Among the tools that the governments — both at the Centre and States — use on and off to meet their political agenda besides Roti, Kapada and Makkan, is Bijli (electricity).
Now that discussions have begun once again on the Electricity (Amendment) Bill, 2022, all stakeholders have decided to adopt a wait-and-watch policy as, according to observers, the existing Act itself has many important provisions but the challenge is in implementation as governments also use it as a tool to attract voters.
At present, one can only guess about the amendments proposed to the Electricity Act, 2003, as policy-makers, despite holding discussions on the subject with stakeholders, have shared little so far.
But, going by the whispers, proposals in the Bill that may not find their way include Delicensing of Distribution Business and Cross Border Trade of Electricity. Of course, the final word is still awaited.
What is it that needs to be factored in the Amendment Bill? According to Hetal Gandhi, Director, CRISIL Research, “The recently released draft of the Electricity Amendment Bill, 2022 has made some key changes.”
Key provisions
These include allowing consumer to choose from multiple distribution licencees. Discoms can engage distribution sub-licencees or franchisees for electricity supply in their areas without separate approvals and the Commission will fix the tariff ceiling and floor.
This is expected to improve quality of service and encourage efficiency by bringing in private participants for collection and operations in State-owned areas, said Gandhi.
Another provision included is Renewable Purchase Obligations (RPO) to mandate power consumption from renewables, with penalties for non-compliance. This RPO mandate will enable stricter compliance by Discoms and aid RE addition.
“A mandated provision in the Act will formalise the targets set centrally, removing State variability and enforcing stricter level of compliance. This will boost RE penetration as States contract more to comply,” Gandhi explained.
The provisions on RPO and payment security exist today as guidelines at the Central level. However, their inclusion in the Electricity Act would bolster their legality and enforcement at the State level.
The cost reflective tariffs would be key to ensuring SERCs factor cost increases since it is part of the Electricity Act, when taking tariff revision approvals.
Further, while a separate scheme is being planned to improve structural inefficiencies, concerns still persist over the legacy debt of around ₹5-lakh crore and legacy regulatory assets estimated to be more than ₹1-lakh crore on the books of Discoms.
The Bill also proposes cost reflective tariffs to recover all costs. Tariff revisions are required to be in line with all the costs incurred, including fuel costs.
“Timely and adequate tariff revisions ensure cost recovery and make Discoms’ revenue sustainable,” said Gandhi.
However, the challenge is to make the regulator implement this provision in letter and spirit. These provisions were there earlier too, but the regulator slipping in implementation led to over hang of recovery assets.
Then there is a proposal for a payment security mechanism for scheduling of power to be managed by load dispatch centres. “This will reduce in Gencos’ overdue amount, but may increase liquidity pressure on Discoms,” cautions Gandhi.
Key omissions
Delicensing of distribution business. Simply put, it means that State distribution utilities (Discoms) will not be delicensed or, effectively, privatised.
What is the key deterrent against this move? Clearly, implementation is an issue and for privatisation to succeed all stakeholders have to be on board. Besides, reforms have to happen across the value chain of the sector. For example: in some States, where privatisation has happened, there is an artificial control on pricing.
According to CRISIL Research’s analysis across top 10 States comprising of 29 utilities forming 70-75 per cent of power consumption on an average, debt estimated is rising (see table).
In comparison, total creditors are estimated to stand at around ₹4.4 trillion as on fiscal 2022 for the same set of States.
To tackle the AT&C (Aggregate Technical and Commercial Loss), the government has come out with some schemes. One was UDAY (Ujwal Discom Assurance Yojana Scheme). However, post closure of UDAY in fiscal 2019, AT&C losses have again risen due to addition of connections in high-loss areas under the Saubhagya scheme and the impact on collections from the pandemic years of 2020 and 2021, Gandhi said.
“This is also substantiated by State filings with State Electricity Regulatory Commissions as submitted by Discoms this year. We expect AT&C losses to improve hereon due to additional capex under RDSS to the 14-15 per cent levels by fiscal 2027. However, continued capex for improvement of the same post RDSS would remain critical for this to not deteriorate beyond fiscal 2027,” she added.
Are tripartite agreements, as prevalent in other infrastructure projects, a way out of fixing the financial challenges of the power sector?
While most are in favour of it, what needs to be ensured is that, irrespective of the package offered, the situation does not go back to square one once the period of incentive is over.
Basically the balance-sheets of the utilities need to be cleaned up, and this can happen only when it is freed from political compulsions. Power sector reforms is a function of sustained political will.