Relevance: GS-3: Effects of liberalization on the economy; Infrastructure: Energy, Ports, Roads, Airports, Railways

Key Phrases: Generation, Transmission, Distribution Utilities in Power Sector; DISCOMS, Electricity Act 2003, UDAY scheme, Saubhagya Scheme.

Context

• The Union Ministry of Power has intended to introduce a bill to amend Electricity Act, 2003 to enable the government to reform the power sector in India.

Background

• Once the basic requirements like Roti, Kapda aur Makan (Food, Clothes and Shelter) get satisfied, demand for Bijli (Electricity) comes into picture. Growth and development in the Power Sector since independence have made India a surplus power generator.
• Power sector in India refers to Generation, Transmission and Distribution of Electricity to the consumers. The Generating companies are referred as GENCOS, the Transmitting companies as TRANSCOS, and Distributing companies as DISCOMS in India. Central Electricity Regulatory Commission is a key regulator of power sector in India.

Power sector at a glance

• In India, power is generated from various sources such as Fossil and non-fossil fuels. Fossil fuel includes Coal (51%), Gas (6%), Lignite and Diesel and its share in total installed generation capacity is nearly 60%. Non fossil fuel includes Renewable Energy and Nuclear Energy sources and it contributes to the remaining (40%) installed capacity.
• Within the Renewable energy sources (RES), the contribution of wind(10%) and solar (14%) combined is approximately 25%. Hydro-based power generation, Biomass power generation, Waste to energy and small hydro power are other sources within RES.
• Both government and private entities contribute to power generation in India. Half of the total power generation comes from privately owned stations. Share of Central and State sectors is approximately equal to 25% each.

Electricity Act 2003

• The objective of the act is to introduce competition, protect consumer’s interests and provide power to all.
• The Act provides for National Electricity Policy, Rural Electrification, Open access in transmission, phased open access in distribution, mandatory SERCs, license free generation and distribution, power trading, mandatory metering and stringent penalties for theft of electricity.
• It aims to push the sector onto a trajectory of sound commercial growth and to enable the States and the Centre to move in harmony and coordination.

Issues faced by Power Sector in India

• Underutilization of installed capacity due to extremely low plant load factor.
• AT&C (Aggregate Technical and Commercial Loss) in India is more than 20%.
• Poor performance of state electricity boards and problems with balance sheets of state DISCOMs
• Limited role of private and foreign entrepreneurs and politicization of the issue
• Shortage of Inputs such as coal especially due to transportation issues affects power generation as was recently highlighted in the media.
• Pattern of electricity consumption in India is still unpredictable and this affects the power demand curve and causes a rise in the peak power demand.
• Government Policies such as electricity bill waivers cause an imbalance in the overall budget of the Power sector.

Government Initiatives

• UDAY (Ujwal Discom Assurance Yojana) Scheme to tackle AT&C losses. However, post closure of UDAY in 2019, AT&C losses have again risen due to addition of connections in high-loss areas under the Saubhagya scheme.
• Saubhagya scheme ensures electricity connection to all un-electrified households in rural areas.
• Privatizing DISCOMs as done in Chandigarh and Dadra Nagar Haveli.

Key Provisions of the Draft Amendment Bill, 2022

• Governments to take measures conducive to the development of the electricity industry and to promote competition while protecting the interests of the consumers.
• Availing options to consumers to choose from multiple distribution licensees. DISCOMs don’t need separate approvals to engage with franchisees for electricity supply in their areas.
• The Commission will fix the tariff ceiling and floor. Cost effective tariffs will be able to recover all costs.
• Bringing private participants for collection and operations in state-owned areas to improve quality of service and encourage efficiency.
• Renewable Purchase Obligations (RPO) to mandate power consumption from renewables, with penalties for non-compliance to enable stricter compliance by Discoms and aid RE addition. It will formalize the targets set centrally, removing state variability.
• Payment security mechanism for scheduling of power to be managed by load dispatch centers.

Expected Outcomes of the Reforms

• RPO provisions and payment security were already existing as guidelines at the Central level. The Act would bolster their legality and enforcement at the State level.
• The Payment Security Mechanism will reduce Gencos' overdue amount though it may increase liquidity pressure on Discoms. Thus, it needs to be cautious in implementation.

Way Forward

• The legacy debt of around ₹5-lakh crore and legacy regulatory assets estimated to be more than ₹1-lakh crore on the books of Discoms are the causes of concern.
• Tariff revisions are necessary to be regularized to recover costs incurred such as fuel costs and to make DISCOMS revenue sustainable.
• Including critical proposals in the bill and implementing it in letter and spirit will bring DISCOMS out of the present crisis. For that to happen, political consensus and communication between the center and states are desirable.
• For privatization to succeed, all stakeholders have to be on board. Besides, reforms have to happen across the value chain of the sector. For example: in some States, where privatization has happened, there is an artificial control on pricing.

Sources: PowerMin-Gov

Mains Question:

Q. DISCOMs in the state are under financial stress in India. Suggest measures to improve its situation from the present state. Also discuss how privatization can be a rescue in this case. [250 Words].