On April 17, 2020 the Ministry of Power introduced the Draft Electricity (Amendment) Bill, 2020 in order to address the key recurring issues of the power sector. Its significance for renewables lies in its promises to tighten the enforcement of orders issued earlier, be it regarding renewable purchase obligations (RPOs), contract sanctity or payment terms of discoms. Its focus on addressing discom inefficiencies through privatisation may end the monopoly of discoms, providing the much-needed relief to renewable energy developers. Renewable Watch talks to leading sector experts regarding key provisions and loopholes in the bill for promoting renewables’ uptake…
How are the proposed Electricity Act amendments expected to increase the penetration of renewables?
The national level RPO and the National Renewable Energy Policy (NREP) are the two provisions specific to renewables. The NREP is yet to be notified and implementation of RPO is yet to be seen. An immediate effect of the RPO enforcement will certainly consume excess liquidity of renewable energy certificates. If the NREP is enforced effectively, we can see a larger penetration of renewables in the overall energy mix.
The amendments proposed in the draft Electricity (Amendment) Bill, 2020 are indeed an attempt to push the renewable energy growth story. The formulation of a separate central level NREP for the promotion of renewables and prescribing a minimum percentage of electricity purchase from renewable sources is one such step. This may help streamline the RPO targets across different states. Further, regulators will need to take this policy into account while determining the tariff for renewable energy projects.
Further, hydropower has been recognised as a renewable energy source (earlier only hydro projects below 25 MW were considered as renewables). It needs to be seen if this step helps the development of hydro projects, which can further help achieve the ambitious renewable energy targets. A significant step has been the introduction of penalties in case of non-compliance with RPO and hydropower purchase obligation (HPO), as till date the RPO exists without any specific consequences in our main statute.
The position on renewable generation obligation (RGO) is not clear under the bill. Although the central government can make rules regarding RGOs, there is no provision for determination of RGOs’ quantum. Further, penalty provisions do not make any reference to non-compliance of RGOs. A clear framework for RGO would have been good.
The proposed amendments are conducive to the growth of renewable energy and try to remove various impediments or shortcomings highlighted by developers. The proposed NREP to promote renewable energy generation and prescribing a minimum percentage of electricity purchase from renewables (including hydro) should provide the much needed clarity and reduce ambiguity regarding implementation due to mismatch between the centre and states.
The introduction of automatic tariff adoption, if the state regulator fails to adopt the discovered tariff within 60 days, is a welcome move. Post the auction and signing of the power purchase agreement (PPA), many projects face delays in getting the necessary approvals and achieving financial closure because of tariff approval. The 60-day timeline is, however, on the higher side, considering a dynamic bidding scenario where successive bids might be low even in a short span of 60 days, thereby giving the impression that the tariff discovered is high and deterring tariff adoption.
The most noticeable proposal taking centre stage is the establishment of an Electricity Contract Enforcement Authority (ECEA), especially after the recent experience in Andhra Pradesh. The renewable energy market in India has been attracting funds from across the globe and honouring contracts is a trademark of such a market. However, the new authority will co-exist with existing forums leading to complications in the process and resolution timelines, which will be addressed after more guidelines are issued on its working.
The gradual phasing out of cross-subsidy surcharge (CSS) and streamlining of the process to promote open access are some of the proposed changes, which can help in the development of open access markets and allow commercial and industrial consumers to transition towards renewable procurement, albeit without a timeline on CSS phase-out framework.
In your view, does this bill address the inherent issues plaguing the overall power sector, especially on the distribution side?
The bill has proposed a payment security mechanism, a new contract enforcement body, nationwide RPO, NREP and the Direct Benefit Transfer (DBT) scheme. Most of these are interlinked and address the immediate issues such as reopening of PPAs or renegotiation of tariffs by states. On the distribution side, the DBT scheme, when implemented, may result in the proper rationalisation of tariffs across the consumer segments. Discoms will be direct beneficiaries provided they can improve their billing and collection efficiency and reduce aggregate technical and commercial losses.
While the bill is a great step, it falls a bit short of industry expectations; even some of the proposals of the 2018 amendment bill are not addressed. Some of the main things that appear to be missing are the overhaul of discoms through a split of supply and distribution activities and a push to discomprivatisation. Though the concept of distribution sub-licences and franchisees of distribution licence is introduced (perhaps to attract private parties), it does not seem to address the financial issues plaguing the distribution segment for a long time.
The bill focuses predominantly on reducing offtake risks for power producers and will have a domino effect across the sector, especially distribution. The issues related to payment delays from discoms to developers have been the major impediment and have severely dented investor confidence in the sector. Developers win projects under intense competition through reverse bidding with thin margins and payment delays add to their woes, resulting in low participation in subsequent tenders. Available cash is being preserved to service bank loans for the existing projects and new activity is curtailed. The issue is far bigger to be resolved with an amendment alone, and would require financial support, introduction of new instruments and long-term efficiency improvement in discom operations.
Amendments to sections 62 and 65 of the Act directs regulators to fix tariff for retail electricity sale without accounting for subsidy, which will be provided by the government directly to the consumer. Cost-reflective tariff allowing for recovery of the prudent cost and low or no burden of tariff subsidies are certain to provide comfort to distribution companies. Considering the impact of Covid-19 and the existing financial stress in the distribution segment, the proposed changes would probably not be enough to improve their situation. However, the bill does aim to bring in reforms by taking over governance from states but with power as a concurrent subject, it is imperative to bring states on board to ensure the implementation of the proposed bill.
What impact will the suggested measures for RPO compliance, ECEA and payment security have on both developers and discoms?
One of the key objectives of the proposal is to provide comfort to developers at least in terms of payment security. However, a deeper approach is required to solve the issue. Generally, payment security mechanisms are inbuilt in PPAs and are still not honoured by discoms. While the proposed amendments encourage discoms to honour payment security mechanisms, they ignore the “must run” status of solar and wind if discoms fail to honour PPAs. Thus, generators will be at a loss, unless deemed generation is provisioned. The ECEA can be a platform to address issues such as disputes on deemed generation and other contractual terms, but it does not address the situation immediately.
These measures should certainly help in restoring investor confidence in the sector, if they are, in fact, implemented well on ground. The compensation provisions for RPO compliance should provide teeth to this framework finally. The formation of ECEA seems to be a positive step for the enforcement of PPA disputes but the question that remains is if this forum would address the price renegotiation issues (akin to the recent Andhra Pradesh episode). As the jurisdiction over tariff related disputes is still with regulators, clarity in this regard would be useful.
Empowering the regional load despatchcentres (LDCs) to not schedule or desptach power till the time the agreed payment security mechanism is provided is another positive step. The RPO compliance and payment security from a discom perspective would have cost implications and would be difficult until their credit position is resolved at the root level.
RPOs have been a key driver for renewable energy adoption in India. However, there is a shortfall in achievement with the current procurement at around 10 per cent at the national level, indicating the need for stricter enforcement. Amendment to section 142 of the act imposing a penalty of Rs 0.50 per kWh, Re 1 per kWh and Rs 2 per kWh for the shortfall in the first year, second successive year and continuing after the second year will ensure that obligated entities procure clean energy.
The ECEA should provide a major boost to investor confidence as it is imperative to protect the sanctity of contracts. Once implemented, this will open doors for developers who have been shying away from investing in the sector and also potentially increase the flow of funds through existing developers.
The amendment empowers LDCs to oversee the payment security mechanism before scheduling electricity despatch. LDCs, however, have no say in PPAs, in creating payment security mechanism and in drafting contracts and thus, remain confined to play an observer role in the entire issue of non-payment by discoms. The risk of payment delays continues to eclipse the sector and the recently proposed guidelines on the payment security mechanism through mandatory letter of credit (LoC) opening by discom reduces the perceived risk. However, discoms will struggle to comply with the mandatory LoC norms as they will find it difficult to convince banks to extend credit due to the current financial situation. The recent announcement of Rs 900 billion infusion may provide the much needed relief to discoms.
Overall, the proposed amendments encourage private participation and address issues raised by developers over the years. It has to be seen how states, which are the major players, especially in the distribution segment, view this proposal.
Are there any other provisions that should have been addressed in the bill, according to you?
Some provisions that could have been addressed in the bill include measures related to open access, distributed generation and new technologies. Open access was introduced in the Electricity Act 2003 and licensees or states were entrusted to provide the non-discriminatory open access to consumers. Nearly 17 years have passed and the struggle between consumers and discoms continues. Haryana is a recent example, where the discom is not allowing generators to connect the plant with the grid, despite connectivity being granted. There is a clear gap between the objective of open access and its implementation. This gap can be eliminated only if open access is enforced by the Act itself.
While a lot has been done for the promotion of large renewable plants, distributed energy sources (rooftop solar and behind the meter projects) are yet to be accepted in our federal regulatory framework. Distributed energy sources have gained popularity among users. There is an immediate need to recognise and promote them under the legislative framework of the Act. This will also protect the investment in the segment.
Technology evolves at a fast pace. New sources of energy such as fuel cells, tidal power and beta voltaic may be developed with time. Such sources should be recognised through a separate provision for lending any regulatory support, as and when they are ready for use.
The separation of supply from distribution, introduction of accountability of discoms, sanctity of PPAs, a regulatory regime for decentralised distributed generation, ancillary support functions and the concept of electricity storage seem to be the biggest misses in the Act.
The bill manages to address the most pressing issues plaguing the sector. However, it could have provided more clarity on how states, which are already struggling to meet existing obligations, will ensure compliance, especially to HPO as hydropower development depends on various factors such as resource potential, project cost and development timelines.
With the increasing penetration of renewables, there is a need to make the grid robust and flexible through ancillary services. The act does not touch upon the ancillary services market with potential application of forecasting and storage, which is critical to achieve clean energy targets.