The end of this financial year marks a mini milestone in the history of India’s power sector. Come next quarter, the landmark Electricity Act, 2003, would have completed 15 years of existence. When it came into force in June 2003, the Act was as much in importance and significance to the power...
The end of this financial year marks a mini milestone in the history of India’s power sector. Come next quarter, the landmark Electricity Act, 2003, would have completed 15 years of existence. When it came into force in June 2003, the Act was as much in importance and significance to the power sector as the economic reforms of 1991 were to the whole economy.
Much has happened in the Indian power sector in the last 15 years, not the least of which is the huge rise in installed capacity and the increase in the contribution of wind and solar in the energy mix. India’s installed capacity today stands at 3,34,400 MW, three times as much as it was 15 years ago; renewable energy, practically non-existent then, now accounts for a third of the installed capacity.
Whether this handsome rise in the capacity base was due to the Act or not, is beside the point here, because capacity creation was not the principal aim of the legislation.
What it set out to do was the creation of a free market for electricity, in which any consumer could buy power from a supplier of their choice, and any power generator could install a plant anywhere and sell energy to any consumer at prices freely determined by the market. This essence is often captured in the phrase ‘non-discriminatory open access’.
The sad truth is, such an open market has not come into being after so many years of the much-hailed legislation. Today, solar energy companies are prepared to sell their power at ₹2.44 a kWhr. True, such a low price is predicated upon a set of favourable conditions such as large capacity, assured payment and done-up infrastructure. But even if one were to put a value to the absence of such enabling factors elsewhere, solar power would cost less than ₹4. Can you and I, or for that matter, a factory, buy that power at that price?
Still expensive for consumers
While generation costs are coming down, consumers continue to pay a high price. It is pertinent to point out that the Central Electricity Regulatory Commission has recently calculated the average cost of power purchased by the utilities at ₹3.48. The reason electricity is still not cheap in the hands of consumers is that we pay for the utilities’ inefficiencies, technical and administrative, and for the utilities’ supplying subsidised power to several categories of consumers (by way of cross subsidy surcharges).
A free market for electricity exists for spot purchases, but few energy companies would dare to put down crores of rupees to create a plant whose generation is left open to the vagaries of the spot market. A relatively free market exists for the short term (less than three months) on the country’s two electricity exchanges. But consumers prefer a stable price of electricity, use of short term only for contingencies. According to the Indian Energy Exchange (IEX), intra-day to ‘up to three months’ power purchases account for only 4 per cent of the Indian power market. Medium term (three months to three years) accounts for another 5 per cent, while 89 per cent of the market is only on long-term agreements.
But that is where the various State electricity distribution companies (discoms) are monopolies in their areas of operation. A plethora of charges (called open access charges), even if duly approved by the respective State electricity regulator, and regulatory restrictions hamper free market. In a presentation to IIT Kanpur last year, the IEX tellingly said, “open access charges are being set higher to restrict open access.”
Cross subsidy surcharge
Perhaps, the most hated of these charges is the ‘cross subsidy surcharge’ (CSS), which is levied to recover the cost of the utility providing subsidised power to certain categories of consumers, such as the poor, religious entities and agriculture. It is therefore an additional tax.
The two National Tariff Policies, of 2005 and 2016, that India has had, say that the tariff a discom charges its customers should not exceed 20 per cent of its ‘average power purchase cost’ (APPC), and the CSS should not exceed 20 per cent of the tariff. In practice, only the second is followed. For example, the CSS is ₹1.45 a kWhr, which is 20 per cent of the industrial tariff of ₹7.26. But the industrial tariff way exceeds the APPC of ₹3.29. Most States levy CSS of around ₹1.60. Again, while the energy regulations call for gradual phasing out of CSS, there is often an increase in the levy. For instance, Assam’s CSS went up from 54 paise in 2016-17 to ₹1.31 in 2017-18, Bihar’s from 79 paise to ₹1.79.
Likewise, States also levy an ‘additional surcharge’ on open access consumers. The principle behind this levy is, ‘if you start buying power from some other producer, how do I recover the cost of my assets?’ which is a monopolistic stance. Even so, the Electricity Act demands that the discom should “conclusively demonstrate” that its assets are stranded because its customers have gone out of its fold. In practice, no such conclusive demonstration takes places, and discoms levy additional surcharges, which have gone as high as ₹1.60 in some States. Over and above these charges, the industry complains of regulatory hurdles. These include delays in approval to be given by the State Load Despatch Centre for a consumer going ‘open access’, and States invoking Section 11 of the Act to disallow a power generator from selling the power outside the State.
Today, there is a marked preference for clean energy. Large consumers have a green-bias and they also could benefit by falling prices of wind and solar. Many States have waived or reduced open access charges, but challenges remain.
For instance, though Tamil Nadu levies only 80 paise as CSS (50 per cent of the regular CSS) on wind and solar, it does not allow open access, except through ‘group captive model’— where the consumer necessarily has to become a shareholder in the generating company. Not many industrial consumers are interested.
Karnataka had waived all charges on green power, but the CSS of ₹1.59 is very likely to be brought back from April 1. Andhra Pradesh and Telangana waive all open access charges, but only for five years after commissioning the plants. Rajasthan does not allow third party sale.
“Bringing down CSS on open access solar would help faster roll-out of solar projects that could sell power directly to customers, in the spirit of the Electricity Act, 2003,” says Andrew Hines, Co-Founder, CleanMax Solar, a solar company that sells power directly to consumers.
In a completely free market, which the Act envisages, consumers (particularly industrial consumers who are paying high tariffs today) could be buying green, cheap power from wind and solar companies. Fifteen years after its promulgation, the Act is way adrift of its goal.
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