Round the clock availability of electricity to all segments of society is essential for growth of the economy and providing a minimum sustainable level of livelihood. Although this aim is universally recognized, even 67 years after independence, we have not been able to achieve this aim. The Electricity Act, 2003 envisaged a new era in the power sector with unshackling of the sector from government controls, establishment of independent regulatory institutions, delicensing of thermal generation and establishment of unbundled power generating, transmission and distribution companies operating on commercial principles for making available good quality power to all.
Distribution continues to be Achilles heel of the power sector with high level of operational inefficiency, power theft, aging infrastructure, fuel shortages, network constraint, rising cost of supply, & much higher AT&C losses than that reported as losses are often hid as unmetered consumption of agriculture. The accumulated financial losses of state distribution utilities being Rs 1.9 lakh crores as on 31st March, 2011. As a result, Central Government announcing its Financial Restructuring of the loans vide its notification dated October 5, 2012 to bail out the beleaguered utilities.
Clearly, there is a need for competition in electricity distribution so as to attract private investments, bring in operational and financial efficiency, ensure round the clock supply to all, distance the government from the sector and to support Government’s initiative to achieve a high GDP growth rate. This has led the Government to consider amending the Electricity Act, 2003 and introduce competition in distribution by separating the wire and electricity supply business. The proposed amendment aims to separate wire and electricity supply business of distribution. This implies that a distribution utility will be restructured so that there is a separate entity for setting up, expanding, modernizing and maintaining the distribution network and a separate entity (s) for supplying the electricity.
This article will focus on policy, regulatory and institutional changes that will be required to be carried out before competition in electricity distribution can be rolled out.
Existing legal Provisions regarding Distribution
The Electricity Act, 2003 has been very restrictive as regards competition in the distribution sector. It envisages that there can be multiple distribution licensee in an area with each distribution licensee using its own wires for distribution of electricity, a provision which has effectively shut off competition in retail distribution. Large consumers i.e. consumers with demand 1 MW or more, can procure electricity through open access. However, open access has not been a success due a plethora of reasons including pancaking of charges, resistance by distribution utilities and state governments as the tariff being paid by these consumers has been without exception greater than the average cost of supply. Cash strapped utilities would not like to lose its high paying consumers.
Experience in India regarding introduction of competition in the electricity sector
Electricity generation has been delicensed in accordance with the provisions of the Electricity Act, 2003, bringing competition in the generation sector. Delicensing of generation has had the desired effect of attracting substantial investments in generation so much so that out of 54,963.9 MW of total generation capacity added in the 11th Plan, 23,011.5 MW (amounting to 41.9%) was added by the private sector. In the 12th Plan, against a target of 88,537 MW capacity additions, 46,825 MW (amounting to 52.9%) is planned to be added by the private sector.
Two power exchanges (IEX and PXI) provide demutualized, transparent platform for sale and purchase of power. As a result of increase in generation capacity, the sale of power through the power exchanges has increased dramatically from 99.8 BU out of a total generation of 764 BU in FY 2009-10 to 170.42 BU out of a total generation of 962.9 BU in FY 2013-14. The weighted average price of electricity transacted through traders and power exchanges has declined from Rs 7.29/kWh & Rs 7.49/kWh respectively in 2008-09 to Rs 4.29/kWh & Rs 2.90/kWh respectively in 2013-14. Power exchanges are emerging as a powerful platform for making available power to all as well as encouraging generation capacity addition on the basis of market demand.
Ministry of Power has formulated guidelines for competitive bidding for supply of power. Under Case-I bidding process, distribution utilities can issue tenders for supply of power by generator/trader. Under Case-II, four ultra-mega power plants have been awarded and are in various stages of completion. The levelised tariff proposed by Reliance for its SASAN UMPP was Rs 1.19/kWh & that by Tata’s for Tata Power’s Mundra Ultra Mega Power Project was Rs 2.26/unit which was considered to be very attractive tariff. Although tariff of Mundra UMPP has been mired in controversy due to request by Tata Power for enhanced tariff due to increased cost of Indonesian coal following a change in law Indonesia, the competitive bidding process has proved its efficacy in bringing down the price of electricity generated.
International experience of privatization and competition in electricity sector
Privatisation & introduction of competition in most countries was preceded by restructuring of the vertically integrated utilities along functional lines. In most of the countries a wholesale electricity market (power pool) was created. The supply side of the wholesale electricity market is composed of power producers and demand side is composed of distribution companies, large users and retail users. Wire business (both transmission and distribution) has been considered as monopoly business and hence regulated. All suppliers /buyers of electricity are provided non discriminate access to the transmission and/or distribution system. Pricing of the regulated services was carried out by Regulators either through price cap regulation and or through rate of return regulation. Price of electricity supplied to power pool has been left to market forces and intervention carried out only in case of high fluctuations.
The process of introduction of retail competition in distribution generally has been carried out over a period extending years, e.g. although privatization of electricity industry in UK was initiated in 1979, market was opened up to consumers with demand greater than 1 MW in 1990. In 994, the market was opened up for consumers with demand greater than 400 KW & retail completion was introduced in 1999.
Privatization and competition in electricity industry is internationally widespread. It has placed greater reliance on market forces and less dependence on government in the allocation of resources. The results of privatization and competition have been quite encouraging. Countries such as UK and Argentina have experienced substantial drop in prices of electricity. In UK the drop in prices following retail market opening was to the tune of 15%, while in Argentina, following privatization, wholesale electricity prices fell about 60% from the pre-privatization level of $60 per megawatt hour in August 1992 . As of 1997, Argentina's wholesale power rates stabilized at about 40% below the pre-privatization level. In February 1997, the New South Wales Independent Pricing and Regulatory Tribunal reported that wholesale electricity prices in Australia have steadily decreased since 1993, representing a 32% drop in real terms over a four-year period . The decrease in prices of electricity has been the result of greater operational and financial efficiency. Substantial foreign investments also flowed in as a result of privatization. The sale of government utilities to private participants helped in improving government finances. And to top it all, it has provided choice to consumers regarding their source of supply.
Issues and Challenges in transition to competitive environment in Distribution
Currently distribution of electricity is a licensed monopoly business as a second licensee cannot come in without laying his own wires. Hence, in order to bring in competition in the distribution sector, the wires and energy supply business will have to be separated and suppliers of energy will be provided non discriminate access to the wire system. An entirely different set of business environment will emerge. Issues that will have to addressed are:
- Reorganisation of Incumbent Distribution Licensee
- Zoning or Demarcation of Different Supply Areas
- Phased introduction of Competition
- Framework for Tariff structure
- Creation and operation of power pool
- Changes in Policy framework
- Changes in Regulatory Framework.
Reorganisation of Incumbent Distribution Licensee
The incumbent distribution licensee is owner of the wire business and the energy supply business. The incumbent distribution licensee will be reorganized and subdivided into two distinct organizations, one solely looking after the wire business and the other solely looking after the energy supply business. Framework for subdivision of assets, liabilities, manpower, functional responsibilities, etc. will have to be established so that it can be smoothly carried out.
Wire Business operator shall be responsible for planning /modernizing/upgrading/ maintaining/ running the distribution network, providing connections, carrying out disconnections, etc. There shall be only one wire business operator in a particular area. The existing distribution licensee can become the wire business operator. The wire business shall be a regulated business and its Annual Revenue Requirement, capital expenditure plans and tariff shall be approved by the Appropriate Regulatory Commission.
The retail supplier shall be responsible for supply of energy to all consumers. It shall arrange for power, carry out wholesale trading, charge tariff in accordance with cross subsidy and subsidy programmes (at least in the initial phase), consumer billing and collection, etc. A supplier of last resort will have to be decided. The incumbent retail supplier can be supplier of last resort.
In a competitive environment, the role of the Commission shall also change. It shall now be responsible for tariff determination only of the wire business. With respect to the supply business, its role shall be that of arriving at suitable tariff structures and maximum tariff of each category and slab keeping in view historical background of electricity tariffs and need of flexibility to promote efficiency and competition.
Zoning or Demarcation of Different Supply Areas
The physical area covered by the existing distribution licensee is generally very large and covers many districts. In order to encourage competition, it would be appropriate to subdivide the license area of the existing distribution licensee into a number of supply zones. This subdivision should be carried out in such a manner that cherry picking is not allowed. Further the current organization structure of distribution licensees i.e. divisions and circles are not in consonance with physical boundaries of districts, zila parishads, etc. Hence, each state will have to undertake zoning exercise so that appropriate, clearly demarcated physical supply zones with corresponding electricity supply divisions and circles are created.
Energy supplier for each zone can be selected on the basis of a transparent bidding process. A prospective supplier can bid for one or more supply zones. Each of the suppliers of energy will be bound by Universal Supply Obligation.
Phased introduction of Competition
As per the EA 2003, open access is allowed for consumers having contact demand greater than one MW. Open access has not been successful. Introduction of full scale retail competition in supply business may not be feasible right from the beginning. However, with separation of wire and energy business, consumers with demand one MW or more should be allowed to choose their own supplier of electricity our source it themselves either through power exchange or a generator or a trader. Subsequently, with success, this facility can be allowed for consumers with lesser demand, for example for consumers with demand of 500 kW or then to consumers with 100 kW or more and finally to all consumers. This will ensure a smooth transition from the current system of only one supplier of electricity to an environment where there are multiple supplier and the consumers has a choice regarding his source of supply. It will also provide the existing utilities sufficient time and experience to mould their working from a monopolistic supplier to a competitive environment.
Framework for Tariff structure
At the present, Multi Year Tariff Regulations have been notified in most states by State Electricity Regulatory Commissions (SERC) and multiyear tariff for the state are being decided in accordance to the said Regulations. The tariff is decided for the ensuing year by the Appropriate SERC. True up is carried out after audited accounts are provided to the SERC. Even after introduction of competition there will be only one wire business operator in an area and hence it will be regulated business. Annual Revenue Requirement of the wire business, its tariff and subsequent true up will be carried out by the Appropriate SERC. Energy supply and billing, collection for energy supply shall be carried out by the Retail Supplier. The energy bill of the Retail Supplier shall include the tariff of the wire business, which after collection form the consumers shall be reimbursed to the Wire Business supplier.
A number of issues arise which shall need deliberation. The earlier tariff structure had element of subsidy and cross subsidy built into it. What shall be the tariff structure for the consumer which shall depend on the tariff structure of the wire business and the tariff structure of the retail supplier? What shall be the guideline for subsidy and cross subsidy? This is especially important as around 80% of the total cost of distribution is on account of cost of electricity. What sort of pricing freedom will be allowed to the Retail Supplier? Issues of smooth transition from current tariff regime to proposed tariff regime will require extensive deliberation considering:
- Trajectory of retail tariffs from regulated to competitive regime
- Cross subsidy and subsidy
- Supply to BPL category of consumer
- Supply to agriculture
- Time of Use tariff
- Mechanisms to promote demand side management & demand response systems
The change must be smooth. Tariff shocks are unsustainable and liable to cause political turmoil. A period of transition for regulated prices for all or some consumers may have to be considered. Transparent and effective mechanisms to meter customers and to assign losses to different voltage levels will have to be devised. More than one energy supplier will be there in one area. The mechanism for allocation of distribution loss to each supplier will have to be devised.
Creation and Operation of Power Pool
Utilities are obligated to supply electricity to all consumers under Universal Supply Obligation. It order to meet its obligation, utilities procure most of its power through long term Power Purchase Agreements with generators (NTPC/NHPC/NPC/ private generators). A small part of its requirement is purchased through bilateral agreements and/or through power exchanges. To meet its Renewable Portfolio Obligations, the utilities purchase solar/non solar renewable energy from generators of renewable energy. Alternately, they purchase Renewable Energy Certificate from Energy Exchanges.
When competition is introduced in distribution, there will be multiple licensed suppliers of electricity in each area. However, as most of the electricity generation would already have been tied up in long term power purchase agreements with existing utilities, the only power that would be available to the new suppliers would be through traders or through energy exchanges. It is obvious that it such a situation, new suppliers of electricity cannot function. Hence, when competition is introduced, the first action that would be required would be to annul all the existing power purchase agreements and create a power pool ( maybe the existing energy exchanges) into which all generators can supply and all users of energy (suppliers, consumers) can procure energy. An entirely new mechanism for pricing electricity made available to the power pool will have to be devised keeping in view availability of electricity from different sources, generating plants of different vintage and efficiency, fuel supply arrangements of different generating units, variations in demand across time of day, weather, season, etc. This will require close monitoring in the beginning to ensure that gaming/cartelization do occur and price of electricity do not move up beyond a certain cap. The power pool will encourage more efficient/less expensive generation to be dispatched first.
Renewable Portfolio Obligation
Each supplier of energy will be required to fulfil his Renewable Purchase Obligation. The existing Power Purchase Agreements of Renewable Energy generators may have to be recast in view of change of energy requirement of existing distribution utility and requirement of new energy supply licensee to meet its RPO Obligation.
Changes in Policy framework
The Policy regimes reflect the vision of the Act. Introduction of competition will require substantive changes to be made in the National Electricity Policy and Tariff Policy. National Electricity Policy will have to reflect the requirements arising out of separation of carriage and content. This shall include creation of power pool, mechanisms for meeting RPO, issues of demand side management and demand response, etc.
The framework for tariff determination will undergo a sea change in view of the requirement to separately determine tariff for wire business and provide a frame work of energy supply to power pool and of energy purchase from power pool, etc.
Changes in Regulatory Framework
Electricity sector in India has evolved from being government controlled to a regulated sector and it functions as per Regulations of the Appropriate Commission. Regulations have force of subordinate legislation. New Regulations have to be formulated to reflect the introduction of competition in electricity supply business. A broad list of new regulations which will be required to be formulated is given below:
- Creation and operation of Power Pool
- Framework of Tariff Regulation for energy supply business
- Regulations for determination of tariff to be charged by wire business operator from different energy suppliers
- Grant of energy supply license
- Apportioning of losses to different energy suppliers
- Supplier of last resort
In addition to the formulation of fresh Regulations, existing Regulations will require substantive changes. Some the Regulations which will require a relook are given below:
- Multi Year tariff Regulations for wire business
- Renewable Purchase Obligations
- Supply Code; Distribution Code
- Allocation of distribution loss between different suppliers
- Switching from one supplier to another within incumbent wire business operator or outside it
- Standards of performance for wire business operator and retail energy supplier
- Communication linkages between meters of wire business operator and IT system of Retail Energy Supplier so that on line monitoring of power flows can be done.
Conclusion
Introduction of competition in the distribution sector has the potential of being the game changer for the electricity sector as well for the economy of the country. Availability of affordable good quality electricity is essential for economic and social progress, especially of the underprivileged sections of society. The fundamental as well as aspirational need of the country that every citizen is entitled to 24×7, good quality electricity can only be achieved if economy and efficiency is achieved through introduction of competition.
Managing transition from regulated industry to competition in retail supply of electricity will be challenging task. This is made all the more difficult due to electricity being in the concurrent list as per the Constitution due to which, distribution is in the state sector. The success of introduction of competition in electricity distribution will be closely linked to prices of power to end consumer and this will depend on the prices of electricity in the power pool. It will be essential to evolve a sustainable business model for both the wire business operator as well as the retail supplier considering the changes envisages in computation of revenue requirement, trajectory of tariff structure, cross subsidy and subsidy regime.
Author is Senior Fellow, Energy Regulations and Practice, The Energy and Resources Institute (TERI) is a senior professional with TERI having wide and in-depth experience and knowledge of the various issues facing the energy sector.
No comments:
Post a Comment