Analysis of the changes proposed in the Electricity Act

Analysis of the changes proposed in the Electricity Act

The Electricity (Amendment) Bill 2014 was tabled in the Parliament recently. Once approved, the amendment will bring sweeping changes in the entire electricity sector. Most aspects of the power industry as it stands today will be touched in some way or another.

We have analyzed the impact of the proposed changes in this article. The changes that we have focused on concern the following areas: Renewable Energy, Open Access, distribution of electricity (ie the role of the Discom), and other changes that have significant impact. There are various other changes as well, but those are outside the purview of this article.

Renewable Energy:

The EA Bill 2014 proposes to include the definition of “Renewable Energy Source” and of “Obligated Entities” in the Act. Further, the bill also states that obligated entities may be mandated to

“procure electricity from or any market instrument representing the renewable energy sources”

These changes are significant as they lay to rest the argument that the obligation to meet RPO is not mandated in the Electricity Act 2003 (‘EA’), particularly for open access and captive generation. This is the premise of on-going cases many states and also in the Supreme Court.

Another objection made to the current regulatory set-up is that RECs have no basis as per the EA. Both these shortcomings will have been addressed with the new Bill.

The Bill also proposes various measures to promote RE generation in the country. The most significant of these is that power procured from RE sources under open access will not attract cross-subsidy. This will give a significant boost to the RE market.

Further, the concept of Renewable Generation Obligation (‘RGO’) has been brought in. The bill requires coal based generators to also set up RE generation,

“…which shall not be less than ten per cent. of the thermal power installed capacity”

This generation will also be allowed to be passed through to the discom as bundled power.

A major shortcoming in the existing act has been the interpretation of the ApTel which leaves co-generation out of the application of RPO regulations. This is now proposed to be changed by mandating RPO to be met only though RE and co-generation from RE. Co-gen from other sources is also required to be promoted, but through sale of power to the licensee only (and not through an RPO).

 

Open Access:

Under the current act, open access has been a failure as most states still do not allow open access, and policies in states are unpredictable. Sweeping changes are now proposed in the open access regime. The Bill proposes that OA will be available to all consumers with load of more than 1 MW by default. Such consumers will be allowed to enter into a bilateral agreement for procurement of power.

 

Change in the role of the Discom:

At present the Discom provides the service of last mile connectivity through the distribution system and also supply of power. This role is proposed to be broken up. A consumer will therefore have the choice to choose his supplier. In a distribution area, more than one supplier will be allowed to operate. The retail tariff set by the SERC will act as the maximum tariff, with suppliers allowed to offer a lower than prescribed tariff.

 

Other significant changes:

Penalty clause: A very important change change is in the penalty clause. Penalty for non-compliance of any provision of the act has been raised to Rs 1 crore. Originally, the penalty was Rs 1 lakh. The bill also proposes a reduced penalty of Rs 10 lakhs for RE generators.

 

Most importantly, the Bill specifically mentions the applicability of penalty in case of non-compliance of RPO or RGO. It says that Sec 142 will be applicable in case:

“…..has not complied with the renewable purchase obligation or renewable generation obligation as specified”

 

Development of market: Another important change has been the mandate to promote forward and futures contracts.

Smart grid and ancillary services: The concept of “smart grid” and “smart meters” have also been incorporated.

“Ancillary services” have also been defined, and all generators will be required to keep a certain portion of generation capacity as “spinning reserve”

 

Conclusion

We believe that these changes will have wide and deep impact in the electricity sector. The promotion of RE and removal of road blocks for development of RE and of open access in the country is a welcome step, and one that was long overdue.

The separation of distribution and supply function also signifies a fundamental shift in the way electricity is distributed in the country. However, this change will take time and strong will to implement. This is evident from the fact that after the EA 2003, the State Electricity Boards were required to be broken up. However, in many states they function in conjunction, and often enjoy the protection of the SERCs and state governments, to the detriment of the industry and consumer.

These changes are bold and welcome. The government will now need to focus on implementation and enforcement. Only then the ambitious plans of “Electricity for All by 2019”, “Make in India” and over 100,000 MW of RE capacity will become a reality.

The Bill would be delayed, as the Standing Committee is yet to give its report on the same.

“The Standing Committee will give its report on the proposed Electricity (Amendment) Bill 2014 by April and then we can introduce it in Parliament,” Power Minister Piyush Goyal

 

The copy of Electricity (amendment) Bill can be accessed here.

Stricter penalties in Electricity (Amendment) Act: Piyush Goyal (Power Minister)

The Power Ministry will soon come up with the Amendment in the Electricity Act 2003, which will have strict penalties. The proposed amendment is likely to be presented in the parliament during ongoing winter session.

“We’re looking at presenting amendments to the Electricity Act in this session of parliament, for strengthening the penalty provisions manifold in the renewable purchase obligations, to make these more stringent,” said Mr. Piyush Goyal, Minister of Power, in a statement.

He said that the current renewable purchase obligation (RPO) is also being re-looked and added, “Earlier, we had certain set of targets till 2022, which we are bringing forward to 2019, we hope that 15 per cent of the renewable power purchase obligation can be enforced to 2015”.

The concept of RGO will also be introduced in the act, in which companies setting up new power projects will have obligation to generate 10% Renewable Energy component.

The amendment will focus on bringing RE into mainframe, as the REC market has not been performing well and there is little RPO compliance by the obligated entities. The RGO will help the govt. to meet its ambitious target of 100 GW solar power by 2022 with wind capacity addition of 10 GW per year.

The provision for forecasting and scheduling of Renewable Energy is expected in act. Also the concept of ‘Must Run’ and ‘Deemed Generation’ are also expected to be part of this amendment. The idea of ‘Hydro Purchase Obligation’ and the provision of giving Renewable status to large Hydro projects can also be included.

It will be interesting to see how this amendment affects the market performance, before the proposed Renewable Energy Act is passed early next year.

Media Articles:

Business Standard

The Economic Times

Indian Express

Renewable Energy Act proposed for Feb, 2015

In the past decade, Renewable Energy in India has witnessed mixed growth curves. While Solar has shown relatively healthy growth year-on-year, wind energy capacity addition has suffered a setback in the recent years, while Biomass and Small Hydro have also seen feeble growth. One of the main reasons for this is the lack of explicit long term vision in state renewable policies and regulations, because of which investors are always skeptic about long term viability of renewable energy projects.

It seems that the new government has been looking at means to enhance the growth of this sector, and are slowly moving in that direction. The government has decided to come up with a Renewable Energy Act that will not only attract investors and further capacity additions, but also look to streamline supply and establish a viable commercial atmosphere through tariffs.

With the recent meetings of the PM of India with business powerhouses of US and the Renewable companies there, it is clear that the Act will proactively encourage more FDI’s into this sector, which already exists up to 100%.

The concrete policy related to the Act would come in place by February next year before Renewable Energy Global Investors Meet and Expo (RE-INVEST) to be organized by the Ministry of New and Renewable Energy. MNRE has also requested the RBI to bring renewable energy funding into the priority sector, so that the funding process can be streamlined along the lines of other priority sectors.

The Act will also emphasize on the development of Off-Grid systems mainly solar roof-tops that will cater to the needs of both the urban and rural populations.

The relevant media article can be read here.

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