High-voltage reforms: Draft power law could be a game changer for sector

The power sector was among the first to be opened up to private investment and structural reform in the early nineties. Since then, however, it has remained an underperformer relative to India’s economic growth, requiring consistent government intervention. The principal reason for this is political: The massive subsidies that states have historically doled out to perceived vote-sensitive segments of the population. The result is that private investment in power generation has been robust — private generators account for more than half India’s installed capacity — but power distribution remains mostly in the realm of shambolic state-owned enterprises, dependent on borrowing and heavy cross-subsidies by industry and rail utilities to finance underrecoveries. This deep-rooted infrastructural inefficiency has dragged down India’s manufacturing competitiveness in the form of high electricity costs. Four bailout packages over the past two decades have failed to reduce state-owned discom dues to power generators. Discoms are facing accumulated losses at about ₹7 trillion. Now, proposed amendments to the Electricity Act, currently out for public consultation, could offer a solution of what is essentially a political impasse and positively alter the power sector in lasting ways. 

The first is to make it mandatory for State Electricity Regulatory Commissions (SERCs), the key tariff-setting agencies in states, to determine tariffs that reflect the actual cost of generating and distributing it. To address the tricky question of targeted subsidies to farmers and so on, the amendment gives state governments the flexibility to provide advance subsidies on behalf of these groups. This would not only eliminate the complications of under-recoveries for discoms but also make power subsidies more transparent. The Bill also proposes to exempt manufacturing, railways, and metro railways from cross-subsidy obligations within five years. This proposal will go a long way in reducing transport and logistic costs and improve the efficiency and competitiveness of key freight and transport utilities. 

Most significantly, the amendments propose to allow distribution licensees to supply power through shared networks. Currently, multiple licensees in the same area — which is principally restricted to a few urban areas in India — must maintain separate networks that add to costs and minimise competition and efficiency by depriving consumers of choice. This legal tweak solves the chronic last-mile problem, which discouraged multiple distributors from operating in an area and imposed monopoly suppliers on consumers with all the inherent disadvantages. This adjustment is likely to enable the original intention of open access — of enabling competition and choice for consumers. 

Parallel to this is the proposal to allow the SERCs to exempt distribution licensees from the Universal Service Obligation to supply large consumers (defined as those with loads of 1 Mw or higher) that are eligible for open access (that is, the right to buy power from any supplier of choice). This, too, introduces a measure of flexibility to discoms operating in a genuinely competitive market to maximise supply efficiencies to domestic and smaller consumers. Taken together, these amendments skilfully address the major pain points that have afflicted the power sector for decades. If enacted, they have the potential to become game changers in a sector where deeper reform is long overdue.