Proposed amendments of Electricity Act, 2018

The Ministry of Power of India has recently announced the draft proposed amendments to the Electricity Act, 2003. The proposed amendments aim to be in line with the country’s changing electricity markets and systems, with their large renewable capacities and the emergence of a smart grid network.
The Amendment proposes important changes in renewable energy, cross-subsidy, open access, operations & responsibility of ERCs, and many other changes. Some of these are discussed in brief below:

Renewable Energy

The EA Amendment 2018 proposes several amendments that are favorable to the RE sector. Some of these are:

  • Definition of Renewable Purchase Obligation and Renewable Generation Obligation introduced.
  • RPO has been separately defined. Related to this, the definition of “Obligated Entity” has also been introduced.
  • RGO means the Renewable Energy Generation capacity required to be established to be procured from Renewable Energy Sources, and sale of such energy along with the electricity generated from the coal or lignite based thermal generating station, by a generating company establishing a coal or lignite based thermal generating station.
  • Introduction of renewable energy service company which provides renewable energy to consumers in the form of electricity.
  • Introducing policies in order to support RE sector like National Renewable Energy Policy to promote smart grid, ancillary support, and decentralized distributed generation in accordance with the provisions of the Act;
  • A penalty of maximum Rs. Fifty lakh for non-compliance of RGO. (Reduced from 1 Cr. to 50 Lakh, the earlier penalty was on 1 lakh.)
  • For non-compliance of RPO, an additional penalty is proposed, which shall be minimum of Rs 1 per unit with a maximum of Rs 5 per unit depending on the extent of the shortfall.
  • Generation and supply of renewable energy will not require any license for such generation and supply.

Cross-subsidy

The draft EA Amendment proposes (a) time-bound reduction in cross-subsidies (CSS), and (b) CSS to be not more than 20% of the wheeling charge. These provisions are nothing new. The EA 2003 also included provisions for reduction of CSS. But these were watered down later.

 

The proposal that CSS be 20% of wheeling charges is significant, as if implemented, it will reduce CSS significantly. Also, the provision for charging “additional surcharge” is proposed to be deleted – this will also have a significant impact as in recent years states have used high additional surcharge as a tool to discourage open access.

Open Access

The draft EA Amendment states the following with respect to open access:

“With effect from the commencement of the Electricity (Amendment ) Act, 2018, all consumers having a connected load of 1 Mega Watt and above with the power system, may procure at their option electricity through open access under contractual agreement from any generating company, trading licensee, or from any other source.”

This implies automatic open access, without the need for permission from the Discom. If implemented, this will be a radical change and can potentially transform the electricity market in the country.

Separation of Carriage and Content

One of the key provisions in the previous EA amendment (proposed in 2014) was the separation of carriage and content – i.e. further breakup of the Discom into supplier and network operator, and also allowing multiple suppliers in the area of the Discom. This proposal was met with significant resistance from the state when the Standing Committee of the Parliament viewed the amendment. As a result, the current amendment, while retaining the provisions, has significantly diluted the scope of carriage and content separation by leaving it entirely to the decision of the state government.

In our opinion, this is a pragmatic approach, as it may allow the passage of the EA Amendment act without significant resistance from the states. However, the flip side of this approach is that such a reform will take a long time to be realized on the ground, and there will be significant differences between states. The EA2003 has heralded the break-up of Electricity Boards into Genco, Transco and Discom’s. Fifteen years on, the separation is still only partially effective in most states.

Others

  • Subsidy to be provided only through “Direct Benefit Transfer”. This can be a potential game-changer for the Discoms, and even for the entire sector. Today, subsidies are paid through the Discom, which, even though is a commercial entity, often works as a government arm. If DBT is introduced, it can pave the way for genuine Discom reforms on commercial principles.
  • Every proceeding before the Appropriate Commission shall be decided efficiently. Matters related to passing through in tariff on account of change in law/duties/taxes etc shall be decided in a maximum of 30 days. All other matters will be disposed of within 90 days. Regulatory Commission shall have all the powers of a civil court.
  • Development of market: Another important change has been the mandate to promote forward and futures contracts in electricity.

Conclusion

We believe that the proposed changes will have a wide and deep impact on the electricity sector. The promotion of RE and removal of roadblocks 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, by watering down the provisions for the same and giving states the choice to implement is a pragmatic way the government has adopted to allow the passage of EA Amendment. In any case, this change is likely to take a long time to start showing on the ground.

Another radical change proposed is of paying subsidies through “Direct Benefit Transfer” only. This can be a potential game-changer for the sector and can pave the way for genuine Discom reforms on commercial principles.

The Infographic displayed above analyses the extent of usage of certain keywords in Electricity Act 2003, Draft EA amendment bill 2014 and the latest Draft Electricity Act 2018. The graph is prepared to understand how the government’s priority has evolved over the years from only conventional power to renewable energy as well.

The word ‘Renewable’ is used 22 times in Draft EA 2018, 23 times in Draft EA bill 2014 and just 4 times in EA 2003. Similarly, Open Access is used 20 times in EA 2003, 32 times in Draft EA bill 2014 and 23 times in Draft EA 2018.

Terms like RPO and Smart Grid have no mention in EA 2003, while in Draft EA bill 2014 RPO was used once & smart grid 7 times whereas Draft EA 2018 smart grid was used 5 times and Franchisee was used the highest 8 times in Draft EA 2018. The term Cross Subsidy is used the least in Draft EA 2018 just once and 3 times in both EA 2003 and Draft EA bill 2014.

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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