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Freedom of Choice in the Indian Power Sector, Shri Avi Mehta, Asst. Vice-President, IIFL

Prior to the enactment of the Electricity Act 2003 (EA 2003), state electricity boards (SEBs) faced significant transmission and commercial losses, which adversely affected their ability to make investments in capacity addition. Also, a cost-plus-based tariff mechanism did not incentivise cost efficiencies. Consumers were faced with a high deficit scenario and poor reliability of power.

The EA 2003 was one of the first comprehensive reforms carried out by the government to create a competitive environment in the power sector. It separated SEBs into generation companies, transmission utilities and distribution utilities to create accountability and a competitive environment within each function. This created an attractive environment for private investments into the sector.

This article analyses how various stakeholders (power plant developers/ industrial consumers/ private individuals) have experienced a change in their ability to choose in the power sector, post such reforms by the government.

Regulatory environment has enhanced choices for a generation company

Prior to EA 2003, private companies required licences to set up a power plant. Also, access to transmission lines was difficult. Poor credit worthiness of SEBs (given high T&D losses) also was a big dampener for private sector investments.

The EA 2003 reduced the clearances required to set up a power plant, as it de-licensed the generation segment. Also, the open access provisions allowed generating stations to obtain access to a transmission line for a fee. Private companies were allowed to build transmission lines for captive/ common use. In addition, a shift to a competitive-bidding-based system for procurement of power from the earlier cost-plus-based system allowed gencos (generation companies) to choose the price at which they would be comfortable to sell their electricity supply. This flexibility in tariff setting allowed a genco to choose fuel sources, which provided a competitive advantage in terms of costs and reliability. The resultant increase in choices for a genco attracted private investments into the sector. This is visible from the c70 percent growth in the all-India generation capacity from 102GW in 2002 to c170GW currently.

However, access to transmission and distribution remains a concern, as cross-subsidies inflate fees associated with open access. Some bottlenecks include execution challenges and concerns on credit worthiness of SEBs. As a result, average deficit continues to remain high at 12 percent (FY `10).

However, choices available only to limited consumers in the current scenario

Although the EA 2003 allows an industrial consumer to choose a supplier, constraints in obtaining transmission access has adversely affected the implementation of this regulation.

While a group of industrial consumers is allowed to set up a captive unit away from the demand source and use captive transmission lines to access this power, the prohibitive cost involved in setting up such power plants and associated infrastructure have resulted in only a few large industrial consumers (cement manufacturers, steel manufacturers, etc.) being able to exercise this choice.

Availability of choices has helped reduce tariff levels

Even in case of individual consumers, consumers in only a few places in India have the ability to choose the distribution company. Post the recent order by the Maharashtra regulator, consumers in Mumbai are able to choose between Reliance Infrastructure, Tata Power and BEST (Bombay Electric Supply & Transport Undertaking - SEB) based on power reliability and tariff. Similarly, media reports indicate that residents in Gurgaon have approached North Delhi Power Limited (a private utility operating in the Delhi region) to supply power under open access regulations. Such an environment has resulted in utilities looking to lower power costs and enhance service levels to reduce customer attrition.

The next stage: Distribution reforms

While the regulators have moved to enhance choices across generation, distribution is yet to witness comprehensive reforms. Poor pace of reforms in distribution have resulted in insufficient improvement in the reliability of power for end-consumers. Cross subsidisation in tariff and continued interference of the Government in regulations have adversely affected investment attractiveness in distribution. This has impacted the health of SEBs, which continue to report huge cash losses.

As can be seen from the examples above (Mumbai and Gurgaon), allowing consumers to make such choices would force distribution utilities to reduce their inefficiencies.

Also, delays in privatisation of distribution could impact the entire value chain, as poor health of distribution utilities would have a ripple-down impact on generation and transmission companies.