Notes on understanding Power
Module 1:Over view of the Indian power sector
Growth of the Indian power sector. Electricity consumption Unbalanced growth & shortage. Strategies to achieve power for all.
Module 2:Understanding The Indian Power market
Building blocks of the electricity market. Role of legislation policy and regulation. Indian Legal frame work :evolution Pre-1956. 1956-1990. 1991-2003 Evolution of Electricity Act 2003. Implication of repeal of three earlier Acts. Perspective of repeal of the three earlier Acts. Transition from single buyer model. Salient features of the single buyer model. Rationale of the single buyer model. Problems of the single buyer model.
The notes are based on the two modules and the manner in which the subject has been taught in the class
Indian Power Sector Power in Concurrent List, Entry 38. Both Central and State can legislate Central law prevails in the event of conflicting provisions.(Art.246 of the Constitution)
The Indian power sector has made significant progress over the years. The installed capacity of the industry grew manifold from 1,361 MW in 1947 to 156.8 GW in January 2010. The sector has also
undergone substantial structural changes. Regulatory policies have played a predominant role in changing the landscape of the Indian power sector. Though the sector has come a long way from its humble beginnings, it is still lagging on several fronts, such as power shortages, T&D losses, among others, and has a long way to go. The industry has been regulated for almost a century and the Electricity Act 1910 was the first act that was introduced to govern the Indian power sector. The Electricity (Supply) Act 1948 was introduced after independence, but it did not achieve the desired results, as the power sectors performance started to deteriorate and a need was felt to restructure the sector. Several regulatory changes were made since 1991, which transformed the industrys performance. Based on the governments regulations and policies, the evolution of the Indian power industry can be divided into two broad phases, pre-reform and post-reform phases. The pre-reform phase (up to 1991) can be divided into pre independence phase (prior to 1947) and post-independence phase (1947-1990) and post-reform phase can be broken down into three phases.
The Building blocks of the Power sector of India Development of sector: investment Viability of sector : financial discipline and rationalization of tariffs Introducing competition : for efficiency improvement Consumer focus
Universalisation of access
#please take note the subject is better understood once you keep the building blocks in mind and then see the reforms that have been introduced for clear and better understanding
Pre-Independence Era (upto 1947) The first instance of commercial generation of electricity in India dates back to 1879 in Kolkata (then Calcutta). In 1897, the government of Bengal granted an exclusive 21-year license to the Calcutta Electricity Supply Corporation to supply electricity to Calcutta. Mumbai (then Bombay) was the second city to get electricity and as time progressed, private companies set up power supply systems in major urban areas under franchises, which allowed them a reasonable rate of return. The demand for electricity during this phase was driven by demand from industries, commercial enterprises (including tramways) and also domestic use. Most of the earlier private companies in the power sector cease to exist today as they were amalgamated into state-owned enterprises; however, a few of them continue to exist as private players. The Electricity Act 1910 was the first act (one of the earliest regulation) in the power industry, which was introduced before independence in 1910. The Act provided the basic framework for supply of electricity in India. The sector was at a nascent stage during this time and there was a huge investment requirement for laying down basic infrastructure. The Act encouraged the growth of the industry by issuing licenses to private companies. Thus, during this phase, electricity generation was mainly in the private sector and power generation was largely based on coal and hydropower. Tata Power (formerly known as Tata Electric), which is the countrys largest private sector utility, commissioned its first hydro electric station with a capacity of 72 MW at Khopoli. The power industry suffered from huge costs and wide variation in power voltage during this period. As the technical knowledge in the domestic industry was not well-developed, most of the projects were based on imported technology and thus entailed huge costs. Also, there was a wide variation in electricity voltage that was supplied during this period, as both AC and DC forms were used.
Post-Independence Era (1947-1990) At the time of independence, electricity generation and supply was concentrated in the hands of private electricity suppliers, and largely in urban areas. Electricity supply was a must across the country to promote overall growth and development; hence, the Electricity (Supply) Act 1948, which was based on the UK Electricity Supply Act 1926, was introduced. Under this Act the Central Electricity Authority (CEA) was established at the central level and the State Electricity Boards (SEBs) at the state level. The objective of the CEA was to develop a sound, adequate, and uniform national power policy to coordinate development of the power sector in India. SEBs became integrated utilities with presence in generation, transmission, and distribution in their respective states. During this period, the development and planning was done by the SEBs at the state level, while the CEA was responsible for planning at the national level and it provided the SEBs with broad guidance, planning, and development. The Act also elaborated the financing norms and institutional framework for the electricity industry in India.
The SEBs took over the private companies in their respective states and the newly-created state electricity boards were interconnected to enhance system reliability and to ensure wider geographical coverage. The electricity sector moved into the public sector domain from the private hands, and over the years, the public sector gained prominence in the power sector. In the initial period, the SEBs performance was satisfactory and they played a vital role in the development of the sector. According to the Electricity (Supply) Act 1948, the SEBs were required to generate a minimum return of 3% on their net fixed assets in service after meeting the financial charges and depreciation. The SEBs were able to generate the minimum returns for many years, but, later on their performance faltered and they had to seek financial aid from the
state in the form of grants, subsidies, soft loans, etc. The early seventies were marked by incidents of power blackouts and grid collapses. Hydropower generation suffered especially, as availability of water resources was heavily dependent on the monsoon season. Moreover, there were delays in civil works, delays in the supply of power plant equipment, and the infrastructure additions in terms of transmission and distribution were also not adequate. In its attempt to assist the states, the Central government established a few private companies that could cater to more than one state. The Central government amended the Electricity (Supply) Act 1948 and established the National Hydropower Corporation (NHPC) in 1975 to build hydropower plants and the National Thermal Power Corporation (NTPC) to set up coal-based power plants to supplement the generation capacities of the SEBs and private companies. NTPC built its own transmission network to transmit electricity to different SEBs. In 1981, the government decided to integrate operations of the central and state transmission systems to form a national power grid to facilitate transmission of power generated by non-SEB generators; these efforts led to the incorporation of the National Power Transmission Corporation in 1981. Initially the company was engaged in managing the transmission assets of the central generating companies, NTPC, NHPC and North-Eastern Electric Power Corporation; but in 1992, this entity was renamed as Power Grid Corporation of India Ltd and all the transmission assets of the three above mentioned generating companies were transferred to it under an ordinance. Furthermore the government set up the Power Finance Corporation (PFC) in 1986 as a financial institution dedicated to power sector financing to supplement planned expenditure on power plants, specifically new power plants. During this phase, lot of emphasis was laid on setting up hydropower plants, as the government planned to develop the irrigation and power sectors simultaneously. The installed capacity in the hydropower sector did witness significant growth up to 1970; however, the lesser-than-expected growth rate and longer gestation period decreased its share in total power generation capacity. In the meanwhile coal-based power plants continued to grow and the share of thermal power capacity increased in the total capacity. While the SEBs aided the growth in the Indian electricity sector, by the end of the phase under review, they suffered huge financial and technical losses (poor revenue collection and billing, poor metering and energy accounting, electricity theft, cross subsidies and SEB staffs inefficiencies were the main reasons for their losses); as a result of these losses, they provided poor electricity service to end consumers because the state-owned corporation power plants were running at low plant load factor (PLF) and the SEBs did not have enough funds for renovation and modernisation of their plants. The demand-supply gap was increasing and many states were facing electricity crisis. These circumstances forced the government to restructure the sector in a phased manner, and this paved way for meting out electricity reforms in 1991.
PostReform Phase (after 1991) The deteriorating health of the SEBs made it impossible for them to infuse fresh investments into the sector. Moreover, the country was facing a macroeconomic financial crisis that made it difficult for the governments, both the Central and state governments, to fund power projects through budgetary support. Due to these events, the government decided to restructure the power sector in a phased manner in 1991; consequently, it opened up the power sector (liberalise) and invited foreign private companies to get funds and technology into the Indian power sector. First Phase (Started in 1991) Independent Power Producers (IPP) Investments were a must in the power sector to enable it to produce electricity in line with the expected economic growth. The government liberalised the sector and opened it for foreign and private investments to increase the availability of funds for the power sector. For allowing independent power producers to operate in the sector, the government made an amendment to the Electricity Act 1910 and the Electricity (Supply) Act 1948 through the Electricity Laws (Amendment) Act of 1991. The amendment allowed private participation in thermal, hydro, wind, and solar power projects, and also allowed them to operate as IPPs. Foreign ownership up to 100% was allowed. IPPs were to operate on a costs-plus model wherein the tariff was determined by the Central government and the IPPs were guaranteed a 16% post-tax return on equity, full repatriation of profits, among others. The operators and the SEBs entered into power purchase agreements (PPAs) as the SEBs were responsible for transmission and distribution of power generated by private players. Around 189 projects, with an expected capacity of 75 GW, were proposed; however, only a few of these projects cleared the approval process, and had Memoranda of Understanding (MoUs) and Letters of Intent. The rest were either stalled in the approval process or did not reach financial closure. The government also put on fast track 8 projects with offers of counter guarantees. Introduction of Mega Power Policy 1995 In 1995, the government introduced the Mega Power Policy to increase private investments in over 1,000-MW generation projects that would supply electricity to more than one state; hence, the name mega power projects. The projects were to be awarded on the basis of competitive bidding and the CEA, Power Grid, and NTPC were to provide support to these projects. CEA was to provide assistance in identifying potential sites for setting up the plants, while Power Grid and NTPC were to provide assistance for transmission of power and preparation of feasibility report, respectively. The experiences of the first phase were not great and the Enron debacle is a reflection of this statement. In the Enron Dabhol Power Project priority was given to FDI rather than the cost of generating electricity.
Second Phase (started in1996) The 1995 Mega Power Policy did not propose any fiscal concession, hence in 1998, the revised Mega Power Policy 1998 included these concessions. The Power Trading Corporation (PTC) was also set up after this revision to purchase power from identified projects and to sell to identified-SEBs. Establishing regulatory commissions and privatizing electricity distribution in cities (with population of more than 1 mn) were the pre-conditions included in the revised policy. In December 1996 the Common Minimum National Action Programme (CMNAP) was structured in consultation with the state governments, and guidelines were established to hasten the sectors progress. In addition to envisaging setting up of regulatory commissions, the CMNAP reiterated the need for rationalization of tariff and that no sector was to pay less than 50% of the average cost of supply. Tariff for agriculture sector was to be not less than 50 paise per unit and the tariff was brought to 50% of the average cost of supply within 3 years.
During this phase the sectors performance improved as compared with the first phase as the PLF reached around 70%; however, commercial losses continued to pose a major hurdle in the sectors development. During this period private sector investments were already being made for capacity addition in generation but the need was felt for private participation in transmission as well; consequently, the Electricity Laws (Amendment) Act was passed in 1998 to enable private participation in the power transmission sector. The central transmission utility (CTU) and the state transmission utility (STU) were set up under this Act. The maintenance and construction activity of transmission network was supervised by CTU at the inter-state level and by the state transmission utility (STU) at the intra-state level. These utilities also recommended regulatory commissions on allotment of licences to different players. The CERC issued the first Indian Electricity Grid Code (IEGC) in January 2000 to ensure grid discipline and to set operation and governance parameters for players in the transmission and distribution (T&D) sectors.
Existing Indian Market Structure: Single Buyer Model
Salient features The Indian single buyer model is characterized by the following:(a) Generating Companies (both State Owned monopolies{SOEs} and IPPs) did not have the freedom to sell power produced to any person other than the SEBs or Government Transmission Companies. The lack of credit-worthiness of these SOEs became a major constraint for private investments, and resulted in the bail-out package securitizing dues of over Rs. 43,000crores (approximately US$ 9 billion). (b) Power was then on - sold to largely state owned Distribution Companies (except in Orissa, and Delhi where distribution business was privatized; and in Kolkata, Ahmedabad and Mumbai where historically private licensees exist) who in turn supplied to consumers. The consumer does not have a choice of the source of supply and the benefits of competition. (c) In case of SEBs, the power is sold by the SEB to the consumers. Again there is no choice with the consumers and no competitive pressures. Rationale for Single Buyer Model Some of the stated reasons for pursuing a single buyer model were3:(a) Securing equal treatment to all generators by avoiding direct bilateral contracts with distributors and consumers. (b) Simple market structure avoiding complexities (of price determination and institutional capacity) arising out of third party access to the grid. (c) Maintain unified wholesale price. (d) Secure bankability - eliminating credit and market risk. (e) Keeping supply-demand mis-match under control. Problems with Single Buyer Model Some inherent disadvantages of the single buyer model and constraints on the efficacy of regulating state owned utilities as seen in India were:(a)Governance: investment decisions are made by government officials who do not bear the financial consequences of their actions. (b) PPAs create implicit or explicit contingent liabilities (like escrows, counter guarantees and sovereign guarantees) for the government which can undermine their creditworthiness and result in macroeconomic instability. This became a contentious issue which undermined the bankability of several proposed IPPs where lack of robust financial model was sought to be substituted by escrows and guarantees. (c) It responds poorly to signals when electricity demand falls short of projections. (d) It hampers the development of cross-border electricity trade by leaving it to extraneous considerations of real-politics in SOEs ignoring the economic considerations.
(e) It weakens the ability and the incentives for distributors to collect payments from customers. (f)When distributors see the paying and non-paying distributors are treated alike, their motivation for cutting off non-paying customers weaken.
Third Phase (2003 onwards) The Electricity Act 2003, which came into effect from June 10, 2003, replaced the earlier laws, acts governing the Indian power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the Electricity Regulatory Commissions Act 1998. The bill sought to provide a legal framework for enabling reforms and restructuring the power sector. The Electricity Bill was passed by the Parliament in 2003; this Bill sought to provide a legal framework for enabling reforms and restructuring of the power sector. The Bill became an Act with effect from June 10, 2003 and replaced the earlier laws governing the power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948, and the Electricity Regulatory Commission Act 1998.
Electricity Act 2003 The Act sought to create a liberal framework for development of the power industry, promoting competition, protecting interests of consumers and supply of electricity to all areas, rationalization of electricity tariff and ensuring transparent policies and promotion of efficiency, among others. The Act came out with the National Electricity Policy, mandatory creation of
SERCs, emphasis on rural electrification, open access in transmission and distribution and some other provisions. It mandated the regulatory commissions to regulate the tariff and issues of license. This Act focused on laws relating to generation, transmission, distribution, trading, and uses of electricity. The Act was amended on May 28, 2007 and the Electricity Act 2003 was enacted with stronger power and clarity and with greater emphasis on assessment, fines, and legal framework to check the commercial losses due to theft and unauthorized use of electricity. Generation The generation segment was opened for private players in 1991. However, even over the years, the generation capacity from private players did not reach the desired level. In 2002 only 11% of generation capacity was from private players and the public sector generators capacity was not enough (as running at low PLF) to meet the growing demand of electricity. The government introduced certain policy measures in generation in the Electricity Act 2003 to ensure more private participation and to reduce the demand-supply gap. Generation of power was de-licensed and the requirement of techno-economic clearance for thermal power generating plants by CEA was dispensed with, which paved way for entry of more players in thermal generation. The Act also removed restrictions on captive power generation and simplified the procedures. Open access was allowed immediately in transmission, which gave the right to private power producers or any other generating utility to sell its power to any entity using transmission network (without any discrimination). Due to these changes, industries could set up captive power generation units and the right to open access allowed them to sell electricity to any consumer using the transmission network. Captive units could thus sell their surplus power to the customers of their choice.
