Power for growth

Draft Bill aims to address the fault lines in the sector

The Indian economy was slowing even before the nationwide lockdown was imposed to contain the spread of Covid-19. As the curbs are being lifted in a phased manner, various pre-existing fault lines in the economy can impede recovery. One such problem area is the state of the power sector. The debt of distribution companies (discoms), for instance, has gone back to the pre-UDAY (Ujwal DISCOM Assurance Yojana) levels and they owe about Rs 90,000 crore to power producers. The lockdown is likely to have worsened their finances significantly because of lower demand, particularly from the industrial se­ctor, which is used to subsidise other consumers like households. Discoms’ fin­a­ncial position, in a way, reflects how the sector is being managed. To improve the state of this critical sector, the government intends to amend the Electricity Act, 2003, and released a draft amendment Bill recently. This should be welcomed.

Proposals in the Bill address some of the key issues in the sector. In the context of pricing, it proposes that power tariffs should reflect the cost of supply and contain cross-subsidies. The existing law mandates tariff determination by regulatory commissions, which tend to recognise costs but defer recovery. Thus, tariffs do not adequately reflect costs. The Bill proposes that the commissions would determine power tariffs for retail sale without any subsidy, which will be paid directly to the consumer. This will indeed increase transparency and help improve the finances of discoms. Further, since the government would have to directly pay the consumer, which, unlike payments to discoms, cannot be delayed, power subsidy can be expected to come down over time. This will also help improve state government finances in the long run. Since payment delays by discoms have a direct bearing on power producers, the Bill aims to give load dispatch centres the powers to oversee payment security, according to the contract, before scheduling the dispatch of electricity. This would again put pressure on discoms and state governments to make payments on time.

The Bill further proposes to establish an Electricity Contract Enforcement Authority, headed by a former high court judge. The Authority will have the powers to enforce contracts in the area of purchase, sale, and transmission of power between generation, transmission, and distribution companies. This will be a big step forward. There have been several instances in the recent past where state discoms have gone back on power-purchase agreements, particularly in the renewable space. Such things must be avoided, as they affect the investment climate. The proposed Authority will be expected to protect the interests of investors. In the context of renewable energy, the Bill suggests that the government should prepare a national renewable energy policy to promote generation and prescribe minimum purchase from such sources. The Bill also proposes that discoms can engage with franchisees or sub-distribution licensees for distribution of power. However, till the financial position of discoms improves, it is not clear whether new firms would be willing to distribute power.

To be sure, discoms are the weakest link in India’s power economy. Numerous attempts in the past, including UDAY, could not bring their finances on track, largely because of populist policies of state governments. While the draft Bill makes all the right noises, things will improve to the extent desired only if the political class accepts the reality of power economics. Consumers need to pay.