Power policy - Pitfalls and way out

November 03, 2014 10:57 AM

There is an urgent need to place an alternate agenda for the reforms in power sector by the new Government for power sector development in the country to meet the national aspiration of electricity for all at affordable cost. While the Electricity Act, 2003 has worked well in strengthening India’s power sector to some extent, it has also underlined the weakness of the new institutional mechanism. “Electricity Act of 2003 now needs a relook and it should be more contemporary.

The problems of present day power sector include cash strapped power distribution companies, their tariff capped , power transmission constraints , lack of political will to curb the menace of power theft and over dependence on private sector.”

Indian Electricity Act 2003
Ministry of Power has proposed to bring a Bill, amending the Electricity Act 2003 in winter session of Parliament to improve the tariff policy and regulations in the power sector. Minister of State for Power informed the Parliament that Electricity Act of 2003 now needs a relook and it should be more contemporary. There is a need to have transformational changes and not incremental changes.
The purpose of Electricity Act 2003 was to improve the performance of power sector by bridging the gap between demand and supply, reduce the aggregate transmission and commercial (AT&C) losses in Power sector, improve the financial health of the sector & reduce the subsidy burden of Government. But due to faulty execution of policies the financial health of power sector has further deteriorated & Government is now even subsidizing private power distribution companies (DISCOMS). Moreover due to continued wrong energy policies banking sector may collapse under the burden of non-performing assets being generated by power sector.

The review of Electricity Act 2003 is an imperative need and must be undertaken to assess its strength and weakness .A status report on the experience of the implementation of Electricity Act 2003 should be placed before the public before going ahead with proposed amendments.

UPA Government had proposed last year an amendment to Electricity Act 2003 to separate content and carriage in distribution. There will be one single distribution company which will be responsible for maintaining the distribution network and there will be several supply licensees in the same area. Multiple supply licensees at the same area of operation is aimed at retail competition thus to tide over the impractical proposal of multiple distribution licensees existing in Act 2003.
As India is energy starved nation, reducing price of power through competition is impractical. The multiple licensee system will help only "cherry picking" and the deterioration of the incumbent public sector licensee, which will be the only responsible for supplying electricity to the unprivileged common

The power generation capacity in country is 2,50,256 MW but the maximum peak demand met is 1,39320 MW in Jul y this year. If one assumes 70 % availability of generating capacity the power availability should have around 1,75 ,000 MW. This clearly points to the fact that around 40,000 MW remains unutilized due to forced outage of units for one reason or other.

The power supplied in the month of July 2014 was 91069 billion units against last year supply of 83211 billion units in July 2013 which is an increase of 9.4 %.However the restricted power demand in July this year was 94500 billion units , an increase of 8.9 % over the last year’s corresponding figure of 86766 billion units.

The average coal availability stock at thermal plants of country is just sufficient for 7 days . 24 thermal plants out of 100 that are being monitored by Central Electricity Authority have less than 4 days coal stock is leading to forced outage of thermal units.

There is over 20000 MW of stranded generating capacity due to coal shortage. Coal India is not supplying full quantity of coal to the thermal plants which have already been completed. These plants are being asked to go for imported coal which will increase generating cost for which there may be few buyers.
With the thrust on capacity addition in private sector, several States are now in a condition of surplus power during part or most of the year. This is leading to a situation whereby state thermal power stations are ordered to be backed down or shut down so as to enable these private sector thermal stations to operate at optimum or full load. Gujarat, Haryana and Punjab are the glaring examples of this.

The cost of supply of power to consumers is going to increase due to over dependence on power purchase from private sector and forcing their own state run units on forced closure. In case of the states refuse to buy power from private parties they are supposed to pay fixed charges to private generators.Gas power stations are lying idle due to costly natural gas. Priority of allocation of gas to NTPC stations and state gas power stations should be ensured at economical rates as a measure to safeguard central sector and state utility finances.

Central Electricity Authority which played a major role in power development of country has been completely sidelined. Now there is no central agency to look after the coming of need based generating station across the country. Now thermal plants are being constructed without looking in to geographical needs of country.

The concept of achieving low tariffs through competitive bidding in Ultra Mega Power Projects (UMPP) has been completely defeated by the changes made in terms of reference after award of contract by giving various concessions to successful bidders. Moreover all the private generators have sought upward revision of their power supply cost in view of extra expenditure being incurred to maintain full supply of coal and CERC has agreed to it. Even the appellate Authority has rejected the plea of state power utilities.

Low carbon sources of energy need to be encouraged. With mass production the cost of Solar energy will soon approach thermal rate. Similarly wind power needs to be enhanced particularly by States far from coal mines. To counter global warming the trend of more thermal stations has to be reversedGovernment policy to set up mega nuclear parks with imported plants is bound to fail due to high capital costs. While Indian nuclear plants are competitive these need to be encouraged instead of mega nuclear plants.

Distribution reforms especially in rural sector have remained the most challenging in power sector reforms. High transmission and distribution losses along with power theft erode the revenue of distribution utilities which has a cascading effect on their profitability. and also tariff remain on higher side.
The tariff for low capacity consumers is less than the cost of power purchased by the power distribution companies (Discoms).The Discoms resort to unscheduled power cuts though the power may be available from generating stations due to economics involved in them. Discoms are not able to pay for costly power purchase because of cash crunch being faced by them.

UPA Government continued with the policy of experimentation in power sector and introduced franchisee system in power distribution. All the franchisee throughout the country is committing gross financial irregularities and breach in terms of contract.

Distribution franchise working in Agra has miserably failed. As per CAG report UPPCL has already incurred a loss of Rs. 489 crore in 2 years and shall incur a loss of about Rs. 5341crore in next 18 years due to Agra franchisee. Same is the story of Nagpur, Aurangabad and Jalgaon where franchisee is not paying to MSEDCL and owes more that Rs. 500crore as dues of power purchase.

The Government has overlooked the cases of state sector Discoms of Andhra, Tamil Nadu, Karnataka and Punjab where the AT&C losses were reduced under public sector ownership. The government has also overlooked the poor performance of private sector Discoms where the technical losses remain high and the financial health has not improved.The practical model adopted by Andhra Pradesh Eastern Discoms and Punjab have actually achieved remarkable results in reduction of AT&C losses could be considered and adopted by the other states having higher level of AT&C losses as an alternative to the proposal of input based distribution franchise or any other model of privatization.

Power theft

The poor performance of Discoms is the direct result of very high transmission and commercial (AT&C) losses and defaulting amount in the maximum in the political sensitive areas. The overall AT&C losses in Haryana are in range of 29.46% but in the political sensitive areas these losses are more than 40%. The AT&C losses touch 70 % in rural domestic feeders of this political sensitive state.

Pillar Box Scheme
To improve the power system and to ensure there is no power theft Punjab model of reduction of distribution losses departmentally must be introduced throughout the country and Government should also provide benefits of financial restructuring plan (FRP) to those states where the AT&C losses has been reduced under public sector ownership.

The AT&C losses in Punjab have been brought down from over 25% to 17 % with shifting of about 20 lakh domestic meters to outside their premises will be further brought down to 14 % after all the meters are shifted outside the consumers premises.

It may be mentioned that in urban areas the consumer meters were shifted outside their premises and fixed on the poles.In rural areas meters of the consumers inside the village boundary were installed in pillar boxes and meters outside the village boundary were installed on poles. Bare LT main/sub main was almost eliminated. Low tension distribution system has been completely re-laid. Decades old worn out conductors have been replaced.

The improved LT system helped in minimizing interruptions in power supply, timely restoration of supply improved voltage at tail- end, eliminate the problem of overloading of the system, possibility of accidents and reduced damage rate of transformers. Utility gained by less demand on same feeder, more revenue, bringing down transmission losses and controlling power theft.
Government of India is providing financial help for such schemes under APDRP and Non APDRP schemes.

Inadequate transmission structure to transmission power from one region to the other is the main constraint for power shortage in southern states though surplus power from different sources is available in other regions. The expansion in transmission system in country has not matched with the capacity addition. After the last grid failure the restrictions have been imposed on all the states to restrict their power import within the prescribed limits.


Financial health of power sector
The very purpose of changing Electricity Act in 2003 was to reduce the losses in Power sector, improve the financial health of the sector & reduce the subsidy burden of Government. Due to faulty implementation of policies the contrary has happened. The financial health of power sector has further deteriorated & Government t is now even subsidizing private Discoms .

The Government introduced financial restructuring plan (FRP) of power distribution companies and linked it to introducing privatization for the reduction of AT&C losses through introduction of input based distribution franchise as per Shunglu Committee report. Many State Government agreed to terms and conditions of FRP to get the loans waived but the state utilities again resorted to fresh loans for their operational expenses.

What is more serious is that due to continued wrong energy policies banking sector may collapse under the burden of non-performing assets being generated by Power Sector.In year 2002-03 on the recommendations of Ahluwalia committee report a financial package was introduced by which outstanding dues of state electricity boards of about Rs 43000 crore were securitized by state governments through the issue of bonds, but because the fundamental problem remained that the cost of supply was more than the average tariff and average revenue realized, the Discoms of the country again went into red and in less than a decade the accumulated losses have gone up to Rs 1.9 lakh crore by March 31, 2012.

Any financial restructuring plan to bailout Discoms can only be successful if state Discoms ate allowed functioning on technical and professional lines. ”
The UPA Government never tried to diagnose the problems faced by power sector but only tried to treat the symptoms. The experimentation in power sector continues only to benefit the private players at the cost of tax payer’s money.
Regulatory mechanism

The aims and objectives which were sought to be achieved through the enactment of Electricity Act 2003 have not been attained as envisaged. First and foremost the act envisaged that with the setting up of independent regulators and distancing of govt. from tariff matters, the state distribution utilities would be able to achieve financial viability and there by restore the financial health of the power sector. While it has done commendable work on model tariff regulations, power purchase management and standards of performance of licensees, the State Electricity Regulatory Commissions’ (SERC) response has been lukewarm and self-defeating.

It is now acknowledged that majority of Regulators have not been able to function independently of the state government and political forces as envisaged in the act with the result that the gap between the cost of power and the revenue realised could not be bridged.

Autonomy & independence of Regulators has been completely eroded as it has been captured by vested interests due to interference by state Governments even in tariff matters under the clause of public interest. Most of regulatory commissions are headed by retired bureaucrats who are enjoying all powers without any responsibility. The proposed amendments in Electricity Act 2003 must take in to account the pitfalls of wrong implementation of policy while working out a way out.

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