31 Jan 2020
Power is one of the most crucial aspects of the infrastructure sector, on which depends a large part of a nation’s growth and development.
India has a diversified power sector, with varied sources of power ranging from conventional sources including coal, lignite, natural gas, hydro, and nuclear power, to non-conventional sources such as wind, solar, agricultural and domestic waste.
The demand for electricity has increased over the years and is expected to rise further in the future. In order to meet this increasing demand, an increase in power generation would be required.
CII works with the Government, industry and with all the other key stakeholders for creating a thriving power ecosystem that can support demand.
Keeping in mind the upcoming budget, CII has provided recommendations to address policy issues in the power sector:
Regional regulators of the power sector – One of the key challenges for the power sector has been determination of tariffs in a fair and objective manner. The Central Electricity Regulation Commission was set up under the Electricity Regulatory Commission Act of 1998 for setting tariffs of centrally-owned or controlled generation companies. The same Act also provisioned the creation of State Electricity Regulatory Commissions (SERCs), with a similar mandate, for the respective states. The objective was to bring in transparency and objectivity in the tariff determination process, through independent regulators.
However, the SERCs have not been functioning optimally and correction measures have not yet been successful.
The Budget could announce setting up of Regional Regulators for the power sector, which can be truly independent and bring about the much needed efficiencies in the sector.
Tariff Based Competitive Bidding (TBCB) process for power transmission projects being set up by States and Center – The recent Inter State Transmission System (ISTS) auctions including five transmission packages of phase I GEC attracted widespread participation from transmission developers with 7-8 qualified bidders, despite the fact that these packages are to be delivered within a compressed timeline of December 2020. The auctions witnessed a tariff reduction of 51 per cent vis-à-vis tariffs established through the cost-plus route. Some of the states including Jharkhand, Madhya Pradesh and Uttar Pradesh are also executing large transmission projects through the Tariff Based Competitive Bidding process and have witnessed substantially lower tariffs.
All new transmission projects, both at the Center and the States, should be awarded only under a competitive bidding route, the TBCB process, to ensure efficiencies of time and costs.
The Budget could make a policy articulation in favour of competitive bidding route for power transmission projects instead of regulated tariff mechanism (RTM) where projects are given on a preferred nomination basis to a state-run company as opposed to competitive bidding.
Direct Benefit Transfer scheme for power sector
In the subsidized sectors, cross subsidies encourage electricity consumption to a point where the value attached to incremental consumption is lower than the cost of supply. On the other hand, higher tariffs charged to commercial or industrial consumers increase their cost of services, which makes them uncompetitive.
High cross subsidy also leads to revenue loss for state utilities, as it incentivizes industry to scale up captive power generation.
Cross subsidies are a major hurdle in operationalization of open access. As per Electricity Act 2003, consumers with load of more than 1 MW can source power from any generator. However, large industrial users cannot switch to an alternate cheaper power supplier due to levy of high cross subsidies surcharge.
The need to reduce cross subsidy and to keep rural tariffs low are contradictory tariff objectives and Direct Benefit Transfer is the solution. The distribution company should be allowed to charge full tariff. The state governments should provide the Direct Benefit Transfers to consumers it wants to subsidise.
This will make industrial and commercial tariffs more competitive, improve the health of DISCOMS, promote open access, help monitor subsides better and only the actual consumption will be subsidized and not the power pilferage or losses.
The Budget could announce a move towards Direct Benefit Transfer model for the electricity sector, along with the timelines for the same.
In the upcoming Budget, CII looks forward to solutions to the pressing issues in the power sector for the sector to flourish in the coming years.