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India Power Summit 2006: Part I - Views on News from Equitymaster
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India Power Summit 2006: Part I
Sep 25, 2006

This article is the first in the series of articles of our key takeaways from the India Power Summit 2006, which was recently held in New Delhi. The organisers did well in planning a discussion on the future of regulations as the first theme of the summit, citing the importance of this topic in the overall fabric of the power sector development in India. We believe that electricity regulators in India, as in other developing countries, have an important role to play in the long-term development of the sector. As part of the conference, among others, three issues that regulators face were discussed. These were - open access, power trading and renewable energy.

I. Open access
Facilitating development of competition at the distribution (retail) level through open access is one of the key issues facing the power sector regulators in India. The Electricity Act of 2003 mandates that consumers with a minimum requirement of 1 MW are to be granted the right to avail open access by 2009 in a phased manner. A consumer allowed open access under the regulation is therefore free to choose any electricity supplier other than the distribution licensee of its area. The aim of open access is to set up competition in the distribution sector, which would ensure quality power supply and cheaper tariff for consumers.

Benefits of open access

Competition among suppliers: When implemented in its entirety, open access will enable consumers to have a free hand in buying power from a company of their choice, even though the electric wires to their houses are owned by or licensed to another company. This measure will provide a better platform for competition and eventually help lower supply costs, thereby reducing the cost of power for end users – largely utilities and industrial consumers. Apart from the reduced cost of power, the ensuing competition among suppliers is also expected to lead to a reliable and quality supply of power.

Forced restructuring mechanism: Open access is aimed at increasing the competition levels at the distribution level, the business at the core of state electricity boards (SEBs). The ill health of many of these SEBs has been a key factor in the consequent ill health of the overall power sector in the country. Now, with increased competition in distribution, SEBs will be forced to reform and restructure. This will give the much needed impetus to the overall reform process.

Better days for generators: While restructuring of SEBs brought about by increased competition will take care of the situation in the demand side, on the supply side, generation companies will benefit from reduced dependence on the SEBs. This will lead to better recovery of dues and enhanced future payment security for the industry. Also, from a generation planning perspective, as consumers avail open access from alternative suppliers, there could be a reduction in the potential total requirement to be supplied by a distribution licensee. This could result in lower requirement for future capacity addition, as freed up generation capacity could be used to service the natural growth in demand and bridge the demand supply gap. For example, in Maharashtra, the demand-supply gap for Maharashtra Distribution Company could be met by a combination of planned capacity addition of around 3,000 MW and a potential reduction of another 3,000 MW due to the exit of open access consumers.

Issues regarding open access
While an open access regime can work wonders for the state of health of the Indian power sector in the long-term (through benefits as indicated above), there are certain key regulatory and non-regulatory issues that plague the scheme. On the non-regulatory front, the limited spare transmission capacity in the country is a prominent factor in limiting the benefit of open access to a few consumers or regions.

As far as regulatory hurdles are concerned, the summit brought into limelight a few of these:

  • Limited awareness on open access phasing and requirements to be met to avail open access

  • Limited information on opportunities for alternate sourcing of power

  • Fear of discrimination from the current supplier on availing supply from an alternative

While it was outlined that the regulator could work with consumer bodies and stakeholders to bridge the communication gap with respect to phasing and requirements for open access and opportunities available in the same, the third parameter (on discriminatory practices) was the major point of debate among participants. There were points raised with respect to:

  1. Tariff barriers: Like setting up a cross-subsidy surcharge at a value that discourages open access. These cross-subsidy surcharges range from 46 paise per unit in Maharashtra to 120 paise per unit in Rajasthan.

  2. Non-tariff barriers: Like treating open access customers differently than those that already purchase power from the distribution licensee.

Overall, the moot point of this discussion on open access was that the path for regulators in the this aspect should be to develop clear-cut regulations permitting open access, determine commercial parameters such as charges for wheeling of power and surcharge applicable to open access customers and resolve any technical disputes on availability of transmission capacity. This, we believe, will make the future of regulation in open access more vibrant and transparent, thus furthering the cause of competition across all segments of the power sector.

II. Power trading
Apart from open access, the future of regulations in the power trading business was also discussed threadbare. The arguments ranged from topics like trading margins and need for a power exchange (act as a counter party to facilitate interaction between buyers and sellers of electricity and promote trade in power at uniform pricing).

Readers should note that the Electricity Act of 2003 recognises power trading as a legitimate activity, and an effective way to reduce the demand supply gap across different regions. Power trading is a comparatively new concept in India and PTC (Power Trading Corporation) is the largest player in this category. Almost 14 bn units of electricity were traded in FY06, compared to 1.6 bn units traded in FY02, thus reflecting compounded annual growth of 72% during this period. Traditionally, the Eastern and Northeastern regions of India have been the surplus states (due to concentration of generation capacity on the back of abundant fuel resources) and Western and Northern states being the ones with large deficits (due to concentration of industries). Power trading is supposed to correct this mismatch upto a large extent.

Margin for electricity traders
(Rs per unit) Purchase price Sale price Trading margins
PTC India 3.13 3.19 0.06
NTPC VVNL 3.05 3.10 0.05
Adani Exports 3.20 3.40 0.20
Tata Power Trading Co. 3.05 3.15 0.10
Reliance Energy Trading Co. 3.20 3.26 0.06
Subhash Kabini Power Corp. 3.17 3.33 0.16
Lanco Electric Utility 4.48 4.52 0.04
Average 3.14 3.23 0.09

Recently, in a move aimed at protecting the consumers as well as providing reasonable return to traders, the Central Electricity Regulatory Commission (CERC) had passed a notification fixing the trading margin to 4 paise per unit (kWh) for electricity traders. This move was aimed at correcting the anomaly of exorbitant margins earned by traders, which increased the power purchase costs for consumers.

Despite the opportunity, power trading has been a very limited activity in India, as most of the generating capacity is locked entirely with SEBs through long-term power purchase agreements (PPAs). Consequently, there is very limited capacity available for open market trading of power, thus restricting the growth of this business. But, as we have gathered from the summit and through our discussion with PTC, improvement in the regulatory framework and transmission infrastructure shall go a long way in shoring up growth of this sector in the future.

III. Promoting use of renewable energy
The discussions were circled around the role of the regulator as a promoter of use of renewable energy sources and setting of tariff of electricity sourced from the renewables. Members also delved upon the regulator’s role in providing suitable connectivity with the transmission grid and specifying the purchase of electricity from such sources as a percentage of total consumption of electricity. The regulatory directions on procurement of electricity from non-conventional sources were also enumerated, as shown in the table below.

Procurement obligations from NCE
State Quantum of purchase from non-conventional energy sources (NCE)
Karnataka 5%-10% of total consumption for each distribution licensee
Madhya Pradesh 0.5% of total annual consumption subject to availability
Tamil Nadu 10% of total consumption for each distribution licensee
Andhra Pradesh Atleast 5% of total consumption, with atleast 0.5% from wind-based energy
Gujarat Each distribution licensee to purchase 1%-2% from NCE

An interesting point that came out of the discussion was that the current pricing methodology for generation from conventional sources (like coal, gas and fossil fuels) does not factor in the costs associated with environmental damage on account of release of substances such as smoke, ash and greenhouse gases, which damage the ecosystem. As such, ignoring these ‘invisible’ costs has resulted in a situation where the cost of power from non-conventional sources (like wind, biomass, solar) seems to be higher than from conventional sources. Thus, a point was raised that regulators need to factor in the total input costs from conventional sources while determining the effective cost of generation.

Conclusion
Apart from the above three core topics of open access, power trading and promoting usage of renewable energy resources, the panel also discussed on the need to measure the performance of utilities on a multi-year period basis, so as to provide them (the utilities) with adequate incentives to improve performance. The need for regulatory compliance was also discussed as part of this theme of ‘future of regulations’.

Overall, the discussions and deliberations revolved around making the role of the regulator more transparent and attuned to the ground realities. While we believe that discussions like these will go a long way in setting a framework for the reforms process to work in a more cohesive manner, there needs to be serious implementation on ground.

Our next article on the India Power Summit 2006 will delve deeper into the transmission sector and what needs to be done to make things better in the future.

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