues of distribution infrastructure of the utilities in states since the 10th Plan. The government has also set up a National Electricity Fund as an interest subsidy scheme for the system augmentation projects in states not covered under R-APDRP. In addition, to improve the financial health of the state utilities running into heavy losses, the federal government has approved a Financial Restructuring Plan which inter alia provides for the restructuring of losses by liability sharing between the state and utility with easy re-payment facility including part capital assistance from the Centre.

(2) Recently, the Central Government has launched following two new schemes by subsuming earlier flagship schemes into them:

Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) has been launched in December, 2014 with the following components;

  • Separation of agriculture and non-agriculture feeders to facilitate independent supply to agriculture and non-agriculture consumers in the rural areas.
  • Strengthening and augmentation of sub-transmission and distribution infrastructure in rural areas including metering of feeders, transformers and consumers.
  • Rural electrification for completion of left over work from the erstwhile RGGVY.

Integrated Power development Scheme (IPDS) has also been launched in December, 2014 with the following components;

  • Strengthening of sub-transmission and distribution networks in the urban areas.
  • Metering of distribution feeders, transformers and consumers in the urban areas.
  • Information Technology enablement of the distribution segment and strengthening of distribution network continued as per earlier approved outlay under the erstwhile R-APDRP.

The government has also approved the requisite outlays for the plan period for the above programmes with an objective to comprehensively address related urban and rural electrification issues to ensure futuristic vision of 24X7 power supply to consumers.

Technology Initiative:
The developers in the public and private sectors are being encouraged to go for the fuel efficient super-critical and ultra-super-critical technologies with 660 MW units and above while constructing new power plants in future. Super-critical Thermal Power Plants of about 22,700 MW capacity have already been commissioned so far and in 13th Plan (2017-2022), coal fired capacity of only super-critical units is being planned. Besides, a large scale Renovation and Modernization (R&M) and Life Extension (LE) programmes of the existing old power stations are also underway for improving efficiency by reducing fuel consumption. The country is also adopting a two pronged strategy whereby on one hand, continuous efforts are being made to augment the supply of clean and green power, and on the other hand, more emphasis is on the need for demand side management and energy efficiency measures. Such measures are essential in view of the need to conserve the depleting energy resources and to minimize the carbon footprint of the sector. A low carbon growth strategy has been adopted in the planning process and high priority is accorded to the development of electricity generation based on hydro, nuclear and renewable sources of energy, wherever possible.

Power Market:
Power trading is recognized as a distinct licensed activity in India with a view to developing a robust electricity market. Presently, two power exchanges are in place for the online sale and purchase of electricity as also a fairly large number of companies registered as trading licensees. Act also provides provision of open access whereby regulators are only required to determine wheeling and cross-subsidy surcharge for the consumers of 1MW capacity and above. Notwithstanding these provisions, currently only about 3% of power is traded through power exchanges and trading licensees. Development of power market is not only in the interest of consumers but it also adds to the investors’ confidence.

Renewable Energy:
The country realizes the need for minimizing dependence on the fossil fuel based energy. Fossil based fuels like coal, gas and diesel are exhaustible energy sources which are fast depleting globally due to mass consumption to meet growing energy needs. Fortunately India is geographically placed in a region where there is no dearth of wind and sun light. Presently, India has the 5th largest wind generating capacity in the world and the 12th largest solar generating capacity in the world. The country is seriously contemplating to tap these energies and a separate Ministry has been created to pursue unhindered progress of renewable energy sources as a popular means of futuristic affordable power. Currently, a total capacity of about 33,200 MW from all renewable energy sources have been installed in the country. The target capacity addition during the 12th Plan (2012 – 2017) is 29,800 MW. Besides, the north and north-eastern region of the country have tremendous hydro potential which needs to be tapped by removing existing bottlenecks in development of Hydro Power Plants.

Perform, Achieve and Trade:
Under the National Mission on Enhanced Energy Efficiency (NMEEE), a scheme namely Perform, Achieve and Trade (PAT) has been undertaken by setting individual target for improving energy efficiency in power sector. PAT is basically a market based mechanism to make improvement in energy efficiency in energy intensive large industries through certification of energy savings that could be traded. Currently, 144 fossil fuel fired power generating stations in the country have been assigned to PAT scheme. The incremental efficiency of these power stations is likely to have substantial reduction in fossil fuel consumption.

Legislation Initiative: 
Current Electricity Act was passed in 2003 and there has been many changes ever since necessitating relook at provisions for amendments for the next wave of reforms. Some of the major changes include competition in retail, the enforcement of Renewable Purchase Obligation (RPO) and Grid safety and security. To enable competition in retail giving more choice to consumers, the federal government is seriously contemplating to separate wires (distribution) and supply business through legislation to facilitate competition in retail supply and development of power market.


India is a big democratic country with federal set up and huge population of over 1250 million with predominantly agrarian economy, while the power is a subject on the concurrent list. There is no point in always comparing it with other developed and developing countries with different socio-economic and political set up on this parameter. Over a period, several reforms have been undertaken with varying degree of success and failures, as well. While the Government has obligation to provide affordable 24X7 power to all homes, industrial and commercial establishments besides adequate power to agriculture, as end consumers people too have certain responsibilities which inter alia include mindset for the payment of at least cost of the supply. With several ongoing measures and reforms, a paradigm shift in working and mindset is certainly perceptible while the country will have to go a long way to address its full energy needs in the future ahead.


More by :  Dr. Jaipal Singh

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