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Role of Regulators in enhancing availability of power , Shri R V Shahi, Former Secretary, Ministry of Power

Several initiatives have been taken, in last few years, all aimed at improving reliability and quality of power supply. Though, importance of energy efficiency and Demand Side Management is greatly relevant, in setting right the imbalances between demand and supply, the fact remains that growth of electricity demand is rising so rapidly that increased availability of power is essential. We also need to recognise that energy efficiency would have a limited role in reducing the need for increase in power generation. Even with efficient electricity consumption, it has been considered necessary that power generation should follow a growth profile of 8% annually for next 25 years to support the targeted economic growth rate.

In Indian context of power demand, the load curve is highly skewed. Several steps have been taken to smoothen the load curve. Yet, there is a large variation between requirement of power during peak hours and during off-peak hours. Indeed, there is tremendous scope to improve the load management to reduce the peak hour requirement and improve the utilisation of installed generation capacities. Even with all these measures, we will continue to need larger capacity additions. Even if we do not compare ourselves with highly developed nations, because of the differences in climatic conditions, comparison with China could be relevant. In the last 30 years most of the capacity additions have taken place in China. Increased power availability was primarily responsible for a sustained economic growth rate of 9-10% over a long period. In spite of China now having more than 800,000 MW of installed capacity of power, they often face the problem of shortage of power. Therefore, for India, rapid expansion of power generating capacity on the one hand, which will mean an effective Supply Side Management, coupled with several measures aimed towards Demand Side Management and improved efficiencies in consumption, on the other need to be equally attended to.

It is true that until we restructured the electricity industry, driven by the Electricity Act 2003 in association with statutory policies viz. Rules and Regulations under the Act, National Electricity Policy (2005), Electricity Tariff Policy (2006), uncertainties and lack of predictability about policies eclipsed the sector. Concerns of power project developers, equity investors and lenders were grave but unfortunately they were genuine. Financial conditions of Electricity Boards, more or less nearing the stage of bankruptcy, hardly inspired any of these developers and financiers to invest in Indian power sector. By the year 2001, all of them - developers and lenders - had left the power sector. Since then a lot of changes have happened. In this paper, I do not propose to discuss what other agencies such as Ministry of Power, Central Electricity Authority etc. need to do further, so that the pace of capacity addition is speeded up. This paper deals with what regulators need to do to facilitate and to encourage capacity additions with a view to improving power supply situation.

As per the Electricity Tariff Policy, the distribution companies need to procure power on the basis of competitive tariff. Electricity Act 2003 provides that if tariff for a generating power station has been determined on the basis of Competitive Bidding, in accordance with the guidelines notified by the Government, the regulators shall accept the tariff. These provisions have led to two schemes - (i) Case-II Bidding, under which Ultra Mega Projects were launched and (ii) Case-I Bidding under which the state distribution companies float tenders for procurement of power and developers respond to supply from the power projects under development or proposed to be developed by them. There is another provision in the Electricity Act, according to which regulators can fix a tariff under which distribution companies can procure power, but this provision is for procurement of power for an year.

In coming years, the pace of capacity additions can be accelerated or can get retarded depending on how the financial health of the distribution utilities shapes up. If it deteriorates, and if many of them start getting into the problem of not being able to pay for the electricity they buy from the generating companies, the confidence that has built up over last few years may start sagging. Regulator's role in this context is very extensive to ensure financial viability. This is one of the most important necessities to attract investments in power generation and transmission. If didn't happen in the past, it was because of the apprehensions about the gross inability of distribution business to support investments. If it has started happening now it is because of the emerging confidence among the various stakeholders that the sector as a whole is improving, that there is seldom any default in payment and that the provisions of the Act and Policies would ensure payments. This assumption is also based on a legitimate expectation from the regulatory institutions that they would not only implement various provisions of the Act and Policies, but would formulate their own policies, procedures and regulations leading to a commercially viable and sustainable sector.

Before I attempt specific suggestions for the regulatory initiatives, I would also like to put forth another perspective. In many ways Regulatory Commissions are in a better position to formulate and enforce implementation of any initiative as compared to what a Government Department can do. The basic idea to further empower the Regulatory Commissions, under the Electricity Act 2003, was to ensure that many decisions which Government may not be in a position to make because of variety of reasons, including political compulsions, can be made by the Regulatory Commissions. Also, in the Government, the whole cycle of decision making is so long involving inter-ministerial and departmental consultations that the process of decision making inevitably gets constrained in a significant way. We need to recognise that Regulatory Commissions have quasi-judicial jurisdictions and enforceability of their decisions and judgements derives the strength from such quasi-judicial nature of their authority. A vision for the sector coupled with decisive actions can lead to much better and faster results as compared to the Ministerial jurisdiction on these functions. After all, when it was decided that these decisions needed to be distanced from the Government and should be brought into the ambit of regulatory framework, it was with a specific objective and purpose. We also must recognise that unlike many other regulatory bodies in other sectors (Telecom, Petroleum), Electricity Act 2003 has been highly supportive, and rightly so, of the important role of Regulatory Commissions. Therefore, expectations from Electricity Regulatory Commissions emanate from this background - an initiative which has a strengthened the regulatory institutions in this sector much more as compared to other sectors - and accordingly the role of Government is shaping the electricity industry has rightly diminished.

A few specific suggestions for regulatory initiatives and interventions, in this regard, are outlined below :

(i)

Case-II Bidding, under which Ultra Mega Projects were launched, has been a success. Right in the beginning, when this Scheme was initiated, it had been suggested to various State distribution utilities and State Governments that they should also encourage and facilitate development of power projects in accordance with Case-II Bidding for the State specific needs for power. A few States have already gone ahead. So far as Case-I Bidding is concerned, there was a lot of reservations on the part of various State distribution and transmission utilities, partly because of mindset and partly because of certain genuine difficulties. When a few States went ahead, with the exercise of Case-I Bidding, the difficulties surfaced more predominantly. The recent revisions in the Guidelines made by the Ministry of Power have helped and Case-I Bidding exercises are taking off. These revisions are, no doubt, helpful, but some practical difficulties are being experienced. To make Case-I Bidding more participative to deliver much more competitive electricity rates, following suggestions are worth considering for modifying the Guidelines.

(a)

The present qualifying requirements for the developers to have land in possession to the extent of 50% or more, to have fuel linkage for the total installed capacity and to have confirmation about water linkage need to be modified. The criterion relating to land acquisition needs to be restricted to the capacity of the project being proposed for the Bidding rather than total project capacity. Similarly, the criterion relating to fuel linkage should be aligned to present policy of the Ministry of Coal.

(b)

The Bidders are required to put in place Contract Performance Guarantee of very high amount. For example, for a 1,000 MW project, the guarantee is of the order of Rs. 300 crores. This needs to be re-visited, so that the competition is widened.

(ii)

Both the above modifications relate to Ministry of Power. CERC may consider advising the Ministry for review of these requirements. The issue relating to evaluating the Bids with particular reference to fuel escalation charges and transmission escalation charges are under the purview of the CERC. The present formulation, on escalating the transmission charges over a period of time, needs to be made more realistic. It seems that with the formulation as notified, pit-head power stations would be undeservedly at a disadvantage.

(iii)

Procurement of power through both these routes, viz. Case-I and Case-II Bidding process, has a potential to transform electricity pricing structure in the country. There are issues which Ministry of Power at the Centre and Energy Departments in States could effectively co-ordinate with all concerned agencies to make both these initiatives succeed. But, there are also issues which Regulatory Commissions can handle more effectively. Issues such as fuel linkages and access to transmission systems can be facilitated better with regulatory interventions. There is no reason why agencies like Coal India Ltd., Gail and even the representatives of Coal and Petroleum Ministries may not be advised to participate in discussions and proceedings in the Regulatory Commissions for resolving these issues, atleast for serious project developers. Similarly, sanctions and clearances by the concerned Departments cannot be allowed to be an unending exercise. Uncertainties in regard to these issues lead to protracted processes of financial closure and further project development activities, all leading to avoidable delays in project execution and commissioning. Environment and Forest Ministry also need to be made accountable. Power Ministry does co-ordinate. The issue is whether Regulatory Commission cannot ask for a committed and accountable performance from the concerned departments, in this regard. My own suggestion is that quasi-judicial authority does give them an edge and they can definitely intervene and expect a more accountable set of committed performance.

(iv)

In Case-I Bidding, while dealing with the issue of fuel price escalation, whether for domestic coal or for imported coal, there is a need for a well conceived formulation. In absence of this, it is likely that the developers who quote under Case-I Bidding might adopt too cautious an approach to hedge for uncertainties on the higher side, and this will inevitably lead to higher tariff, even under Competitive Bidding process. Therefore, if the CERC were to come out with a formulation on this subject, which could provide for enhancement linked to well specified indices, it is felt that, the distribution utilities might benefit from a more competitive tariff regime.

(v)

Developers of hydro projects, it is well known, face enormous amount of uncertainties. Much longer gestation periods lead to blocking of equity capital of developers for such long periods. They are not given any benefits during construction period just as the lenders get a benefit of interest during construction. So long as gestation periods range between 3 to 5 years, developers have been managing the financial burdens. Unpredictable geological and other surprises, leading to construction periods extending to 7 to 8 years, and in some cases even more, are making investments in these projects more risky and much less attractive. Therefore, while the macro level national consideration may be to encourage hydro project development, enterprise level financial considerations do not suggest any preferential treatment to hydro projects by a project developer, who has an option to develop short gestation projects, with low hanging fruits. A serious consideration has to be given as to how to deal with this issue. Eleventh and Twelfth Plans are going to further dilute the hydroelectric proportion in our installed capacity profile. We must recognise that out of all the other renewable technologies, where we are prepared to accept much higher ranges of tariff, hydroelectric projects do offer much better and cleaner solutions to climate change concerns.

(vi)

With all the efforts that have been mounted in last few years - and the process continues - an effective solution to manage our peak loads is still to emerge. Unless we offer reasonably attractive rates of returns by way of accepting significantly higher prices of power for peak hours, we may not be able to make an effective dent on this problem. We need to encourage developers to set up capacities to meet peak hour requirement. Such encouragements should facilitate development of these projects in a time frame that we are able to come out of peak hour problems in next two to three years. In fact, there is a strong case for every major town and city to be having about 15% of additional capacity, in surrounding areas, which could meet the peak hour requirement. Technologies and fuels could be selected based on locations and availability. If price of this power is made higher, developers will come forward. Another solution to this problem could be peak hour tariff for hydro projects which could be asked to generate during morning and evening peaks by appropriately structuring their operational strategy. They would do so if properly incentivised. In fact, new projects could come-up based on such incentives.

(vii)

Regulatory Commissions have the most important role in ensuring that the financial viability of distribution utilities is such that investors and lenders do not raise concerns on whether they would be paid by the distribution utilities. In the last few years, based on several initiatives of the Government of India and also of Regulatory Commissions, by and large, payments by power by distribution utilities have not emerged as a major area of concern. As a result, we see overwhelming - in fact euphoric - response of power project developers. But, doubts have already started surfacing whether, when large capacities get added, the distribution utilities would be able to make payments in a sustainable manner. Tariff rationalisation, realistic fixation of performance targets, and reasonably achievable multi-year tariff parameters etc. are issues which completely fall in the jurisdiction of Regulatory Commissions. Unforeseen purchases of high cost power is a ground reality, just as fuel price and rail freight increases. Many Commissions have been realistic to recognise this while many have felt - and not rightly so - that the burden should be passed on to the distribution utilities. Such approaches do not inspire confidence of developers and lenders. On balance, a lot is required to be done through regulatory interventions to retain the continued confidence and interest of power project developers and lenders.

(viii)

Finally, according to the Electricity Tariff Policy (2006), within a period of five years, cross-subsidy in the tariff structure was to be brought within plus minus 20% of the average tariff. In fact, a road map was required to be drawn by every State Regulatory Commission right from 2006 as to how to reach the above goal. Unfortunately, most of the Regulatory Commissions could not do it in the initial years. Many others are still in the process. This type of a cross-subsidy structure was envisaged with a clear objective of creation of a commercially viable distribution system which can, in a sustainable manner, be expected to service the huge capital investments, along the entire supply chain. If this is not done, it is doubtful whether distribution utilities could be able to provide the right level of confidence to the developers on security of payments for electricity supplied to them. Turning around of Distribution Utilities is very much the responsibility of the Regulatory Commissions as well. Most of the parameters have to be performed as per their judgements. Electricity market development will require viability of this business at the cutting edge of this industry which is Distribution.

There are a number of issues which will require regulatory interventions. As we grow into higher profiles of power sector, with large degree of complexities, emerging situations and challenges will require commensurate response. At this point of time, I have tried to highlight a few important issues which need regulatory attention. This is not an exhaustive list of all that may be needed, but the suggestions do capture the important issues confronting capacity addition programmes and proposals.