The Electricity Amendment Bill 2022: Market friendly but more powers for the Centre

The proposed amendment to the Electricity Act, 2003 appears to follow a pattern that has evolved in recent years. (Representative image)

While the war in Ukraine has sent shock waves to the global energy market, it had some unintended domestic consequences. It reignited the debate on energy security, the economic fallout of increased energy costs owing to global fuel-supply disruptions and our commitments on renewable energy and new technologies. The proposed amendment to the electricity law, namely, the Electricity Amendment Bill, 2022, which proposes to amend the 2003 statute, has to be now seen in a wider global context.

Although the global energy market volatility impacted India’s fuel imports for the power sector, Indian retail consumers have largely been insulated from tariff shocks. To some extent, the central government can take credit for certain sector-specific interventions, including the initiative to increase generation by utilisation of stranded capacities. The central government used its emergency powers under Section 11 of the Electricity Act, 2003 to force certain coastal generating stations to ramp up generation to meet the current power demands.   This was seen as a measure to arrest price increases that were seen in the power exchanges. In an attempt to ensure timely payment of dues of generation and transmission companies, the central government activated a portal that called out the defaulters and also introduced the Electricity Late Payment Surcharge Rules of 2022. While recognising the financial distress of distribution companies, the Electricity Late Payment Surcharge Rules proceeded to put in place penal consequences, including regulating a defaulting entity’s ability to access the power market.

The financial stress of the distribution sector was highlighted by a Niti Aayog and RMI India report dated August 2021 on power distribution in India. This report has recognised that “most power distribution companies incur losses every year—the total loss is estimated to be Rs 90,000 crore in FY 2021.  Due to these accumulated losses, discoms are unable to pay for generators on time— as of March 2021 an amount of Rs 67,917 crore was overdue. They are also unable to make the investments necessary for ensuring continuous high-quality power, or build the infrastructure required to facilitate the transition from fossil fuel to renewables (but intermittent) energy sources, such as solar or wind.”  This report has acknowledged the fact that apart from the introduction of the self-sustaining reform mandate in the Electricity Act, 2003, the central and state governments, have launched several schemes, to upgrade the distribution infrastructure and help the distribution companies improve their finances. However, these schemes have not rendered the desired result and in July 2021 the central government announced further financial support of over Rs 3.03 lakh crore under the Revamped Distribution Sector Scheme.

The proposed amendment to the Electricity Act, 2003 appears to follow a pattern that has evolved in recent years, which is to institutionalise the role of the central government in the distribution sector.  It proceeds on the premise that the distribution sector in its current avatar, apart from being a candidate for periodic bail-out packages, also has the potential of jeopardising future addition of generation capacity. The projected growth in generation capacity has an ambitious renewable energy narrative, which is linked to India’s international climate commitments and energy security strategy.

Market Friendly

The bill introduces a liberal market-driven power distribution regime, with a view to secure more private sector participation. The positive investor sentiment that was witnessed in the generation side, after generation was delicensed in 2003, needs to be now replicated, in some form, on the distribution side.

Currently, India has an installed capacity of 408 GWs out of which 57.7 percent of electricity generated is based on fossil fuel i.e., coal and gas. The balance 42.3 percent is non-fossil fuel based, which includes 1.7 percent of electricity being nuclear power. The projected generation capacity target of 2030 is in the range of 775 GWs of which 64.7 percent is expected to be non-fossil fuel. Hence, there is an urgent need to send the right signals to investors, both domestic and foreign.

In the spirit of reforming the distribution sector, the bill proposes that the Central Electricity Regulatory Commission will have the power to issue distribution licenses for distributing electricity in more than one state. This clearly circumvents the ability of the state government (and that of the incumbent distribution licensee) to stall the process of allowing parallel licensees to come in and operate in their territory. Further, in order to create a “plug and play” regime, even the need for a second distribution licensee to roll out and maintain its own distribution system is removed. Such provisions will introduce competition in the distribution sector, currently dominated by cash-strapped state-owned distribution licensees. In a parallel distribution licensee regime, the amendment bill for instilling competition restricts regulatory superintendence to fixing of maximum ceiling tariff. Again, to push for a market-friendly regime, even a small 1 MW consumer, under the proposed amendment, can directly be connected to an inter-state transmission system, which generally operates at 400 kV level.

The bill also expands the central government’s jurisdiction to make rules and may be guilty of encroaching on territory over which the state governments traditionally, under the constitutional scheme, exercised jurisdiction. Some features have been included in the bill with a view to improving compliance of orders and directions of the regulators. The role of the National Load Despatch Centre has been enhanced, and in continuing with the centralising features, the bill vests it with the power to buy and sell electricity under certain circumstances.

In order to meet the 500 GWs of renewable energy generation target of 2030, investor confidence needs to be restored. Payments to generators need to be made in a timely manner, in terms of their contracts. Disputes need to be addressed fairly, efficiently and effectively. The state grid needs to be strengthened in order to allow the integration of renewable energy, without loss of generation for want of transmission capacity. One can argue all this can be achieved under the current law, without the need for any amendment.

It appears that the proposed amendments are largely on account of the failure of state-owned distribution licensees to conduct their affairs on commercial principles, in terms envisaged under the existing law. It is also a reflection on the perceived failure of certain state regulators, operating under the central law and policies.  Clearly, the bill is reactionary in its approach and content, without any philosophical or ideological underpinning. The question that now remains is the efficacy of the bill to address concerns relating to the distribution sector and also protect interests of stakeholders who are currently exposed to both domestic as well as global uncertainties.

Sanjay Sen is a Senior Advocate, Supreme Court of India. Views are personal, and do not represent the stand of this publication.