Lighting the Global Manufacturing Hub: Need for 2nd Phase...

XVII Annual International Seminar Proceedings; January, 2016

ISBN no. 978-81-923211-8-9 http://www.internationalseminar.in/XVII_AIS/INDEX.HTM Page 559

Lighting the Global Manufacturing Hub: Need for 2nd

Phase of

Power Reforms in India’s Transmission and Distribution Sector

Ikshit Mittal Nidhi Jhawar

3rd

year, B.B.A. LL.B. (Hons.) 3rd

year, B.B.A. LL.B. (Hons.)

Gujarat National Law University Symbiosis Law School

Knowledge Corridor, Rohan Mithila, Opposite Pune Airport

Koba, Gandhinagar- 382007 Pune-411014, Maharashtra, India.

Gujarat, India.

Abstract

Growth in the power sector of the country sets in motion, its other development and industrial

goals. It is apparent that lacunas in power sector are a very significant barrier in India‟s aim

of becoming a world super power and a global manufacturing destination. Owing to its

importance, electricity sector has been regulated from as early as the 19th

century. However,

need for reformative policies was felt very late during 1990s and then series of reformation

begun to revive and regulate this sector in more contemporary and competitive manner. A

path breaking step in this regard was the passing of the Electricity Act 2003 which opened

gates for private investments in this sector and established the Central Electricity Regulatory

Commission (CERC). After some initial hiccups, generation sector actually benefitted from

reforms which has resulted in massive capacity addition of 267 GW. However, similar pace

of growth could not be seen in the transmission and distribution sector due to various reasons,

most evident of them being poor financial condition of the SEBs and inconsistent tariff

policy. SEBs in India were to be unbundled into separate entities upon the discretion of state

government, however, in most places, due to political and other factors, governmental control

in SEBs was retained. This worsened the condition of transmission and distribution entities in

these states and caused huge losses to them. The need to ascertain logical tariff policy based

on international experiences is to be analysed while evaluating National Tariff Policy Bill

2015. Strategic efforts are required to tackle other problems like T&D losses, procedural

delays due to clearances and acquisition, outdated technology, et al to ameliorate

transmission and distribution sector and overall Plant Load Factor (PLF) which is indicative

of sector‟s prosperity.



Objective:

This paper highlights the need of 2nd

phase of power sector reforms concentrated towards

Transmission and Distribution sector by identifying various loopholes in the power

Transmission and Distribution sector in India, present the appalling condition of the State

Electricity Boards (SEBs) and recommending measures to tackle those shortcomings.

Research Methodology:

The authors have used doctrinal research methodology for this paper wherein various books

and articles, authored by eminent professors, jurists, industry players, et al, have been

consulted and duly acknowledged. Critical and analytical approaches are then used for

coming out with a solution and recommendation.

Findings:

Initial research indicates positive growth that the Generation sector has made due to 1st phase

of power sector reforms. However, in depth study of the industry literature reveal various

loopholes in transferring the benefit of increased generation capacity to the end user, owing

to inefficient working of the Transmission and Distribution segment.Instability of the SEBs,

irrational tariff policy and other technical and procedural shortcomings are the major

problems that unsurfaced during the study.

All these, in the background of government‟s initiative to attract foreign investments in the

manufacturing sector, poses a great challenge to the government for sustaining the promises

or the investment initiatives as without electricity, no industry can run.

Research Limitations:

There are a few limitation to this research within which its finding should be interpreted. This

paper enlists a non-exhaustive list of problems faced by the Transmission and Distribution

sector, hence, the users of this research should refer to more material to develop an overall

understanding of the power sector in India.



Practical Implications:

This paper is very useful for the current and potential investors and other industry players for

identifying and tackling the problems faced by the power industry in India. This paper is of

utmost relevance to the government officials, bureaucrats and other policy makers to

introspect and plan out 2nd

phase of power sector reforms based on the lines of

recommendations formulated in the paper. This research will also help the students and other

academic community to familiarize themselves with the legal or policy framework along with

the shortcomings of the power sector in India.

Originality:

This paper is an original work of the corresponding authors. Any material taken for reference

from any other source has been duly acknowledged.

Keywords:

Transmission & distribution, tariff policy, SEBs, power sector, reformative policies.

Paper type: Research Article

Introduction

In modern world of today, when power sector goals of India are not of just attaining self-

sufficiency, rather, inviting world players to set up manufacturing units in India, electricity is

one of the most basic infrastructures that it has to provide.

Power sector reforms are often identified with the Electricity Act 2003 which abolished

monopoly of SEBs and brought in non-discriminatory open access to the power sector

segments so that competition could be fast tracked in the generation and supply segments.

The Act attempted to build a new architecture of pan-India electricity markets for providing

full choice to the generators and consumers, with a major role to be played by state-level

players. Unfortunately, these players have been very slow in responding to the progressive

approach of the Act and this is proving to be one of the biggest stumbling blocks for

improvement of power infrastructure in India.

After few initial leaps, there has been reasonable progress on some fronts such as the revival

of private sector‟s interest to set up power generation plants which has added significantly to

country‟s installed capacity. However, core concerns that urged initiation of these reforms



relating transmission and distribution segment, still remain the same. Poor financial condition

of SEBs and irrational tariff policy carrying a significant burden of cross subsidies have

posed a roadblock in improvement of transmission and distribution channels. Several other

reasons like power losses because of outdated technology or theft and delay in

commencement of projects because of procedural complexities are also affecting the stability

of transmission and distribution sector in a very oppressive manner. Therefore, there is a need

of careful analysis of these difficulties and second phase of power sector reforms.

In the first section of this paper, erstwhile legislations and brief background of the power

sector reforms have been noted. Next, key reforms including Electricity Act 2003 and its

positive effect on the generation sector have been examined. Lastly, major difficulties faced

by transmission and distribution sector have been critically analysed with policy

recommendations to handle those difficulties.

Erstwhile Legislations and Background of Power Sector Reforms

The first statute dealing with the electricity sectorwas India Electricity Act, 1887 which was

enacted mainly for protection of person and property. This act was replaced by Indian

Electricity Act, 1903 which is said to be the first legislative effort to govern electricity sector

in India. Owing to the lack of expertise in this field, this law was rather confusing as it did

not stipulate bulk trade of electricity and contained unclear provisions regarding the division

of power between the central and the local level. All these defects and ambiguity were, to an

extent made clear by the 1910 Act.

In 1948, Electricity Supply Act was enacted to establish Central Electrical Authority (CEA)

and State Electricity Boards (SEBs). This Act was enacted with a pious object that electricity

should be made available to all the parts of the country by the specialized boards in all states

dedicated to this task. However, since this sector forms a key infrastructure domain in any

state, incorporation of the boards under this Act was delayed.1

Article 246 read with 7th

schedule provides for electricity as a subject of concurrent list

whereby both central and state government can make laws. Hence, it is expected that

governments at both the levels work in harmony and try to maximise the reach of power to

1Kumar, Alok and Chatterjee, Sushanta (2012), Electricity Sector in India: Policy and Regulation, New Delhi,

Oxford University Press.


ISBN no. 978-81-923211-8-9 http://www.internationalseminar.in/XVII_AIS/INDEX.HTM 63

the population at the lower most level. In 1956, Industrial Policy resolution was passed which

reserved generation and transmission of power to only public sector with exemption being

given to the existing private entities.

Till 1960s, the concept of inter-state power transfer was in very scarce existence. Therefore,

to integrate power transmission process in India, five Regional Electricity Boards (REBs)

were established in 1964 to facilitate inter-state transmission. Till then, resources required for

generation such as coal and water were unevenly distributed and hence, there was a need to

encourage collective sharing. Many initiatives were taken by the central governmentsuch as

interest free loan, tax exemptions, etc., to the projects which were being established for inter-

state transmission of electricity. In 1975, to boost the generation sector, National Hydro

Power Corporation (NHPC) and National Thermal Power Corporation (NHPC) were

incorporated by the government which were provided World Bank support for setting up

large scale power generation projects.

Strengthening the Power Regulatory Framework- 1st Phase of Reforms

By around 1980s, power sector in India was at its all-time low, with most of the SEBs on the

verge of bankruptcy. The investments were not even sufficient to cater 30% of the

requirement and funds from institutions like World Bank also were negligible to revive the

dying utilities and power sector as a whole. The need for revolutionary policies to pool in the

investment to this sector was strongly felt.

In 1991, amendment was made to Electricity Supply Act which now allowed private

investment in the generation segment and also established Regional Load Dispatch Centres

(RLDCs). This amendment came in the background of financial crisis in the sector whereby it

was felt that India could have managed only a few more days of imported essentials with

existing reserves.2 Hence, several policies were announced hoping that additional

investmentsfrom private sector in the generation segment would alleviate the financial

condition of the power sector. The main that were policies promulgated includes:

A guaranteed 16 percent return on equity with full five years tax holiday.

Debt to equity ratio of 4:1.

2Pal, Animesh (2013), “Power Sector in India: Growth, Policies and Challenges” International Journal of

Emerging Technology and Advanced Engineering, Vol.3, No. 3 (Feb. 2013), pp. 527-536



Sovereign guarantees and escrow benefits in case SEBs defaulted.

The initial response to this amendment was excellent as within a span of few years, more than

100 projects with investment of more than 100 billion dollars were offered to the government

by various private entities. Some of these quickly approved on fast-track basis, however,

promised benefits could not be extended to all these owing to the revenue stream of SEBs.

Since proper mechanism were not made available for procurement and transportation of coal,

Independent Power Producers (IPPs) faced a lot of difficulties. Long drawn litigation of land

acquisition disputes and financial closure further added to the failure of this policy. However,

after proper analysis, the reason for the failure of this policy can be attributed to poor

financial condition of SEBs which still remained unaddressed. Since these new projects

assured a high Plant Load Factor (PLF), high return on equity, higher capitalcost of plants,

higher variable cost due to insurance fee, etc., the tariff for the power generated from these

privately owned projects was comparatively higher than power from NTPC or SEB projects.

As SEBs were financially unstable to an extent that they were nearing bankruptcy, purchasing

power at such high tariff from these projects multiplied the difficulties of IPPs.In 1998,

transmission sector too was opened for private investment subject to prior approval of Power

Grid Corporation Ltd. (PGCL) as the Central Transmission Utility (CTU).

During 1980s and 1990s, The World Bank financingwas mainly influenced by Washington

Consensus.According to that, development processes were hindered more by economic

policies, rather thanshortage of financial resources. Therefore, as a change in policy, World

Bank was insisting for privatization.3 Odisha was the first state to come up with grid

restructuring project and reformative policies to deal with its power sector. Odisha‟s

Legislative Assembly enacted Orissa Electricity Reform Act 1995 which contained

provisions of separating generation, transmission and distribution. This act also constituted an

independent body as Orissa Electricity Regulatory Commission to facilitate state‟s power

utilities.

Odisha‟s model proved to be a role model as it was followed by many states bifurcating their

SEBs into generation, transmission and distribution segments. Need for grid restructuring

was felt by the Union government and it came up with and ordinance which was eventually

accepted and incorporated by the parliament as Electricity Regulatory Commission Act,

1998. Under this act, Central Electricity Regulatory Commission was established to look after

3Ibid.



power utilities owned by the centre and those involved in inter-state operations. Provision for

setting up State Electricity Regulatory Commission (SERC) was also incorporated in the act,

however, it was left to state‟s government discretion. The fundamental object with which

these commissions were set up was to determine logical tariff rate which was otherwise

becoming a tool for serving politicalinterests.

Establishment of these regulatory commissions can be said to be the first footing step in the

direction of power sector reforms in India. Various committees were constituted such as

Deepak Parekh Committee which suggested for AcceleratedPower Development and

Reforms Programme (APDRP)for financing power projects and Expert Committee under the

chairmanship of Montek Singh Ahluwalia which tried to resolve dues and disputes of SEBs

and union power utilities.

Electricity Act 2003: Lodestar in the Indian Power Landscape

A third stage of reforms is marked by passage of the Electricity Act of 2003, which seeks to

replace adhoc state experiments with a uniform national framework.4 This act can be

considered one of the most important step taken by the government in for revolutionizing

India‟s power sector. With the passage of this act, all previous legislations governing

electricity sector such as Indian Electricity Act 1910, Electricity Supply Act 1948 and

Electricity Regulatory Commission Act 1998, were repealed and consolidated to serve the

sector in more contemporary manner. It creates a progressive and transparent structure for the

development of power sector.

Some of the important attributes of the Electricity Act 2003 are:

Facilitates investment by creating competitiveenvironment and reforming distribution

sectors.The National Tariff Policy was notified in 2005, which mandated that, “All

future procurement of power by the distribution utilities and all future investments in

4Williams, J. H. and Ghanadan, R. (2006), “Electricity reforms in developing and transition countries: a

reappraisal” Elsevier, Energy 31, pp. 815-844.



inter-state power transmission would be through competitive bidding route from

January, 2011.”

Mandates unbundling of SEBs into distinct generation, transmission and distribution

utilities.

Simplified procedure of setting up power generation projects by removing license

requirement, except for the techno-economic clearance for hydro projects which

exceeds capital investment as notified by Union Government.

Establishment of SERCs was made compulsory.

Trading of electricity was recognized as independent activity.

Open access in transmission segment which encourages a multi buyer and seller

model.

Stringent provisions dealing with theft of electricity.

Electricity Act is a very comprehensive and contemporary piece of legislation which if

implemented judiciously by both the union and state governments along with their utilities,

would result in overall development and revival of power sector, which is a pivotal

component in India‟s path of prosperity.

Electricity Act 2003 provides for unbundling of SERCs into specialized and distinct segments

of generation, transmission and distribution. However, even now it works as an integrated

unit in few states. Furthermore, in states like Jammu & Kashmir, Puducherry, Goa, Sikkim,

Arunachal Pradesh, Manipur, Mizoram and Nagaland, the electricity sector is operated

through government department. In other states, though SEBs have been restructured into

different segments of generation, transmission and distribution entities, distribution still

remains to be a public sector undertaking except for Delhi and Odisha. However, there are a

few private utilities functioning in some areas in few states like Reliance and Tata Power in

Mumbai, CESC in Kolkata, Torrent Power in Ahmedabad, and Noida Power in Noida. Even

though a few of them are functioning in generation, transmission and distribution work at the

same time, they are better managed and are in a more stable condition.Hence, professional

and competent operations of the state utilities with functional autonomy and without

bureaucratic hurdles are the key requirements to yield the results of power sector reforms.5

5Supra n. 4



Positive Indications in Generation sector

In 2003, to facilitate generation of power by setting up of large sized thermal power plants in

the country and in order to derive the economies of scale, the Union Ministry of Power

hadliberalized its mega power policy. Therefore,with effect from 1.3.2003, all inter-state

projects with a capacity of 1000MW and above in the case of thermal and 500MW and above

in the case of hydel projects are declared to be treated as mega power projects subject to

compliance of certain conditions and are also extended the concession of “zero” customs duty

on import of capital goods. In order to protect the interest of domestic bidders, price

preference of 15% is being given for the domestic manufacturers in addition to deemed

export benefits as per the EXIM policy for mega projects under public and private sector.6 In

addition to this, tax holiday on the income is also conferred upon these projects with a

provision that it can be claimed in any block of 10 years within first 15 years by the

promoter. Further, the state governments were requested to give exemptions to these mega

power plants from sales tax and other local taxes as far as possible. Most of the participation

by private investors in the power sector has happened in generation sector, driven by de-

licensing of generation, fiscal incentives for large scale capacity additions and competitive

procurement of power.7

Power generation sector promises strong growth opportunity on account of mounting

development of economy, increased susceptibility for consumption and urbanization. All this

has led the country to make significant progress in unearthing the opportunities and building

up capability for capacity addition. Indian private sector has responded positively to the

reformative policies of the government concerning power sector, and have shown huge

interest in power generation process due to the change in power procurement prospect

towards competitive bidding is expected to pool in more private sector investments and

overall efficiency in the sector.

Over the past one decade, India has made impressive progress in adding to the size of its

overall power generation capacity. The total power generating capacity of (utilities & non

utilities) has increased from meagre 1362 MW in 1947 to 267 GW at the end of March,

6 http://powermin.nic.in/Policy-Setting-Mega-Power-Projects-Pvt-Sector, August 2015.

7Emerging opportunities and Challenges: India Energy Congress 2012, available at -

https://www.pwc.in/assets/pdfs/power-mining/energing_opportunities_and_challenges.pdf, August 2015.



2015.8On careful analysis, in addition to radical reforms, by the clearance of supply-side

bottlenecks, power generation is one segment on which the government has indeed done well.

In particular, the assurance of coal linkages has ushered life into the power generation units

which were otherwise either dead shut or were under performing due to unavailability or

inadequacy of fuel. Moreover, many additional facilities have been added to the nation‟s total

power capacity in the recent times. Given the increasing energy demands of the nation and its

drive towards becoming an international manufacturing hub, this could not have come at a

better time.

On one hand, where generation sector is giving a lot of positive signals, the same cannot be

said for the transmission and distribution sector. The efforts of the government towards these

sectorshave been barely sufficient due to improper planning and negligence. It is the

efficiency of transmission and distribution sector that determines the quality of power

supplied to the customers and hence, these sectors need proper planning to ensure adequate

standard of power supply. There are many reasons because of which these two sectors are

lagging behind the expected target of their growth. A paradoxical situation is evident wherein

SEBs lack the finances to purchase electricity from generation units, which leads to surplus

power in the hands of power generators and a record low Plant load Factor (PLF), which

sums up the poor state of power distribution. There are huge power losses during

transmission of electricity due both technical and commercial losses like theft. These losses

directly reduces the net available power to the consumer and also affects the financial

position of the players involved in these sectors.

Therefore, it is pertinent to analyse the difficulties faced by the players involved in these

sector and device a policy and technological framework for improvement of these two

sectors, only then will India be able to sustain its dream of becoming an international

manufacturing destination.

Major problems faced by the transmission and distribution sectors

1. Unstable condition of State Electricity Boards

2. Irrational Tariff Policy

3. Delay due to Clearances and approvals

4. Complexity in Private Land Acquisition

8http://www.indiaenvironmentportal.org.in/content/413926/growth-of-electricity-sector-in-india-from-1947-

2015/, August 2015.



5. High Transmission and Distribution (T&D) Losses

6. Low Plant Load Factor (PLF) and outdated technology

State Electricity Boards- A colossal concern

The State Electricity Boards (SEBs) in India are considered to be the „Achilles Heel‟ of

India‟s power landscape. It is one area of concern which may well have the effect of

frustrating and invalidating efforts on all other fronts relates to the worsening financial health

of SEBs and power distribution companies (PDCs) that were created in several states in early

2000s under a comprehensive restructuring program that involved, among other things,

creation out of the terminally declining State Electricity Boards, autonomous outfits for

generation, transmission and distribution respectively.9

The revenue generated by majority of SEBs and PDCs from sale of electricity falls short of

their expenses on its purchase and T& D to a great extent. They are forced to resort to short-

term borrowings to pay for bills to National thermal Power Corporation (NTPC), other public

sector undertakings (PSUs) and independent power producers (IPP). Together with long term

borrowings for funding capital spent on maintenance of subsisting assets, interest payments

have increased sensationally. Despite the humongous losses on selling power far below cost,

most of the electricity boards are not making serious efforts to rectify them.

It is a seemingly never ending vicious cycle. The SEBs/ PDCs make losses in the hope that

one day, the government would take an initiative to discharge their liabilities and they start on

a clean slate. The genesis of this malignant issue is that governments of all political shades

recklessly promise power at a giveaway rate and then proceed to vindicate the promise in an

equally unabashed manner10

. For extending largesse to farmers or households in order to

secure votes for their governments, the politicians make SEBs/ PDCs suffer instead of

providing money from their budget which is, logically, the course that should be taken. In

addendum to subsidies, SEBs/ PDCs also bear the thrust of widespread corruption and

inefficiency that exists in myriad ways such as inflated claims for various costs by PDCs in

9“Power Transmission-The Real Bottleneck, an overview of Indian power transmission sector, its challenges

and recommendation”, available at- http://www.ficci.com/spdocument/20311/Power-Transmission-

Report_270913.pdf, August 2015. 10

“Electricity externalities in India”, The Energy and Resources Institute, available at-

http://www.teriin.org/ee/pdf/fca.pdf, August 2015.



their books, theft of power on a massive scale, T&D losses due to ageing equipment and poor

maintenance, besides inefficiencies at all levels in the distribution system.11

The task of bringing in subsidies and tackling corruption is made impossible by an

unembellished fact that votes have been secured from millions of people from ages who have

been fed on these sops. Thus, any political establishment which tries to take away subsidies

or stop illegal connections which benefit millions living in slums and jhuggis runs the risk of

being severely taxed in the elections12

. The new age politicians need to break away from this

stigma and illustrate to the world that a government can be welcome among the masses even

without subsidies or allowing unauthorized connections.

The government is gradually understanding the scope for improvisation and is now

considering advantages of privatisation or specialization of these SEBs. Advantages of

privatisation include effective execution by specialized player, technological advancements

through increased expenditure on improved machinery and increased foreign investments.13

This may lead to improved revenue realization making this segment more efficient with more

players to cover up for the deficit.

The transmission and distribution sector should be remodelled in such a manner where all

households, including the poor, farmers and industries should be provided with uninterrupted

supply of quality power. This will create the right ambience for extinguishing losses of SEBs

/ PDCs and turning them into vigorous and profitable industries.

One such remodelling strategy can be seen by looking at the Gujarat example wherein

restricting of its SEB lead to overall improvement of its power sector. Gujarat‟s power sector

was in disarray in 2001. Initially the conditions of the electricity sector in Gujarat were

depressing. The first two steps taken to rejuvenate the power sector were bolstering the power

utility‟s finances and building employee morale. Debt structuring was sought, convincing

banks and financial institutions to lower their rates, which resulted in huge savings. Though

initial resistance was shown by the private players, power purchase agreements were

renegotiated and after months of hard bargaining, the rates got lowered leading to further

savings to the tune of hundreds of crores. A law against power theft was passed in Gujarat

11

Supra n. 9 12

Dubash, Navroz and Rajan, Sudhir (2001),“The Politics of Power Sector Reform in India”, available at-

http://pdf.wri.org/power_politics/india.pdf, August 2015. 13

Pargal, Sheoli and Banerjee, Sudeshna (2014), “More Power to India-The Challenge of Electricity

Distribution” World Bank, available at- https://openknowledge.worldbank.org/handle/10986/18726, August

2015



and stringent action began against those who ran up large power bill arrears, disconnecting

their supply. Meters were installed and unmetered power supply was stopped altogether. The

majority of employees who feared for their jobs and felt alienated from the Gujarat State

Electricity Board were assured of retaining their jobs. After this, unbundling was carried out

and the Gujarat Government passed the Gujarat State Electricity Industry (Reform and

Reorganisation) Act 2003, which divided the GSEB into a holding company, a power

generation company, a power transmission company and four distribution companies. This

enabled better management and more efficient operations. Another key reform was the

separation of the feeder line that supplied power to the rural areas into two: one to supply

power for agricultural needs and other for household and other needs. Since the tariff for

power used for agricultural purposes was much lower, many had been using this subsidised

supply for their household needs as well, resulting in huge losses for GSEB. Separation of

feeders was a path-breaking step that no state had indulged in before which helped save

crores of rupees. Diligent care was taken to ensure that the state electricity regulator remained

truly independent of political pressures. The regulator has, ever since, been able to revise

power tariffs every year, which ensured the state bridged the gap between the average cost of

supply and what users paid for it. The result can be very well seen as the Gujarat experience

is considered to be a lodestar of success of the SEBs in India.14

Similarly, the State Electricity Boards of Maharashtra, Delhi, Odisha, etc., have witnessed

huge success. Some worries remain but none of them are such that cannot be overcome.

Similar strategies have to be adopted by other states to improve the conditions of their SEBs

and power sector on the whole.

Tariff Policy- The Price Tangle

The Indian power system is the fifth largest in the world and among the most complex. With

an annual electricity production of 1,031 billion units (BU), it is among the top five power

consumers across the globe, and the demand is expected to touch 1,900 BU by 2020. As

India‟s demand grows, steps have to be taken to address the concerns that impede the

expansion of its power sector. As a result of populist tariff schemes exacerbated by aggregate

14

“Power Distribution Reforms in Gujarat” IDFC (2009), available at-

http://www.idfc.com/pdf/publications/Gujarat-Distribution-Reforms-Draft-Report.pdf, August 2015.



technical and commercial (AT & C) losses and operational inefficiencies, the finances of the

state discoms are becoming unhealthy with huge outstanding debt. India‟s power sector also

grapples with complex regulatory processes, and the high cost of financing new projects

results in cost overruns, leading to a high tariff.15

Tariff setting is a primary instrument of economic regulation. The volume and nature of

demand and supply are determined by the economic signals provided by tariff and a

considerable portion of the reform effort is expended on rationalizing tariffs, often

disproportionately so16

. The process of tariff setting requires analysis of various operating

and financial parameters.

The amendments proposed to the National Tariff policy in 2015 are mainly for the purpose of

giving emphasis to competition and creating feasible conditions for the same in the Power

Sector. The proposed tariff policy seeks to strike a balance between the interests of

consumers and the investors and also makes an attempt to amplify predictability and financial

viability orientation in the tariff setting process in the sector. The distribution sector is

grappling with a financial crisis and tariffs are not reflective of the cost. This has led the

government to focus on provisions pertaining to tariff policy. Tariff policy provisions are to

be made mandatory for tariff determination, along with timely filing of tariff petitions by

utilities and disposal by the respective state commissions. The amendment envisages

enhanced powers to regulatory commissions to initiate suo moto proceedings for tariff

determination.17

Retail Tariff set by ERCs will be seen as the maximum tariff, with the

suppliers being given the option offer lower than the prescribed tariff. The proposed

amendments seek to empower the load dispatch centre with the rights to penalise for any non-

compliance of its directives on power supply.

In terms of market policies that stimulate the deployment of renewable technologies in the

electricity sector, policy schematics can be broadly categorised in to a price system in the

form of feed-in tariffs and a quota system such as renewable portfolio standards. These two

15

“Changing rules of Indian Power Sector: Empowering the Economy” Confederation of Indian Industry

(2015), available at- http://www.pwc.in/en_IN/in/assets/pdfs/publications/2015/changing-rules-of-indian-power-

sector-empowering-the-economy.pdf, August 2015. 16

Ahluwalia, Sanjeev S. and Bhatiani, Gaurav (1999), “Tariff Setting in the Electric Power Sector Base paper

on Indian Case Study” The Energy Resources Institute, available at-

http://www.teriin.org/upfiles/pub/papers/ft15.pdf, August 2015. 17

Supra n. 17



major policy directions are currently in place around the world with feed-in tariffs showing

strong success in Germany and renewable portfolio standards in place in the US.18

Feed-in tariffs guarantee a set price for renewable energy producers for a set period of time

thus eliminating the uncertainty associated with selling electricity generated from renewable

technologies to power companies; however, they do not guarantee a set percentage of

renewable in the energy mix.19

Renewable portfolio standards set a minimum requirement for

power generated from renewable technologies in the power generator‟s portfolios. They

guarantee the goals set out by policy makers, and they encourage competition between

technologies based on renewable energy credits.20

Feed-in tariffs have been applied in 23 of the 28 European Union members, and Germany‟s

Act on Granting Priority to Renewable Sources reframed in 2000 has proven to be a most

effective framework for promoting renewable technologies. Rapid increases in installed

capacity from technological advancements tend to accelerate the pace of achieving grid

parity, and economies of scale are made possible by the increase in demand. Overall, in terms

of policy effectiveness, feed-in tariffs have proven to be an effective policy instrument in

increasing the rate of diffusion of new technologies such as wind turbines and solar cells. The

drawback of feed-in tariffs is the cost of implementation. In the Republic of Korea, they

placed a financial burden on the government as the portion of renewable energy grew faster

than expected.

The Ministry of Power in India has proposed amendments to the country‟s existing tariff

policy of 2005. Promotion of renewable generation sources has now added as the fifth

objective of the policy. There are three salient features for the solar sector in the proposed

amendment:

Renewable purchase obligation (RPO) has been revised to 8% by 2019

Discoms will now be allowed to procure bundled solar power from the existing

conventional power generators on a cost plus basis to meet their RPOs

Renewable sources have been exempted from inter-state transmission charges

18

Jong Ho,Kim, Changhun and Shin, Heeyoung (2014),“Developing Asia: Current Status and Policy

Issues”Asian Development Bank working paper series, No. 245 (Sept.). 19

“A white paper on Indian solar and wind energy” CRISIL & PHD Chamber (2015), available at-

http://www.crisil.com/pdf/ratings/CRISIL&%20PHD%20Chamber%20white%20paper_Indian%20solar%20an

d%20wind%20energy%20sector_12Feb2015.pdf, August 2015. 20

Soonee, S, Garg, Minaxi and Prakash, Satya (2010),“Renewable Energy Certificate Mechanism in India” 16TH

National Power Systems Conference, 15th

-17th

December, 2010.



The tariff policy tries to facilitate the growth of competition in all segments of the power

sector. However, one of the shortcomings of the proposed amendment to the tariff policy is

that it is silent on detailed methodology and the process to be followed to determine ceiling

tariff. Though the proposed amendments could be a very good driver for boosting the

renewable sector in the country, more detail is required to back up these policy

announcements for effective implementation, which is always the weakest element of such

policies in India.21

Also, like most other central government initiates in the power sector,

bringing states on board with these tariff policies will be a significant challenge.

Delay due to Clearances and approvals

Due to best of the efforts, many projects still are not finding private player and many others

are not able to start functioning. Although policy reforms have made an encouraging platform

for private investments in the power sector, same is still not preferred by many corporates due

to complexities involved in execution of the project with respect to approval and clearance

compliances from the government bodies for example, ministry of environment and forest,

railway department, Airport Authority of India, et al.

Although it is agreed that most of this compliance is necessary to ensure that environment is

not harmed and rights or life of any other person is not affected illegally, there is still some

room for simplifying these procedures, at least in transmission sector. Transmission sector

has seen some private participation with private players coming up with project proposals,

however, many of these projects are stuck in variousstages of development waiting for

approvals and clearances.22

Therefore, there is need to bring in accountability for timely

decisions onclearances by identifying single point responsibility for different projects.

Clearance from ministry of environment and forest (MoEF) is the most tedious task in setting

up any project. Government should try and facilitate compliances, once a project is awarded

following the competitive bidding mechanism so as to ensure quick commencement of those

projects. Compliance policy should be rationalize, that is to say strict compliances should be

mandatory for projects which affects other stakeholders crucially and some relaxations or

21

“Powering India: The Road to 2017” McKinsey & Company, available at-

http://www.mckinsey.com/~/media/mckinsey%20offices/india/pdfs/powering_india_the_road_to_2017.ashx,

August 2015. 22

https://www.kpmg.com/IN/en/industry/Documents/Recharging-the-power-sector-Energy-POV.pdf, August

2015.



exemptions should be granted to projects which are otherwise safe. Since transmission setup

barely pollute the environment and requires very less linear area through the forest, they

should be given some relaxation and there applications must be decided in a speedy manner.

The transmission projects are also affected by right of way disputes. Although various

measures have been introduced by the policy regulators to resolve these issues, these have to

be implemented properly to eliminate these hurdles at a faster pace.

Complexity in Land Acquisition procedure

Land Acquisition has been a major hindrance in the power sector development in India.

Power plants and utilities face major curtailments regarding the availability of land several

and projects have been delayed owing to resistance from local communities and litigation.

The Land Acquisition Act 2013 was made with the intent of making the process of land

acquisition more certain, decrease litigation, increase predictability and avoid resistance from

landowners, however, it still contains rigorous provisions which are expected to make Land

Acquisition more costly and time consuming. Land has to be acquired through state

government machinery and when that is not supportive, projects are most likely to get

delayed because of the procedural complexities.

Resistance from local communities has proven to be a potent force and has led to delays in

projects. There is a huge difference between the registered value offered and the actual

market value of land under the Act, which results in disputes and litigation. Moreover,

valuations are conducted on the basis of the current status of land, and the system does not

capture the appreciation after the construction of the project. Local communities feel cheated

out from the path of development which leads to distrust and disputes. Moreover,

rehabilitation packages are not planned properly and execution is inefficient.

In addition, it has been reported that in some cases, even after land owners were asked to sell

and handover their land in „Public Interest‟, the project was not completed for several years

due to other delays, a fact that eroded the credibility of both the industry and the government.

In such a scenario, it is essential to proactively manage and arrive at a balance between

community interests and developer‟s interest.



High Transmission and Distribution (T&D) Losses

In India, average T & D losses have been officially indicated as 27% of the electricity

generated. However in studies carried out by independent agencies these losses have been

estimated to be as high as 50% in some states.23

This huge loss is bleeding the country‟s

resources when compared to the developed world‟s average which is below 10%. This

unaccounted or wasted power resource can be utilized for supply to millions of population

who otherwise are deprived of it. Also, if all the lost energy is charged, financial condition of

the market players can improve manifold.

T&D losses are broadly classified into two categories of technical losses which occur mainly

because of technology handicap and commercial losses which occur due to factors like theft,

improper meter reading, pilferage, et al.While filling these gaps is prime responsibility of the

companies, role of government in facilitating the same cannot be ignored.

The first step in regulating T & D losses is in fact estimating the actual current loss properly

as the lack of realistic estimates of T & D losses forms a barrier for private sector

participation in these sector as the company is not able to have an exact measure of revenue it

would be able to earn from the project. The government should then look to strategically try

and tackle these losses by:

making stricter provisions of punishment for theft of electricity or tampering of the

meters;

ensuring adequate funds for installation of meters;

constituting district vigilant squad which should be given responsibility of making

raids and arresting people who are found illegally using electricity from the

transmission and distribution tower;

tax exemptions for importing equipment for reducing T & D losses;

using modern technologies, like Smart cards, to reduce theft and target subsidies to

agricultural consumer24

;

awareness campaigns to make the masses aware about the stringent punishment for

theft and benefit of using legally supplied electricity; and

23

“Transmission and Distribution Losses (Power)” The Energy and Resources Institute, available at-

http://www.teriin.org/upfiles/pub/papers/ft33.pdf, August 2015. 24

Supra n. 23



energy audits should conducted at all levels to ensure proper implementation of

policies and estimating the shortcomings.

If all these measures are taken up by the government to help the T & D player minimize the

losses, it is most likely to solve their problem and can alleviate the power sector in matching

the demands without using extra perishable resources.

Low Plant Load Factor (PLF) and outdated Technology

Plant Load Factor in the power sector is basically the yardstick for measuring efficiency in

the working of power sector. In the recent times, PLF of the Indian power sector has been at

its all-time low indicating the imbalance prevailing in the power sector which needs

immediate attention. There is no straight jacket formula to increase the PLF and its position

can only be improved by collective development of all the segments of power industry. With

India inviting the world players to invest and contribute in its economy, such low PLF

showcase a negative image of investment sustaining prospects in the country. Hence, it is

imperative for the power sector to achieve overall development and high PLF.

Use of outdated technology also deprives the efficiency standards that country‟s power sector

aim to achieve. Hence, encouraging steps should be taken up by the government like

exemptions on import of equipment so that more investment is pooled in by the players to

improve the efficiency.

Hence, by looking into various reasons discussed above, there is an ardent need of second

phase of power sector reforms to uplift the conditions of transmission and distribution

regime. In addition to the recommendations made under respective heads, there is need to

address the abandoned projects. Currently, there is no guideline to deal with abandoned

projects and past experience in power and other sectors show that such projects create a dead-

lock thereby hurting all the stakeholders and finally the consumer. These projects should be

reopened for bidding and there should be a timeline awarded within which commencement

should be mandated. There should be a level playing field between private developers and

state owned entities. This would ensure greater enthusiasm from private players and also

reduce the reluctance of financial institutions in lending to private transmission players. CTU

should be made an independent body and there should be creation of an unbiased Empowered

Committee without PGCIL representation. This would remove the conflict of interest of



PGCIL as the planner, proposer and commercial bidder. In addition, this would eliminate all

unfair commercial advantages available to PGCIL by having CTU as one of its functions.

Conclusion: the Road towards “Make in India”

To conclude, it is seen that strong power sector forms a base for India‟s aim of sustaining its

progressive initiatives in inviting foreign investment in the manufacturing sector. Not only

this, it is crucial that attention of the policy makers and other market players is centred

towards dilapidating condition of India‟s transmission and distribution segment so that per

capita consumption and PLF indicates increased reach of electricity to the Indian citizens.

The writing on the wall has been there for some time now-reform the SEBs or risk undoing

all the good work in the power sector.Unbundling of the SEBs in India into separate entities

should be carried out and there is a need to ascertain a logical tariff policy based on

international experiences while evaluating the National tariff Policy 2015. Concentrated

efforts towards tackling other problems like T& D losses, procedural delays due to clearances

and acquisition, ageing technology, problems of the transmission and distribution sector and

overall PLF need to be made.

The trials in India‟s power sector are not seen as a failure of India‟s Electricity Act‟s design

but of its implementation. The second phase of power sector reforms is desirable to facilitate

proper implementation of progressive policies in the transmission and distribution sector.

While the potential of the sector overall remains unrealized, several states and utilities have

made remarkable headway. With all states operating under the terms of the same regulatory

framework, the distinguishing factor in their performance has been the extent of adherence to

the Electricity Act‟s terms.

Around 300 million Indians lack access to electricity in a country where per-capita electricity

consumption is one-fourth of the world‟s average. The country is craving for energy security

and energy at affordable prices. Light can be seen at the end of the tunnel, however, all these

measures would come to naught if the SEBs do not mend their ways.

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