Hits and Misses

The Ministry of Power introduced the Draft Electricity (Amendment) Bill, 2020 on April 17, 2020 to address the key challenges plaguing the power sector. It focuses on addressing discom inefficiencies, which is the root cause for many other problems in the power industry including the lack of contract sanctity and non-payment of dues to developers. The proposed amendments are conducive to the growth of the renewable energy sector and aim to remove the impediments faced by developers. While it is a step in the right direction, it falls a bit short of industry expectations as it has missed issues like renewable energy certificates and open access. Renewable Watch highlights the key provisions of the draft amendment and the gaps that need to be addressed…

Renewables-related provisions

Though there are few provisions designed specifically for renewable energy uptake in the proposed amendment to the Electricity Act, they are quite effective. First, it proposes the introduction of the National Renewable Energy Policy (NREP), which will cover all the facilitation measures for greater renewables uptake including renewable purchase obligations (RPOs). There is a specific penalty provision for non-compliance with the RPO by discoms and other obligated entities. The amendment proposes to impose a penalty of Re 0.50 per kWh for the shortfall in the first year, Re 1 per kWh in the second year and Rs 2 per kWh third year onwards. This penalty aims to ensure that the obligated entities procure clean energy as per their RPO targets.

A key issue being faced by solar and wind power developers at present is delays in tariff adoption. Often, it takes as much as six to eight months for tariff adoption, which leads to delays in project completion and cost overruns for developers. Thus, a provision for time-bound tariff approval by the central and state regulators has been proposed. It aims to ensure timely approval of tariffs for projects allocated in auctions. The proposed amendment gives regulators 60 days for approving tariffs, starting from the date of filing the tariff petition by discoms or tendering agencies. After the completion of 60 days, the tariff would be deemed approved.

Another issue plaguing the renewable energy sector is grid curtailment. At present, the National Load Despatch Center (NLDC) does not have any jurisdiction over state load despatchcentres (SLDCs), which are under the state electricity regulatory commissions (SERCs). Curtailment mostly occurs at the state level, mainly in wind power projects but also in solar power projects. This generation curtailment occurs in the high wind season and ends up impacting up to 50 per cent of the project’s annual revenues. To resolve this issue, the amendment proposes that the NLDC should be able to give direction to the SLDCs. Thus, if such curtailment happens, the NLDC can look into the issue and judge whether the cause was technical or commercial. This can significantly help in safeguarding developers’ revenues.

Apart from renewable energy related clauses, the proposed Electricity Act amendment focuses on two broad areas, regulatory structure of the power sector and discom inefficiencies.

Proposed structural changes

The proposed amendments aim to change the structure of the power sector to some extent. Under this, it is proposed to establish an Electricity Contracts Enforcement Authority (ECEA) to prevent instances of tariff renegotiation and attempts to wriggle out of contractual obligations. A case in point is the recent controversy involving tariff renegotiation in Andhra Pradesh, which put huge investments at risk and halted project development and investments in many parts of the country. The ECEA, once formed, will act at the central level to ensure contract or power purchase agreement (PPA) sanctity and remove the monopoly of states in tariffs and contract dispute resolution.

Moreover, it has been observed that many SERCs have a bias towards their respective discoms and tend to take decisions in their favour. Thus, it has been proposed that members of SERCs and the Appellate Tribunal for Electricity (APTEL) will be appointed by a central selection committee to reduce the state’s interference in regulatory proceedings. The proposed amendments also aim to make the National Tariff Policy more binding on state agencies, from the mere guiding documents earlier.

Tackling discom inefficiencies

The poor financial health of most state discoms is a cause for concern for the entire sector as they are unable to pay power generators on time. The situation is so bad in certain states that many developers have not been paid their dues for more than six months. It has long been believed that the privatisation of discoms might help in addressing some of these inefficiencies. However, the state agencies have been against this idea and discoms’ situation has deteriorated over the years. The proposed amendment aims to introduce sublicensing of discoms, which is a softer approach to blanket privatisation, and bring in some private agencies to the segment.

The amendment also proposes cost-reflective tariffs, which can reverse the present tariff structure in the country. For instance, industrial consumers that are connected to the HT grid and pay high tariffs will be paying the lowest. Similarly, residential consumers connected at the 11 kV and below level enjoy low tariffs at present, but will have to pay a high price for power if discoms adopt cost-reflective tariffs. Moreover, the amendment mandates the reduction of cross-subsidy surcharge, which has long been a major pain point for commercial and industrial consumers. In addition, the payment security mechanism for developers is being legalised by introducing it to the amendment. This mechanism allows developers to open a letter of credit, and discoms will get only the amount of power for which a letter of credit (LC) has been opened. Moreover, discoms that default on payments will not be allowed to procure power through power exchanges or short-term open access.

Gaps to be addressed

Although the proposed Electricity Act amendments tackle many existing challenges that are plaguing the power sector, there a couple of issues that have not been highlighted. The proposed amendments shed very little light on open access transactions, which are becoming increasingly cumbersome due to bureaucratic hurdles. After almost 16 years of introduction, the choice of opting for open access should rest with the consumer. Discoms should provide time-bound open access approvals to willing consumers and there should be no restrictive regulations based on the consumer category or power demand.

Supply standards for discoms and penalties for non-supply are also missing in the proposed amendment. Further, the amendment gives 60 days for tariff approval to regulators, but does not mention the frequent delays in filing of petitions by discoms and tendering agencies. In addition, the payment security mechanism needs to be strengthened so as to safeguard renewable power developers that do not get paid for unscheduled power. There should be greater clarity on the payment security mechanism so that discoms do not have to curtail renewable power in order to avoid paying LCs. While at present the NLDC and SLDCs are made responsible for not scheduling power to defaulting discoms, SERCs can be tasked with ensuring timely payments by discoms to developers.

There is also a lack of clarity on the inclusion of hydropower in the NREP. As per the amendments, the policy will cover hydropower, but it is not clear whether RPOs would cover hydro as well or there would be separate hydropower obligations. In addition, renewable energy certificates, which are an important tool to achieve RPO targets, do not find a mention in the amendment. Although the imposition of penalties for non-compliance with RPOs is a step in the right direction, this amendment might cause confusion if implemented. The reason is that many states already have penalties for RPO non-compliance that is, the tariff is much higher than the proposed penalty amounts. Further, many discoms will just pay the penalty amount and not add the required renewables to their energy mix. Thus, in addition to penalties, such defaulting entities should be mandated to achieve the required RPO targets.

On the structural side, there needs to be a clear bifurcation of jurisdiction between the ECEA and SERCs. As per the amendments, the ECEA would be for dispute resolution regarding contracts and SERCs for tariff-related regulations. However, most disputes are actually on account of tariffs, which might create unnecessary confusion and delays. Thus, many experts believe that all adjudication power should be given to the ECEA and SERCs should be made free from any dispute resolution process. The other viewpoint is to strengthen APTEL and give complete adjudication power to it, instead of creating another regulatory body. In addition, SLDCs should be made completely independent of any interference from discoms or transmission companies in order to avoid generation curtailment for commercial reasons.

Overall, the bill manages to address the most pressing issues plaguing the sector even though a few have not found a mention. Now, it remains to be seen whether this bill becomes an act after getting the go-ahead from Parliament or gets shelved like others.

Based on a presentation by Mahesh Vipradas, Vice President, Regulatory and Power Markets, Sembcorp India