May 1, 2020

Draft Electricity Act to usher in distribution sector reforms, financial discipline, focus on renewable energy push

Draft Electricity Act to usher in distribution sector reforms, financial discipline, focus on renewable energy push

The Draft Electricity Act (Amendment) Bill 2020, which has been shared by the Union Power Ministry for suggestions, lays focus on next generation reforms, financial health of distribution companies, their ownership, governance and thrust on renewable energy sector.

The much-awaited changes sought for the ageing Electricity Act, 2003 was shared by the Union Power Ministry on April 17, 2020 with stakeholders for suggestions. Initially, three weeks’ time was given for feedback. Later, due to the coronovirus-led lockdown, it was extended to May 8 and again to June 5.

The draft Bill has evoked mixed response. While States which extend free power to the farm sector such as Telangana, Andhra Pradesh and Punjab, among others, are delving deep into the manner in which it could impact them, Independent Power Producers (IPPs), who have been hit by delayed payments and moves to review the long-term Power Purchase Agreements (PPAs), are happy.

Anish De, National Head, Energy & Natural Resources, KPMG in India, says, “The current version of this (Bill) has been in the making for two years now. Several significant changes have been proposed. The biggest of which is on an independent authority for contract enforcement. There is also an attempt to make the appointments processes for regulators standard and neutral.”

He further states that, “A big emphasis is on clean energy including hydro. An attempt has also been made to streamline distribution franchising and a new concept of sub-licensing has been introduced but needs to be detailed.”

“Issues related to markets, competition, financial viability, sector restructuring, supply security, and consumer protection are largely unattended in this draft. Most provisions are positive, but some could be contentious,” he says.

Girish Kumar Kadam, Sector Head and Vice President, ICRA, says, “The establishment of Electricity Contract Enforcement Authority to resolve the matters and to perform certain obligations in the contracts is a welcome move. However, there is need for clarity with regard to the roles of the CERC and APTEL. This provides for an assurance to IPPs on the protection they get from long-term contracts.”

“Lately, some of the renewable energy companies had to face tough times with states seeking to renegotiate PPAs. Though the MNRE intervened to ensure this situation does not go out of control, the Enforcement Authority is a most welcome move,” he explains.

One of the aims of the new Bill is to bring financial discipline in the distribution companies through Cost Reflective Tariff aimed at eliminating the tendency of some Commissions to be flexible. Therefore, the Bill provides that the Commissions shall determine tariffs that are reflective of cost so as to enable discoms to recover their costs.

Second is the provision for Direct Benefit Transfer where it is proposed that tariffs be determined by Commissions without taking into account the subsidy, which will be given directly by the government to the consumers. This is where states are seen to be worried.

Ashok Khurana, Director General, Association of Power Producers, says, “The proposed amendments are formulated to remove the regulatory impediments/shortcomings being experienced in sectoral functioning. The creation of the Electricity Contract Enforcement Authority will help instil discipline among the contracting parties. To avoid any jurisdictional issues between CERC and this proposed body, the bifurcation of functions should be spelt out clearly.”

“Empowering Load Despatch Centres to oversee the payment security mechanism will help resolve the chronic problem of receivables in the sector. Tariff fixation powers of state commissions have been curtailed and these bodies have been mandated to determine tariffs without subsidy,” he said.

The power sector falls under the concurrent list. The issue of subsidy and concerns of cross subsidising the power tariffs from industrial consumers to agriculture consumers and other sectors, is one of the contentious issues for certain States, which could oppose it.

Renewable policy

The Bill lays special thrust on the renewable energy sector, including hydro energy. It is proposed to come up with a new National Renewable Energy Policy for the development and promotion of generation of electricity from renewable sources of energy.

It is proposed to have mandatory renewable purchase obligation which is not being strictly adhered to now by various states. With the renewable energy capacity set to go up significantly over the next decade, this is a welcome move.

It is also proposed to establish adequate Payment Security Mechanism for scheduling of electricity by empowering Load Dispatch Centres to oversee the establishment of adequate payment security mechanism before scheduling dispatch of electricity, as per the contracts.

To strengthen the regulatory regime, there will be one Selection Committee for selection of Chairpersons and Members of the Central and State Commissions and uniform qualifications for appointments of Chairperson and Members of Central and State Electricity Regulatory Commissions.

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