Untitled Document
  

India's Energy Sector
 

The Indian power sector has made significant progress over the years. The installed capacity of the industry grew manifold from 1,361 MW in 1947 to 156.8 GW in January 2010. The sector has also undergone substantial structural changes. Regulatory policies have played a predominant role in changing the landscape of the Indian power sector. Though the sector has come a long way from its humble beginnings, it is still lagging on several fronts, such as power shortages, T&D losses, among others, and has a long way to go.

This chapter traces the evolution of the industry and how the policies and measures adopted by the government at various intervals have changed the industry’s structure. This chapter lays emphasis on the developments that took place in the sector since 1991; this was the watershed year for the Indian power sector, as a number of measures adopted in this year altered the functioning of the power sector.

The industry has been regulated for almost a century and the Electricity Act 1910 was the first act that was introduced to govern the Indian power sector. The Electricity (Supply) Act 1948 was introduced after independence, but it did not achieve the desired results, as the power sector’s performance started to deteriorate and a need was felt to restructure the sector. Several regulatory changes were made since 1991, which transformed the industry’s performance.

Based on the government’s regulations and policies, the evolution of the Indian power industry can be divided into two broad phases, pre-reform and post-reform phases. The pre-reform phase (up to 1991) can be divided into preindependence phase (prior to 1947) and post-independence phase (1947-1990) and post-reform phase can be broken down into three phases.

Pre–Reform Framework (before 1991)

Pre-Independence Era (upto 1947)

The first instance of commercial generation of electricity in India dates back to 1879 in Kolkata (then Calcutta). In 1897, the government of Bengal granted an exclusive 21-year license to the Calcutta Electricity Supply Corporation to supply electricity to Calcutta. Mumbai (then Bombay) was the second city to get electricity and as time progressed, private companies set up power supply systems in major urban areas under franchises, which allowed them a reasonable rate of return. The demand for electricity during this phase was driven by demand from industries, commercial enterprises (including tramways) and also domestic use. Most of the earlier private companies in the power sector cease to exist today as they were amalgamated into state-owned enterprises; however, a few of them continue to exist as private players.

The Electricity Act 1910 was the first act (one of the earliest regulation) in the power industry, which was introduced before independence in 1910. The Act provided the basic framework for supply of electricity in India. The sector was at a nascent stage during this time and there was a huge investment requirement for laying down basic infrastructure. The Act encouraged the growth of the industry by issuing licenses to private companies. Thus, during this phase, electricity generation was mainly in the private sector and power generation was largely based on coal and hydropower. Tata Power (formerly known as Tata Electric), which is the country’s largest private sector utility, commissioned its first hydro electric station with a capacity of 72 MW at Khopoli.

The power industry suffered from huge costs and wide variation in power voltage during this period. As the technical knowledge in the domestic industry was not well-developed, most of the projects were based on imported technology and thus entailed huge costs. Also, there was a wide variation in electricity voltage that was supplied during this period, as both AC and DC forms were used.

Post-Independence Era (1947-1990)

At the time of independence, electricity generation and supply was concentrated in the hands of private electricity suppliers, and largely in urban areas. Electricity supply was a must across the country to promote overall growth and development; hence, the Electricity (Supply) Act 1948, which was based on the UK Electricity Supply Act 1926, was introduced. Under this Act the Central Electricity Authority (CEA) was established at the central level and the State Electricity Boards (SEBs) at the state level. The objective of the CEA was to develop a sound, adequate, and uniform national power policy to coordinate development of the power sector in India.

SEBs became integrated utilities with presence in generation, transmission, and distribution in their respective states. During this period, the development and planning was done by the SEBs at the state level, while the CEA was responsible for planning at the national level and it provided the SEBs with broad guidance, planning, and development. The Act also elaborated the financing norms and institutional framework for the electricity industry in India.

The SEBs took over the private companies in their respective states and the newly-created state electricity boards were interconnected to enhance system reliability and to ensure wider geographical coverage. The electricity sector moved into the public sector domain from the private hands, and over the years, the public sector gained prominence in the power sector.

In the initial period, the SEBs’ performance was satisfactory and they played a vital role in the development of the sector. According to the Electricity (Supply) Act 1948, the SEBs were required to generate a minimum return of 3% on their net fixed assets in service after meeting the financial charges and depreciation. The SEBs were able to generate the minimum returns for many years, but, later on their performance faltered and they had to seek financial aid from the state in the form of grants, subsidies, soft loans, etc. The early seventies were marked by incidents of power blackouts and grid collapses. Hydropower generation suffered especially, as availability of water resources was heavily dependent on the monsoon season. Moreover, there were delays in civil works, delays in the supply of power plant equipment, and the infrastructure additions in terms of transmission and distribution were also not adequate. In its attempt to assist the states, the Central government established a few private companies that could cater to more than one state.

The Central government amended the Electricity (Supply) Act 1948 and established the National Hydropower Corporation (NHPC) in 1975 to build hydropower plants and the National Thermal Power Corporation (NTPC) to set up coal-based power plants to supplement the generation capacities of the SEBs and private companies.

NTPC built its own transmission network to transmit electricity to different SEBs. In 1981, the government decided to integrate operations of the central and state transmission systems to form a national power grid to facilitate transmission of power generated by non-SEB generators; these efforts led to the incorporation of the National Power Transmission Corporation in 1981. Initially the company was engaged in managing the transmission assets of the central generating companies, NTPC, NHPC and North-Eastern Electric Power Corporation; but in 1992, this entity was renamed as Power Grid Corporation of India Ltd and all the transmission assets of the three above mentioned generating companies were transferred to it under an ordinance. Furthermore the government set up the Power Finance Corporation (PFC) in 1986 as a financial institution dedicated to power sector financing to supplement planned expenditure on power plants, specifically new power plants.

During this phase, lot of emphasis was laid on setting up hydropower plants, as the government planned to develop the irrigation and power sectors simultaneously. The installed capacity in the hydropower sector did witness significant growth up to 1970; however, the lesser-than-expected growth rate and longer gestation period decreased its share in total power generation capacity. In the meanwhile coal-based power plants continued to grow and the share of thermal power capacity increased in the total capacity.

While the SEBs aided the growth in the Indian electricity sector, by the end of the phase under review, they suffered huge financial and technical losses (poor revenue collection and billing, poor metering and energy accounting, electricity theft, cross subsidies and SEB staff’s inefficiencies were the main reasons for their losses); as a result of these losses, they provided poor electricity service to end consumers because the state-owned corporation power plants were running at low plant load factor (PLF) and the SEBs did not have enough funds for renovation and modernisation of their plants. The demand-supply gap was increasing and many states were facing electricity crisis. These circumstances forced the government to restructure the sector in a phased manner, and this paved way for meting out electricity reforms in 1991.

Post–Reform Phase (after 1991)

The deteriorating health of the SEBs made it impossible for them to infuse fresh investments into the sector. Moreover, the country was facing a macroeconomic financial crisis that made it difficult for the governments, both the Central and state governments, to fund power projects through budgetary support. Due to these events, the government decided to restructure the power sector in a phased manner in 1991; consequently, it opened up the power sector (liberalise) and invited foreign private companies to get funds and technology into the Indian power sector.

The post-reform phase can be divided into three phases:

First Phase (Started in 1991)

Independent Power Producers (IPP)

Investments were a must in the power sector to enable it to produce electricity in line with the expected economic growth. The government liberalised the sector and opened it for foreign and private investments to increase the availability of funds for the power sector. For allowing independent power producers to operate in the sector, the government made an amendment to the Electricity Act 1910 and the Electricity (Supply) Act 1948 through the Electricity Laws (Amendment) Act of 1991. The amendment allowed private participation in thermal, hydro, wind, and solar power projects, and also allowed them to operate as IPPs. Foreign ownership up to 100% was allowed. IPPs were to operate on a costs-plus model wherein the tariff was determined by the Central government and the IPPs were guaranteed a 16% post-tax return on equity, full repatriation of profits, among others. The operators and the SEBs entered into power purchase agreements (PPAs) as the SEBs were responsible for transmission and distribution of power generated by private players.

Around 189 projects, with an expected capacity of 75 GW, were proposed; however, only a few of these projects cleared the approval process, and had Memoranda of Understanding (MoUs) and Letters of Intent. The rest were either stalled in the approval process or did not reach financial closure. The government also put on fast track 8 projects with offers of counter guarantees.

Introduction of Mega Power Policy 1995

In 1995, the government introduced the Mega Power Policy to increase private investments in over 1,000-MW generation projects that would supply electricity to more than one state; hence, the name mega power projects. The projects were to be awarded on the basis of competitive bidding and the CEA, Power Grid, and NTPC were to provide support to these projects. CEA was to provide assistance in identifying potential sites for setting up the plants, while Power Grid and NTPC were to provide assistance for transmission of power and preparation of feasibility report, respectively.

The experiences of the first phase were not great and the Enron debacle is a reflection of this statement. In the Enron Dabhol Power Project priority was given to FDI rather than the cost of generating electricity.

The main objective of reforms was to ensure reliable and quality power supply at an economic cost. It was essential to ensure that the sector was financially viable and attractive enough for private investors to put in their money. The SEBs were integrated utilities with presence in generation, transmission, and distribution in their respective states. The SEBs were under huge losses and it was perceived that unbundling the SEBs and segregating generation, transmission and distribution into different corporations could make it possible to monitor efficiency levels in each of the areas. Many states initiated the restructuring process. Orissa was the first state to undertake restructuring of the power sector in 1996; the results were, however, not significant as the losses (theft, technological and financial) did not come down.

The first phase of the reform failed as the objective of attracting private players did not achieve the desired results. Private players did not enter the sector, as the SEBs, who were to transmit and distribute the power generated by the private players, were still running in losses. Private players were uncertain about their returns due to poor financial health of the SEBs. The annual commercial losses of the SEBs increased consistently from Rs 45.60 bn in 1992-93 to Rs 106.84 bn in 1997-98. The power plants continued to work at low PLF.

Second Phase (started in1996)

The 1995 Mega Power Policy did not propose any fiscal concession, hence in 1998, the revised Mega Power Policy 1998 included these concessions. The Power Trading Corporation (PTC) was also set up after this revision to purchase power from identified projects and to sell to identified-SEBs. Establishing regulatory commissions and privatising electricity distribution in cities (with population of more than 1 mn) were the pre-conditions included in the revised policy.

In December 1996 the Common Minimum National Action Programme (CMNAP) was structured in consultation with the state governments, and guidelines were established to hasten the sector’s progress. In addition to envisaging setting up of regulatory commissions, the CMNAP reiterated the need for rationalisation of tariff and that no sector was to pay less than 50% of the average cost of supply. Tariff for agriculture sector was to be not less than 50 paise per unit and the tariff was brought to 50% of the average cost of supply within 3 years.

During this phase the sector’s performance improved as compared with the first phase as the PLF reached around 70%; however, commercial losses continued to pose a major hurdle in the sector’s development. During this period private sector investments were already being made for capacity addition in generation but the need was felt for private participation in transmission as well; consequently, the Electricity Laws (Amendment) Act was passed in 1998 to enable private participation in the power transmission sector. The central transmission utility (CTU) and the state transmission utility (STU) were set up under this Act. The maintenance and construction activity of transmission network was supervised by CTU at the inter-state level and by the state transmission utility (STU) at the intra-state level. These utilities also recommended regulatory commissions on allotment of licences to different players.

The CERC issued the first Indian Electricity Grid Code (IEGC) in January 2000 to ensure grid discipline and to set operation and governance parameters for players in the transmission and distribution (T&D) sectors.

Third Phase (2003 onwards)

The Electricity Act 2003, which came into effect from June 10, 2003, replaced the earlier laws, acts governing the Indian power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the Electricity Regulatory Commissions Act 1998. The bill sought to provide a legal framework for enabling reforms and restructuring the power sector.

The Electricity Bill was passed by the Parliament in 2003; this Bill sought to provide a legal framework for enabling reforms and restructuring of the power sector. The Bill became an Act with effect from June 10, 2003 and replaced the earlier laws governing the power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948, and the Electricity Regulatory Commission Act 1998.

Electricity Act 2003

The Act sought to create a liberal framework for development of the power industry, promoting competition, protecting interests of consumers and supply of electricity to all areas, rationalisation of electricity tariff and ensuring transparent policies and promotion of efficiency, among others. The Act came out with the National Electricity Policy, mandatory creation of SERCs, emphasis on rural electrification, open access in transmission and distribution and some other provisions. It mandated the regulatory commissions to regulate the tariff and issues of license. This Act focused on laws relating to generation, transmission, distribution, trading, and uses of electricity. The Act was amended on May 28, 2007 and the Electricity Act 2003 was enacted with stronger power and clarity and with greater emphasis on assessment, fines, and legal framework to check the commercial losses due to theft and unauthorised use of electricity.

Generation

The generation segment was opened for private players in 1991. However, even over the years, the generation capacity from private players did not reach the desired level. In 2002 only 11% of generation capacity was from private players and the public sector generators capacity was not enough (as running at low PLF) to meet the growing demand of electricity. The government introduced certain policy measures in generation in the Electricity Act 2003 to ensure more private participation and to reduce the demand-supply gap. Generation of power was de-licensed and the requirement of techno-economic clearance for thermal power generating plants by CEA was dispensed with, which paved way for entry of more players in thermal generation.

The Act also removed restrictions on captive power generation and simplified the procedures. Open access was allowed immediately in transmission, which gave the right to private power producers or any other generating utility to sell its power to any entity using transmission network (without any discrimination). Due to these changes, industries could set up captive power generation units and the right to open access allowed them to sell electricity to any consumer using the transmission network. Captive units could thus sell their surplus power to the customers of their choice.

Transmission

The Electricity Act 2003 introduced a non-discriminatory open access in the transmission segment, which enabled the generators to sell power to any customer and gave the buyer the option to choose the generator using the transmission network. The transmission utility was not allowed to refuse use of its transmission network except in instances of capacity limitation. At the national level, Power Grid, which was the central transmission utility, could provide open access, and at the state level, the state transmission utilities could provide open access. The open access customers are categorised as short-term customers (up to one year) and long-term customers (for 5 years). The opening up of the transmission network is likely to induce competition among generators as well as buyers.

Distribution

The distribution segment was not given more consideration in the earlier regulations, which lay more emphasis on the power generation segment instead. It was considered that by increasing power generation, the demand for power could be met to some extent, but the industry suffered huge losses (T&D and financial) on the distribution side. SEBs, the main bodies involved in power distribution segment, were in bad financial shape, which made it difficult for them to pay the generator for the electricity supply. The risk of defaults from the SEBs worried generators and hindered new players from entering the industry. The Electricity Act 2003 came up with measures that could improve the performance of the distribution sector on almost all fronts.

The measures meted out included more than one distribution licenses permitted in the same area, which increased competition among the distribution licensees, and ensured better services for the end consumer. The best case of multiple licenses was noticed in Delhi after privatisation in 2002, which resulted in improved operational performance, reduction in AT&C losses, and reduction in incidences of load shedding. NDPL, BSES, and BRPL, the three distribution companies, came into existence and took charge of power distribution in different areas of Delhi.

The concept of distribution franchisees was introduced under the Electricity Act 2003, under which a distribution licensee could distribute electricity through another player within the distribution area. The Bhiwandi circle (near Mumbai) reported the first instance of distribution franchise that was granted to Torrent Power by Mahavitaran (distribution license in Maharashtra).

The anti-theft provisions under the Act lowered the commercial losses of utilities as electricity losses arising from theft decreased continuously and investors started to show renewed interest.

In the distribution segment, open access was introduced, which opened up a new era of choice for consumers to choose their supplier. Many SERCs like Jharkhand, Madhya Pradesh, and Punjab have issued guidelines for open access and allowed it up to 1 MW capacity and above.

Changing Market Structure after Electricity Act 2003

With the enactment of the Electricity Act 2003 and implementation of open access, the market structure in the power sector changed from the old single buyer structure to a multi-buyer model. The generator could sell power to any buyer using the open access provision in transmission and users had the choice to choose their supplier. Ever since the Electricity Act 2003 was introduced, there was increased competition among generators and suppliers, which improved the sector’s performance. Currently many states, which have unbundled the SEBs, have reported improvements in their operational efficiency and are able to ensure reliable power supply to consumers.

Even though SEBs are handling the regulatory operations, the Act has mandated the creation of regulatory commissions in each state; these commissions have played a significant role in passing different regulations and monitoring performances of the state utilities. Few of the state regulatory bodies have set targets for their utilities, and achievement of these targets before the scheduled time which fetches them incentives and any delay gets them penalised. Thus, the structure is more regulated.

The market structure, which has taken shape after the Electricity Act 2003, looks promising as it gives the right of choice to the supplier as well as buyer while attempting to ensure quality and regular supply of power.

Under the Indian Constitution, power is a concurrent subject and hence its development is the joint responsibility of the central and provincial state governments. The Parliament and state legislature are both empowered to make laws.

Ministry of Power (MOP): The MOP is responsible for development of the electrical energy sector in India. It started functioning as an independent entity from July 1992. Earlier, the power sector was governed by the Ministry of Energy, which had departments for power, coal and non-conventional energy resources. The main functions of the MOP is planning, formulating policies, administration and enactment of legislation for thermal and hydropower generation, transmission and distribution. The Ministry also looks after processing of projects for investment decision as also monitoring the implementation of power projects. It also takes care of training and manpower development of the power sector and is responsible for administration of the Electricity Act 2003 and the Energy Conservation Act 2001 and to make amendments to these Acts, to maintain accordance with the government’s policy objectives.

Central Electricity Authority (CEA): The CEA was constituted under the Electricity (Supply) Act 1948, the Act amended by the Electricity Act 2003. The functions of CEA are described under Sec 73 of the Electricity Act 2003

Regulatory Bodies: The CERC and the SERC are the two main regulatory bodies that govern the power sector. These regulatory bodies were formed in 1998 when the Electricity Regulatory Commission Act 1998 came into force; so far these bodies have an established arrangement for protection and promotion of consumer interest, fair competition, transparency, and for providing a level-playing-field for all players in the sector.

Contribution of Regulatory Bodies

The regulatory system was not effective in the power sector in India before 1997. The SEBs performance was not satisfactory; they were suffering from huge financial and commercial losses; there was no regulatory body to regulate the functioning of SEBs and regulations were not addressing core issues like consumer interest, supply of reasonable power, and quality of power. The sector was facing an urgent need of regulatory bodies, which would regulate the sector efficiently. Therefore, in order to make competitive, transparent, and consumer-friendly environment, an independent CERC at the Centre and independent SERC at the state level were considered as the need of the hour for regulating the power sector.

The respective commissions took over the role of a regulatory body for the sector. The regulatory bodies set up transparent procedures for tariff fixation keeping in view the interest of both the supplier and the beneficiary and carried out the tariff plans in a successful manner. Regulatory commissions passed numerous regulations and provided a legal framework for players to conduct their business in the industry.

System Operators: There are five different regional load dispatch centres (RLDC); NRLDC (Northern RLDC) situated at Delhi, WRLDC (Western RLDC) situated at Mumbai, SRLDC (Southern RLDC) situated at Bangalore, ERLDC (Eastern RLDC) situated at Kolkata, NERLDC (North-Eastern RLDC) situated at Shillong (Meghalaya). The main function of these load dispatch centres is to look after the operation of power system in their respective regions and report to the National Load Dispatch Centre (NLDC). Power Grid is the central transmission utility, which acts as the NLDC. NLDC monitors the different load dispatch centres.

Status of Reforms

Reforms have played a crucial role in each segment of the power sector. In the generation segment, de-licensing of thermal and captive power generation and generation in rural areas has allowed private players to invest in power generation. The government made distribution a separate segment to improve the segment’s performance. Further, reforms were initiated in the power sector in Orissa, on the basis of other countries’ experiences in restructuring.

Orissa was the first state to unbundle its SEB into five corporatised entities: generation, transmission and the three distribution zones in the state. An independent regulatory commission, Orissa Electricity Regulatory Commission, was also set up in the state. Later on Orissa privatised into different entities. Haryana, Andhra Pradesh, Karnataka, and many other states also followed the process of unbundling and regulatory reforms. The Regulatory Commission Act 1998 made a provision for setting up regulatory commissions. Around 25 states have state regulatory commissions; some small states of the North-Eastern region have joint regulatory commissions; 14 states have unbundled their SEBs, and Orissa and Delhi have privatised their respective distribution segments.

After the establishment of regulatory commissions, several regulations have been passed; the most important ones being Availability–Based Tariff Order (2002), Terms and Conditions of Tariff (2004), Multi-Year Tariff (MYT) Norms (2004), Electricity Grid Code (2006), and Open Access in Inter-State Transmission (2008). Under the ABT regime, the generator and the beneficiary (buyer) set up PPAs on the basis of which generators feed power to the grid and the beneficiary draws the power. If beneficiary overdraws power it has to pay unscheduled interchange (UI) charges and if generator overfeeds to the grid it will have to pay the UI charges. The mechanism helps in maintaining grid discipline and aids the grid operate at optimal efficiency. Many states like Gujarat, Karnataka, Delhi, Maharashtra, etc have implemented intra-state ABT and have optimised their power purchase cost.

The terms and conditions of tariff were introduced in 2004, as per which many norms were laid down to determine the tariff for generation, transmission, and distribution. The MYT was set to reduce the regulatory risk and incentivise efficient performance of utility. It was set up for a fix number of years called the control period (Delhi’s MYT period is 3 years) during which, fixed charges remain unchanged while energy charges change. The MYT framework was designed in such a way that if the utility achieved the target set-up under MYT framework it would get an incentive. In Delhi the AT&C losses reduction target for BRPL and NDPL is 17% whereas for BYPL it is 22%. In 2006 the Electricity Grid Codes laid down technical rules covering all the utilities connected through grid or using inter-state transmission system. These codes ensured the efficient functioning of power system and penalised the user for avoiding the rules. CERC is the regulatory body that monitors these codes at the central level while SERC monitors it at the state level.

The reforms in the sector have progressed well so far; however, the concern that is still prevailing in the sector is government dominance over the regulatory commission. The government has regulated the sector for more than 50 years and many a times, it has been unwilling to transfer the power to regulatory commissions. Tariff setting still has a component of subsidies that is given by the government; hence, in spite of clear norms and regulations, commercial viability of tariff remains a question mark. Accordingly, reforms have to be more intensive and come out with more measures in removing odds of the sector.

Government of India Policy

The Electricity Act 2003 states that, “the Central government shall, from time to time, prepare the national electricity policy and tariff policy, in consultation with the state governments and the authority of development of power system based on optional utilisation of resources such as coal, natural gas, nuclear substances or materials, hydro and renewable sources of energy.”

National Electricity Policy (NEP)

This policy, which was introduced in February 2005, aims at laying guidelines for accelerated development of the power sector, providing electricity to all areas and protecting interests of consumers keeping in view the availability of energy resources, technology available to exploit these resources, economics of generation using different resources, and energy security issues.

The policy was prepared in consultation with the state governments, CEA and other stakeholders.

In accordance with the National Electricity Policy, the CEA formulates the NEP once in 5 years. The plan carries out the programme in short term and prospective periods. This plan works out as the standard reference document for different players in the sector. It includes: short-term and long-term demand forecast for different regions; suggested areas/locations for capacity additions in generation and transmission keeping in view the economics of generation and transmission; losses in the system; load centre requirements; grid stability; security of supply; quality of power including voltage profile etc and environmental considerations including rehabilitation and resettlement; integration of such possible locations with transmission system and development of national grid including type of transmission systems and requirement of redundancies; and different technologies available for efficient generation, transmission and distribution; fuel choices based on economy, energy security, and environmental considerations.

The policy covers all the segments of the power sector and plans have been laid down for achieving the objectives of the policy. Generation plans have set a target of 1,000 units per capita of consumption, for which purpose 100,000 MW would be added by the end of the plan (2012). Many programmes and initiatives have been taken for meeting the capacity addition challenge; for instance, in thermal generation, super critical technology for rapid capacity addition, mega power projects and merchant power plants are some initiatives while in the hydropower, 50,000-MW hydro initiative launched in 2003 and preparation of a project feasibility report for 48,000-MW project were some of the initiatives.

National Tariff Policy (NTP)

The policy lays down the guidelines for attracting adequate investments to the sector and ensuring reasonable charges for the consumers. These guidelines stress on competitive procurement of power. The Central government formulated this policy in consultation with regulatory commissions and CEA. Regulatory bodies are guided by tariff policy in framing the tariff regulation.

Features of NTP

The reforms in the sector have restructured the vertically-integrated market structure to a competitive structure. Market efficiency has been improved over time as many laws and regulations have achieved the desired result. Mobility has increased in the power market and so have the number of players; the regulation has created a competitive market place, which in future will bring open market in power sector.