Draft Amendments Proposed In India Electricity Act To Strengthen Power Supply Agreement Contracts

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The Ministry of Power (MoP), Government of India, has proposed amendments to the Electricity Act, 2003 in the form of draft Electricity (Amendment) Bill, 2020 notified on April 17, 2020, to address the issues plaguing the power sector and impeding its investment prospects.

As per ICRA, an independent investment information and credit rating agency, the introduction of an entity like Electricity Contract Enforcement Authority (ECEA) with the authority to adjudicate upon matters regarding the performance of obligations under a contract related to sale, purchase or transmission of electricity, is likely to uphold the sanctity of the power supply contracts. 

According to ICRA, Draft Amendments proposed in Electricity Act, 2003 is expected to strengthen the sanctity of power supply contracts, to bring reforms in the distribution segment, Uniformity in appointments of regulators and implementation of direct transfer for the subsidy, Focus on renewables via National Renewable Energy Policy, deemed approval for bid tariffs and stricter penalties for the shortfall in meeting renewable purchase targets

Commenting on the proposed amendments, Mr. Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA Ltd says, “While the establishment of ECEA is a positive move, there should be a clear demarcation of responsibilities between existing regulators and ECEA to avoid jurisdiction issues. 

Furthermore, the proposals to notify a National Renewable Energy Policy (NREP) for promotion of renewable and hydropower, enabling state commissions to adopt the central government notified renewable purchase obligation (RPO) norms, the introduction of per unit penalties for the shortfall in meeting RPO target, deemed approved of the tariff discovered through bidding route and incorporation of provisions of the payment security mechanism in the electricity act, once implemented, are likely to revitalize investor confidence, especially in the renewable power sector.” 

This apart, the other key amendments include simplification of tariff structure by mandating state electricity regulatory commissions (SERC) to determine cost-reflective tariffs with a reduction in cross-subsidies. Moreover, the tariffs must be determined without considering the state government subsidy, which is to be directly paid to the consumers by the government. 

Further, the amendments propose to bring in uniformity in appointments to central and state electricity regulators, by constituting a single selection committee for the entire country. There is also a provision to entrust the functions of a state commission to another state commission or joint commission, in the absence of the chairman and members of the SERC, which would avoid any delay in addressing regulatory matters. 

The proposals also include the appointment of distribution sublicensee with the approval of the SERC and distribution franchise by informing the SERC, to operate on behalf of the distribution utility in a specific area of the licensee’s area of supply. However, there is no reference to the separation of the supply and distribution functions in the proposed bill, which was key for the introduction of competition in the power distribution segment. 

According to ICRA, The power distribution segment remains the weakest link in the power sector, owing to the weak operating efficiencies, inadequate tariffs, and subsidy concerning the cost of supply and resultant accumulation of regulatory assets. This is reflected in the large dues pending from discoms to generation companies of more than Rs. 920 billion as of February 2020. This is expected to be further exacerbated by the ongoing lockdown due to the COVID 19 outbreak, which is adversely impacting the electricity demand and in turn the revenues and cash collections for distribution utilities.

“While the amendments proposed such as direct benefit transfer for a subsidy, cost-reflective tariff determination, and uniformity in the appointment of SERCs, are certainly positive for the distribution segment, in the long run, the effective implementation of these provisions requires the support of the state governments and the utilities, through proactive efforts on operational improvements, timely filing of tariff petitions, and cost-reflective tariff revisions by the regulators. Also, the central and state governments must devise a mechanism to liquidate the regulator asset position of the discoms and outstanding dues to power generators,” says Mr. Vikram V., Associate Head & AVP, ICRA Ltd. 

Recently, ICRA has revised the year-end outlook for the Renewable energy (RE) sector, from stable to negative. The sector is facing headwinds because of the long delays in making payments by the state distribution utilities; execution delays for projects bid out over the past two years due to challenges in completion, land acquisition difficulties, securing transmission connectivity, and; financing promptly.The average bid tariffs discovered in the auctions for wind and solar power projects in CY2019 so far remained at Rs. 2.7-2.8 per unit. While this is higher than the low of Rs. 2.4 per unit discovered in CY2018, the tariffs continue to remain less than Rs. 3.0 per unit, given the imposition of tariff cap by the nodal agencies.

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