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Major Issues affecting Power Sector- Dr Pramod Deo, Chairman, Central Electricity Regulatory Commission


The Indian power market is being introduced to new concepts and designs which not only bring in efficiency but also expose the sector to various risks. CERC is at the helm of the sector to bring in stability and provide guidance to the sector. In a dialogue with CERC Chairperson, Dr Pramod Deo, answers to some of the major issues affecting power sector are discussed. Excerpts

Question: How would you rate the performance of the Indian power sector as a whole? Have we been able to justify the reform process or not?

Answer: Power sector reforms are a necessity and are underway. Much has been done to reform the sector as a whole. There have been improvements in the Generation and Transmission sector but there is lot of scope for improvement in Distribution sector.

Guidelines for competitive bidding for procurement of Power by distribution licensees under the Electricity Act have been issued. About 42600 MW of generation capacity has been contracted through the competitive bidding process. Average tariff for these projects is in the range of 2-3 Rs per unit which is much lower than the recent cost plus tariffs. Competitive bidding for transmission projects is underway. The bidding for six corridors has already been completed. Five new corridors have been identified for competitive bidding. The tariff discovered through the competitive bidding route is more efficient than that determined through cost plus basis.

Open Access remains at the core of reforms in the power sector. The objective is to ensure that consumers receive adequate supply while at the same time distribution licensee improves its performance. Open Access at inter-state level is fully operational. However there have been issues in the implementation of open access at state level. In some states Open Access has not been implemented in the same spirit as envisaged in the Act. Section 11 has been invoked by a couple of states to stop export of power outside the state. High Open Access charges are being levied in some states. Ring fencing of SLDCs and their empowerment would remove the hurdles from Open Access Implementation.

Though the Act was intended to introduce a Multi buyer multi seller model, the Single buyer model is still in vogue. The State discoms bundle their total demand and procure power through a state trading company or arm. Such an arrangement perpetuates inefficiency. It is not possible to foster competition if we go back to single buyer model.

The high distribution losses for state utilities are a matter of concern. To rein such high losses the Urban Distribution Franchisee model has been introduced. It is a unique public- private partnership (PPP) model. Standardization of Distribution Franchisee model has been agreed upon by Forum of Regulators (FOR). Standard Bidding documents and Franchisee agreements have been made public. There is a Need to replicate the standardised DF model in urban areas.

Markets are crucial for building up investor confidence and to attract investments. A power generator today has an alternative avenue to sell power, through the market, over and above the long-term Power Purchase Agreements which acts as a payment security. The power exchanges were created with the objective of furthering transparency in discovery of electricity prices.

Further the REC mechanism has been introduced in the power exchanges to promote renewable energy through market based mechanism. CERC has created a facilitative framework for grid connectivity and evacuation for renewable. Detailed study on assessing investment requirement for evacuation as also for investments/provision of funds for the purpose has been commissioned.

It is important to continue with the pace of reforms to ensure the sustainability of power sector.

Question: Where have we gone wrong in managing power distribution in India? Nearly all the states are reeling under heavy losses with the situation predicted to be worse in the future. How can we delineate political interference from tariff determination and free power for agriculture?

Answer: "There has been a concern that the losses in distribution sector are stymieing the growth of power sector. The losses of the distribution companies are increasing and are at a level of about Rs.60,000 crore. This poses a challenge to new capacity addition and private investor confidence would wane in the power sector if the situation persists."

One of the primary reasons for the poor financial health of discoms is that, tariff revisions are not being done at regular intervals. As per a study conducted by Forum of Regulators (FOR) for 10 states an additional increase to the tune of 1% to 39 % is required to fully recover the cost of supply. The petitions for revision of Annual Revenue Requirement are not being filed by Discoms or are filed with delay due to delay in subsidy transfer from State Government.

The Ministry of Power wrote a letter to the Appellate Tribunal for Electricity highlighting the problem of tariff revision and tariff inadequacy. APTEL issued a suo motu order in this regard and has sought information from State regulators on the status of tariff adequacy and tariff revision.

The way forward is to undertake tariff revisions on regular basis, ensure tariff adequacy and rationalise tariffs. Recently Bihar, Punjab and MP have increased their tariffs and others need to follow. Efforts are being made to evolve model tariff regulations and bring about harmonisation in tariff revision process. More importantly, there is a need for the regulators to discharge their statutory responsibilities without fear and bias. Adequate safeguards are there in the Act to ensure that they act professionally without being influenced by external pressure.

Question: How will the new transmission pricing regime influence the growth of power market?

Answer: "Realizing the urgent need of revamping the transmission pricing mechanism in India, CERC issued regulations for a point of connection transmission tariff framework, which would be distance and direction sensitive. The National Electricity Policy requires the transmission charges to reflect network utilization. The Point of Connection tariffs are based on load flow analysis and capture utilization of each network element by the customers."

he new Point of Connection (PoC) based transmission pricing mechanism would facilitate integration of electricity markets and enhance open access and competition by obviating the need for pan caking of transmission charges.

The distinction between generation and demand customers would provide sitting signals to the generation based investments. With the implementation of the new transmission pricing mechanism – where transmission charges are locationally differentiated – the generators will have to take a view both on transmission costs of electricity and transportation costs of fuel.

The new framework will greatly facilitate fair and transparent competition for case-1 bids. Under the current methodology, the case-1 bid processes are severely distorted because of pan-caking, and this results in pit head / hydro plants not being competitive for inter-regional bids. The impact of pan-caking is further amplified in such bid processes because of application of escalation factors to transmission charges over a 25 year period. The proposed methodology will remove such difficulty.

Question: Will REC’s be the solution for grid based renewable projects in India?

Answer: The Electricity Act, 2003 and the policies framed under the Act, as well as the National Action Plan on Climate Change (NAPCC) provide for a roadmap for increasing the share of renewable in the total generation capacity in the country. However, Renewable Energy (RE) resources are not evenly spread across different parts of the country. This inhibits SERCs in renewable energy resource deficit States from specifying higher Renewable Purchase Obligation (RPO). On the other hand there are States where there is very high potential of RE sources. In such States there are avenues for harnessing the RE potential beyond the RPO level fixed by the SERCs. However, the high cost of generation from RE sources discourages the local distribution licensees from purchasing RE generation beyond the RPO level mandated by the State Commission.

It is in this context the Renewable Energy Certificates (REC) assumes significance as it addresses the mismatch between availability of RE sources and the requirement of the obligated entities to meet their RPO. As the REC framework creates a national level market for grid connected renewable energy generators to recover their cost, it is expected to encourage the RE capacity addition in the States where there is potential. The framework of REC is expected to give push to RE capacity addition in the country.  

Question: How will the market gain with reduced bidding time and evening trading at power exchanges? What is the scope for introduction of new products in the market?

Answer: The reduced bidding time block of 15 mins (instead of 1 hour earlier) would enable harmonization of bidding and physical scheduling of power. This will help in attracting wind generators and solar generators to power exchanges. These generators are small in size and loss of opportunity for even a single time block of 15 minutes has a high impact on the generators in terms of UI liability. Smaller bidding time blocks will increase their comfort level to bid and will attract them to the day ahead market. Implementation of 15 minute bidding interval in the Power exchanges would increase the operational flexibility, accommodate the ramp rate and reduce the UI.

The proposal for introduction of evening markets has been kept in abeyance at present. This is mainly because liquidity in the day ahead morning market is still low and there were apprehensions that introduction of evening market will split liquidity further.

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