Sectoral reforms in India have rarely been linear. The power sector is a good example of how they have been shaped by changing circumstances. The Electricity (Amendment) Bill, 2022, marks a major step forward.

By way of a background, the Electricity Act 2003 initiated the first generation of power sector reforms by making the necessary institutional and structural changes. These included unbundling the State electricity boards, setting up independent regulatory commissions, and introducing competition.

The reforms opened the sector to private participation and countered years of sluggish expansion of generation and transmission, which had not kept pace with growth in electricity demand. The competitive framework supported a significant increase in the addition of thermal power plants and renewables. Furthermore, the transmission grid was unified into a “national grid” and all households gained access to the power grid. For the first time in India’s history, power shortages due to lack of generation capacity were eliminated.

However, circumstances have changed of late. The private sector has invested huge amounts of capital in the generation sector and is now less optimistic about new investments. This retreat is triggered by certain vulnerabilities in the distribution sector. These include poor financial condition; weak contract enforcement; lack of payment security mechanisms; and payment delays. All domestic and foreign investors in generation and transmission are struggling owing to these problems.

Unviable discoms

The below data points highlight the scale of the challenge:

— A June 2022 RBI article titled “State Finances: A risk Analysis” highlighted the impact of State subsidies and freebies noting that Discoms’ overdues posed the highest fiscal risk to State finances;

— A November 2021 RBI report on State finances said States need to address debt sustainability issues. The State debt-to-GDP ratio was 31 per cent in FY21 and is expected to rise above 33 per cent in FY23, well above the 20 per cent limit set by the NK Singh Panel on Fiscal Responsibility & Budget Management;

— The MoP’s 10th Annual Integrated Rating & Ranking of Distribution utilities in August 2022 showed that the Discoms recorded a loss of 0.93 ₹/unit loss in FY21 and the outstanding liabilities to generation are at over ₹1.2 lakh crore

Distribution is the sole point for revenue collection in the electricity value chain. Its efficiency is critical to the viability of the entire sector. Unfortunately, the above data shows that the continued near-bankruptcy of Discoms is increasing input costs and hurting consumers.

As things stand, there is just no way the country will see continued investment in the sector that is so vital to our journey to India@100. This comes at a time when the transition to clean energy is imminent, and the country is committed to decarbonisation on the world stage. The impact will be catastrophic for our economy. Crises are important events where the ‘Overton Window’ widens and a larger space of opportunities emerges. Now is the time for the second generation of reforms, to create a favourable policy framework that supports and increases private sector investment in the generation sector and addresses the problems in the distribution sector.

It is hoped that the implementation of the Electricity (Amendment) Bill 2022 will start a revolution in this sector.

The Bill gives necessary legislative support to the mechanism of payment security and the enforcement of contracts. The bigger role entrusted to the National Load Dispatch Center and regulatory commissions is critical in this regard. Once roles and rights are defined, effective results can be achieved.

The Electricity Act 2003 allowed consumer choice through parallel licensees, requiring new licensee build their own network to serve consumers. Obviously, there were not many takers due to the high costs and frictions, as witnessed in Mumbai.

The Electricity (Amendment) Bill 2022 allows multiple distribution licensees, with the new licensees being able to use the incumbent licensee's network. This significantly lowers the barrier to entry in the distribution sector.

The amendments to the Act will support the enforcement of a higher share of renewables. It is also necessary to strengthen regulatory and jurisdictional mechanisms and improve corporate governance of distribution licensees.

It is paramount that this be done while respecting the constraints of cooperative federalism. The one “criticism” of the Bill relates to the strengthening of some rights in favour of the central government, in a concurrent list matter.

It is hoped that the States will truly recognise that the financial situation of Discoms is unsustainable and poses a systemic risk to the Indian banking system, so that an atmosphere can be created in which the concerns of the States can be addressed and an acceptable solution to the State and Central governments, investors, and most importantly consumers can be found.

The Bill, if passed, will breathe new life into the power sector and bring hope for a sustainable and competitive power sector.

Co-Chair, CII National Committee on Power, and Managing Director, Apraava Energy Pvt Ltd

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