How infrastructural challenges, legacy issues could impact power reforms

A series of regulations aimed at improving electricity supplies and empowering customers could reshape India's electricity market, provided infrastructure and legacy issues are sorted out first

Over the last fortnight, the Union Ministry of Power has issued a series of regulations aimed at simplifying electricity supply in the country. From time-of-the-day (ToD) tariff to market coupling and changes to the Electricity Rules, the idea is to make electricity more market-oriented and reduce regulatory hurdles. But infrastructural challenges and legacy issues could impact these developments.

Rights of consumers: In the latest amendment to the Electricity (Rights of Consumers) Amendment Rules, 2023, the power ministry has introduced ToD to be made effective by April 2024 for industrial consumers and for all other consumers by 2025. It has also specified that the tariff for solar power during the day would be 20 per cent less than the normal tariff.

ToD aims to incentivise customers to plan their electricity usage. For instance, for heavy usage like using washing machines, the customer can decide to run it during off-peak hours, when the tariff is low or rationalise usage of equipment such as ACs during peak hours when the tariff is higher.

The regulations, however, have not laid down any guidance on the tariffs, which would be decided by the state electricity regulators.

These rules are also expected to provide an impetus for the adoption of solar power, with lower tariffs when the sun is shining (also known as solar hours).  

So what are the caveats?

ToD can only be introduced if consumers have installed smart meters. On this, India has a way to go. The Centre has set a target of 250 million smart meters by 2025, against current installations of 66,00,000. According to the National Smart Grid Mission portal, 229 million smart meters have been sanctioned under different projects of several utilities at the Central and state level.

The smart meters roll-out is part of the Centre’s newly-launched Rs. 3 trillion Revamped Distribution Sector Scheme (RDSS), which aims to improve operational efficiencies and financial sustainability of state-owned power distribution companies (discoms) by providing conditional financial assistance.

Out of the total scheme outlay of Rs. 3,03,758 crore, Rs. 10,000 crore has been allocated for smart metering infrastructure across the country. Before RDSS, the target was to have 100 per cent smart meter penetration by 2022. Under the earlier reforms scheme for discoms, UDAY, smart metering was one of the primary targets.

On the ground, smart meters have faced several challenges, which has precluded optimum coverage. The first was the reluctance of the financially ailing discoms; as a result, wherever smart meter tenders have been raised, lack of back-end infrastructure has stalled their installation.

For example, Uttar Pradesh recently cancelled a tender of 7.5 million smart meters after bids were received. Industry sources indicated the state wanted the quoted price to be lower than what was discovered through the tenders.

Several players quoted in the paper also highlighted the mismatch in the smart meter installation projects and the back-end infrastructure in major states. “The smart meter and grid infrastructure needs to be seamless. In some cases, either the back-end IT infrastructure is missing or not robust enough or built on technology not in sync with the meters,” said a metering sector executive, adding these creases would be ironed out when Central agencies clearly set out technical specifications for states to follow.

An open market for electricity: Market coupling has been another contentious issue. The term refers to the process by which all bids by power exchanges are matched to discover a uniform market-clearing price for the day-ahead markets (DAM) or real time markets (RTM). In 2021, the power ministry had proposed that all DAMs on the power exchanges should be merged into one with a “market coupling operator” managing the price discovery.

Last week, even as the consultations over the Power Market Regulations, 2021 were still underway, the power ministry directed the Central Electricity Regulatory Commission (CERC) to initiate the market coupling process.

This move would entail merging power trading markets operated by two major players -- India Energy Exchange (IEX) and Power Exchange of India Ltd (PXIL) -- and a latest entrant, Hindustan Power Exchange (HPX). These exchanges have several power trading mechanisms – term ahead, green term ahead, day ahead, intraday and real time market. The sellers are power generating stations and buyers range from discoms, industrials, and commercial consumers.

The reactions to this decision have been extreme. IEX stock prices tanked the next day. IEX holds close to 90 per cent of the day-ahead spot power trading market. PXIL holds 40 per cent market share in the term-ahead market and Renewable Energy Certificates (RECs).

In the draft regulation issued by CERC in 2021, there have been starkly diverse comments from various industry stakeholders. India’s largest power generator NTPC voted in favour of the coupling saying – “market coupling would result in a larger market place with higher volumes and more efficient price discovery instead of a number of smaller markets (exchanges).”

But IEX said, “Market coupling of power exchanges will take away the price discovery function that will significantly diminish the value proposition of the power exchanges and make them meagre bid collection centres or ‘post office’ for MCO in DAM or RTM, which constitutes around 98 per cent of the market.” PXIL, however, is in favour of the regulation.

The Central Electricity Authority (CEA), the power ministry’s technical arm, has said market coupling needs a cost-benefit analysis as the mechanism will add another layer of cost as an intervening medium.

Renewable energy players such as Hero Future Energies said, as generators they prefer multiple exchanges rather than one authority as it offers different prices for the same product thereby inducing competition.

Market coupling as a concept has been adopted from the European electricity market where there is cross country power trading through different transmission networks. This makes the role of a single market operator necessary. Several stakeholders have pointed out that India has only one transmission operator and one grid manager, managing the network of all states.

The power ministry, however, has pointed out that power trading at different platforms is causing problems in optimal utilisation of the transmission network, because it gets divided among several platforms. 

Unlike ToD tariffs, there is no deadline to enforce market coupling. These two regulatory changes might change the face of the electricity market India. But before that, the power ministry has to tackle the chronic problem of sick discoms, industry expectations, legacy design of the market -- all without overstepping the federal structure of the power distribution sector.