Power Sector Developments

in India

Industry Information Insights 2014

Rewave Infra Solutions EnergySector.in

Table of Contents

Executive Summary

Power Sector Before Independence

Electricity Supply Act, 1948

Institutional Developments

Power Sector Reforms

World Bank and Reforms

Restructuring of SEBs

Electricity Regulation

Electricity Act, 2003

Power Sector After EA2003

Executive Summary

Post 1991 Era

In the 1990s, a series of power sector reforms made thesector more open and competitive through deregulation andencouragement of private investment. In 1991, privateinvestment was allowed into power generation anddistribution, whilst transmission remained closed to privateparticipation until 1998. Mega Power Policy (MPP) 1995 wasintroduced to accelerate investment in power generation bygiving plants with above 1,000 MW capacity additionalincentives. Power Trading Company (PTC) was formed to actas an intermediary between the private mega power plantsand the SEBs.

Electricity Regulatory Commission Act, 1998 constituted theCentral Electricity Regulatory Commission (CERC) andencouraged the states to establish their own State ElectricityRegulatory Commissions (SERCs) to regulate and rationalizethe tariffs. The considerable policy efforts in the power sectorduring the 1990s, however, had limited achievements. Thepower sector remained commercially unviable with littleprivate investment until a number of new policies followed inthe 2000s.

Pre 1991 Era

The power sector in India has undergone significant progressafter Independence. When India became independent in1947, the country had a power generating capacity of 1,362MW only. Hydro power and coal based thermal power havebeen the main sources of generating electricity. Generationand distribution of electrical power was carried out primarilyby private utility companies. After 1947, all new powergeneration, transmission and distribution in the rural sectorand the urban centers came under the purview of State andCentral government agencies. State Electricity Boards (SEBs)were formed in all the states.

India’s power sector had been a monolithic system that wastightly regulated and dominated by vertically-integrated StateElectricity Boards until economic reforms began in 1991. TheSEBs controlled the entire electricity supply chain fromgeneration, transmission to distribution within a given state.However, distorted tariff structure, political intervention, hightransmission & commercial losses resulted in near bankruptcyof the SEBs and insufficient and unreliable electricity supply.

The first major policy thrust from Central Government cameonly in 1998 when it enacted the Electricity RegulatoryCommission Act, 1998 to pave way for formation of Centraland State Electricity Regulatory Commissions and distancingof Government from tariff determination. The most significantand wide-ranging change in legislation was the promulgationof the 2003 Act, which superseded all the previous electricityrelated legislations and created a more open environment forinvestment and competition in the sector. The 2003 Act alsorequired statutory restructuring of integrated SEBs andseparation of trading function from transmission and systemoperation.

The amendment of Supply Act (1948) in 1991, followed by theenactment of Electricity Act (2003) and notification of MegaPower Policy (1995), National Tariff Policy (2005), NationalElectricity Policy and Integrated Energy Policy have all led to amuch liberal power sector, which then saw active investmentsfrom private sector across the value chain.

The National Tariff Policy was notified in 2005, whichmandated all future procurement of power by the distributionutilities and all future investments in inter-state powertransmission through competitive bidding route from January,2011.

Restructuring of SEB

The process of reforms and restructuring in Indian PowerSector begun in the early 1990’s with a few StateGovernments enacting state level legislations to reform andrestructure integrated State Electricity Boards (SEBs) prior toenactment of the Electricity Act, 2003. Odisha, Haryana,Andhra Pradesh, Rajasthan, Uttar Pradesh, Karnataka, Delhiand Madhya Pradesh have restructured their SEBs under statelevel legislations. The first state to restructure its integratedSEB under a state level legislation was Odisha in 1995.

Pre-Independence

To deal with these difficulties, the Indian Electricity Bill wasintroduced in the Central legislation to amend the law relatingto the supply and use of electrical energy.

The drafting of the Indian Electricity Bill 1909 finally led tothe enactment of the Indian Electricity Act 1910. In thislegislation, the power of licensing was left to the localgovernment, thus getting rid of the problem of dual control.

Further, the concept of issuing license for bulk supply wasintroduced. Bulk supply meant that a company could generateand sell to other distributors in large quantities who would, inturn, retail it under a different license to small consumers.

The first legislation in the electricity sector in India was theIndian Electricity Act of 1887. This Act provided for theprotection of person and property from injury and risks,attendant to the supply and user of electricity for lighting andother purposes.

This Act was repealed and replaced by the Indian ElectricityAct 1903. Many practical, electro-technical and commercialdifficulties were realized during the period from 1903 to 1909.

Indian Electricity Act

1887

1903

Indian Electricity Act

Indian Electricity Bill

1909

1910

Indian Electricity Act

Electricity Supply Act, 1948

In the initial years, these provisions ensured that the SEBswere financially healthy. However, the financial position of theSEBs deteriorated.

During the period 1948 to 1956, the SEBs took over mostprivate licensees upon expiry of their license agreements.

While the growth of the Indian power sector primarily beganin the private sector, the Industrial Policy Resolution of 1956reserved generation and distribution of electricity exclusivelyfor the public sector while allowing existing private utilities tocontinue. However, no new private licenses were granted.

The Electricity Supply Act (ESA), 1948 was enacted by theGovernment as it was felt that the pace of electrification wasvery slow and that electricity was only available in majortowns and cities.

The Electricity Supply Act, 1948 paved the way for setting upof State Electricity Boards (SEBs) and envisaged constitutionof the Central Electricity Authority (CEA).

It also laid down the principles for calculating the returnswhich the Electricity Boards were to earn. A three percentreturn on net capital at the beginning of each year was theoverall guiding principle for tariffs charged by the SEBs.

Indian Electricity Act

1910

1948

Electricity Supply Act

Formation of CEA Under ESA

1948

1956

Industrial Policy Resolution

Institutional Developments

Rural Electrification Corporation (REC)

Rural Electrification Corporation (REC) was set up in 1969after the famines of the 1960s with a mission to facilitateavailability of electricity for accelerated growth and forenrichment of quality of life of rural and semi-urbanpopulation.

NHPC and NTPC

In order to give a boost to power generation, the Governmentof India created the National Hydroelectric Power Corporation(NHPC) and the National Thermal Power Corporation (NTPC)in 1975.

Regional Electricity Boards

In 1964, the Regional Electricity Boards were established indifferent regions in India for facilitating integrated operationand for encouraging exchange of power among differentstates.

To encourage the states to build infrastructure for exchange ofsuch power, inter-state lines were treated as centrallysponsored schemes and the states were provided interest freeloans.

The reason for development on the lines of regions was thatthe generation resources in India are unevenly spread. Thehydro resources are primarily located in the Himalayanfoothills and the North Eastern region whereas coal is locatedin the Bihar-Jharkhand-West Bengal area with some reservesin Andhra Pradesh and Madhya Pradesh. Lignite is available inTamil Nadu and Rajasthan.

Power Finance Corporation (PFC) and PGCIL

The Power Finance Corporation (PFC) was set up in 1986 toassist building of new capacities and in 1989, the Governmentof India set up the Power Grid Corporation of India Ltd.

(PGCIL) by carving out transmission lines from the variouscentral generating stations. Till that time, the generation andtransmission systems in India were planned and developed onthe basis of regional self-sufficiency and the initial set of interregional links was developed under the centrally sponsoredprogramme.

NHPC and NTPC established large regional generating stations,the benefits of which were shared by the states of the region.

The World Bank played a crucial role in the growth of NTPC’sinstalled capacity as more than half of the US$7 billion loanthat it awarded went to NTPC.

Regional Electricity Boards

1964

1969

Rural Electrification Corporation

NTPC and NHPC

1975

1986

Power Finance Corporation

PGCIL

1989

Power Sector Reforms

In 1989, the World Bank had stated that request from theelectricity sector from developing countries added up to $100billion and only about $20 billion was available frommultilateral sources.

The message meant that not much of funding would beavailable from the World Bank. Furthermore, there were nosurpluses left within the sector for investment purposes.

However, nothing really happened till 1991 when the existingelectricity laws were amended to provide for privateparticipation in generation.

The Electricity Laws (Amendment) Act of 1991 was enacted toencourage the entry of privately owned generators. Furtheramendments were carried out in 1998 when the transmissionsector was also opened for private investments subject to theapproval of the Central Transmission Utility (CTU).

Need For Power Sector Reforms

The Indian power sector had reached the absolute dead-endby the 1980s. The total losses of the SEBs without subsidy hadcrossed INR 3000 crores. The sector was facing peakingshortages in various parts of India and severe financial burdenwas imposed on the state governments because of theperformance of the SEBs.

High Financial Losses

of SEBs

Peaking Electricity

Shortages

Conditional Funding From World Bank

No New Investments in Power Sector

The World Bank & Reforms

The World Bank had assisted various power sector projects,especially at the time the NTPC was set up in 1974. The WorldBank was interested in the creation of the NTPC because theBank felt that their loans were better assured as the NTPCprojects were expected to be better managed as compared toSEB projects.

Over time, the World Bank was desirous of moving away fromgeneration because of environmental issues. Since coal wasthe primary fuel for power generation which gave rise toenvironmental degradation, the Bank wanted to supportprojects which envisaged restructuring of the sector.

In order to encourage private sector participation, severalother policy measures were also undertaken.

• The private investors were offered a guaranteed 16%return in equity with a full five year tax holiday.

• The required debt-equity ratio was kept at 4:1.

• The projects were also given sovereign guarantees andescrow benefits in case there were defaults on part of theSEBs.

However, escrow could not be granted to all projects as therewas a limit, given the revenue stream of the SEBs.Independent Power Producers (IPPs) faced many problems,from securing coal contracts to getting wagons from therailways for movement of their coal.

During the 1980s and early 1990s, the World Bank lendinghad been influenced by Washington consensuses. Accordingto this, the development processes were hindered less bycapital shortages, and more by economic policies thathindered market forces. Therefore, The World Bank beganapproaching privatization as one of the policy option.

Restructuring of SEBs

The distribution segment of the Orissa State Electricity Board(OESB) was divided into four regional utilities and later onprivatized. The transmission assets remained under publicownership with the Grid Corporation of Orissa (GRIDCO). Theexisting hydro generation assets were vested with the OrissaHydro Power Corporation (OHPC) and the thermal capacity ofthe OSEB had to be transferred to the NTPC to settle the duesof the OSEB with the NTPC. This restructuring was madepossible through the Orissa Electricity Reforms Act, 1995.

While Orissa was the first state to enact its own reforms act, itwas followed by other states like Haryana (1997), AndhraPradesh (1998), Uttar Pradesh (1999), Karnataka (1999),Rajasthan (1999), Delhi (2000), Madhya Pradesh (2000) andGujarat (2003).

Orissa (Now Odisha) was the first state to get assistance fromthe World Bank for restructuring. In the state, the generatingplants were running at 36% PLF in 1993-94, transmission anddistribution losses were at 43% and the proportion of billscollected was only 17%. The entire Orissa project was in threeparts and the total cost of the project was US$ 997.2 million.The World Bank provided $350 million and the OverseasDevelopment Agency of the UK provided $110 million.

The Orissa Model involved restructuring of the monolithic SEBinto separate generation, transmission and distribution sub-sectors.

Private Investment in Generation

1991

1995

Orissa Electricity Reforms Act

Private Investment in Transmission

1998

1998

Electricity Regulatory Commission

APDP

2000

Electricity Regulation

While the CERC was responsible for all centrally ownedstations and other stations having an inter-state role, theSERCs were responsible for stations within their own stateonly.

The primary intention for setting up of regulatorycommissions was to ensure that tariffs were determinedaccording to economic principles and that the entire processbe free from any political interference. The role of theGovernment was only that of a facilitator and catalyst whichwould lay down broad principles of policy.

Around the mid 1990s, the Government of India realized thatthe distribution sector would have to be addressed first and ifthe problems in the distribution sector can be addressed,investments in the generation sector will automatically flow.

The Government of India therefore passed an Ordinancewhich later culminated as the Electricity RegulatoryCommissions Act 1998.

It was similar to the Orissa Reforms Act and it paved the wayfor setting up of the Central Electricity RegulatoryCommission.

The states could also rely on this Act to set up their own stateelectricity regulatory commissions or enact their ownlegislations for this purpose. The functions of the CERC andthe SERCs were clearly demarcated.

Other Reform Measures

The committee suggested to waive off 50% of thesurcharge/interest on delayed payments and rest of the duesalong with full principal amount aggregating to about INR33,600 crores was to be secured by tax-free interest bearingbonds issued by the respective state governments throughReserve Bank of India.

With the enactment of the Electricity Act 2003 andimplementation of open access, the market structure in thepower sector changed from the old single buyer structure to amulti-buyer model. The generator could sell power to anybuyer using the open access provision in transmission andusers had the choice to choose their supplier.

There is increased competition among generators andsuppliers, which improves the sector’s performance.

Many states, that have unbundled the SEBs, have reportedimprovements in their operational efficiency and are able toensure reliable power supply to consumers.

Enactment of Electricity Regulatory Commission Act was thefirst major step to initiate power sector reforms in India. Thiswas followed by few other steps like introduction ofAccelerated Power Development Programme (APDP) in 2000-01, which sanctioned a composite loan/grant for improvingthe infrastructure of electricity utilities.

Later, under the recommendations of Deepak ParikhCommittee, APDP scheme was restructured and renamed asAccelerated Power Development and Reforms Programme(APDRP).

Next major step was the constitution of an Expert Committeechaired by Mr. Montek Singh Ahluwalia, then Member(Energy), Planning Commission, to suggest ways for one-timesettlement of outstanding dues of all SEBs towards centralutilities and also to work out the method for capitalrestructuring of SEBs.

Electricity Act, 2003

The EA 2003 also recognized the existence of two or moredistribution licensees in the same geographical area (Section14).

The job of price determination has been handed over to theregulatory commissions. The constitution of the stateregulatory commissions was mandatory (Section 82). Powertrading has been recognized as a distinct activity with thesafeguard that regulatory commissions are authorized to fixceilings on trading margins, if necessary (Sections 12, 79 and86). For the benefit of consumers, certain institutions like theconsumer’s redressal forum and their appellate body hasbeen envisaged (Section 42).

There are other safeguards as far as the consumer isconcerned with special emphasis on performance standards(Sections 57 to 59). At the same time, in order to plugrevenue leaks, 100% metering has been made compulsory(Section 55) and provisions relating to theft of energy havebeen made very stringent (Sections 135 to 150).

The Electricity Act (EA) 2003 came into being in June, 2003.This Act repealed all the existing electricity laws such as theIndian Electricity Act 1910, the Electricity Supply Act 1948,etc.

The primary objective of the EA 2003 is to promotecompetition in order to enable the consumers to have thebest possible price and quality of supply.

The EA 2003 mentions that all SEBs have to be unbundled intoseparate entities of generation, transmission and distribution(Section 131 and 172).

In order to enhance generation, licensing has been done awaywith completely except that techno-economic clearancewould be required for hydro projects (Sections 7 and 8).

Captive generation has been promoted (section 9). Openaccess in distribution, to be introduced in a phased manner,has been recognized wherein a bulk consumer can accesspower from any other source provided certain technicalconstraints are met (Section 42).

New Developments

National Tariff Policy

Tariff by bidding process: New projects are selected on thebasis of competitive bidding but expansion projects are anexception as they already have tie ups for their supply.

Returns to attract new investment: Attractive returns so thatinvestment in power sector is higher than other sectors.

Peak and off-peak hour’s tariff: Tariff of peak hours and off-peak hours is the function of ABT, which is implemented in allregions.

National Electricity Policy

This policy, which was introduced in February 2005, aims atlaying guidelines for accelerated development of the powersector, providing electricity to all areas and protectinginterests of consumers keeping in view the availability ofenergy resources, technology available to exploit theseresources, economics of generation using different resources,and energy security issues.

Energy Conservation Act

2001

2003

Electricity Act

National Electricity Policy

2005

2006

Integrated Energy Policy

National Tariff Policy

2006

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