Power up open access

Updated: Sep 5 2014, 07:05am hrs
The Electricity Act, 2003, was enacted, with a vision of unleashing competition in the power sector which would foster the most efficient use of resources. Introducing competition also aimed at creating vibrant markets, facilitating greater efficiency in generation, transmission and distribution, bringing transparency in pricing and eventually giving a free hand to the consumer to decide source and price of power consumed.

More than a decade later, the achievements on the open access front remain a mixed bag. While progress has been made with the advent of power exchanges in 2008, a number of hurdles remain. As a result, the market across India remains fractured with some states promoting competition while in others, monopolistic policies continue to hamper the growth of a free market. Lack of availability of adequate power despite abundant installed generation capacity is impairing the nations economic growth and productivity.

The power exchanges pioneered operationalisation of open access in distribution by providing a platform for buyers and sellers above 1 MW to trade in electricity using standardised contracts under the regulatory supervision of the Central Electricity Regulatory Commission (CERC). Over the last six years of operation, the market has achieved fairly good liquidity, prices are stable with only a few peaks and hardly any volatility. In fact, the price discovered on the exchange has become the benchmark for the larger system to follow. Although, almost 80 million units (MUs) of electricity, on an average daily basis, and almost 30 BUs, on an annual basis, are being traded through exchanges at the moment, the volumes, however, remain well below potential. If the state regulators, governments, transmission and distribution utilities and system operators implement open access in the true spirit, the markets can easily grow to double their current levels.

There are days on the exchange when supply exceeds demand largely because potential buyers stay away due to a variety of operational, regulatory, or infrastructural challenges. However, this comes at a huge cost. According to estimates by energy market consultant, AF Mercados, if states were to procure power instead of shedding demand, the combined cost to the distribution utilities will increase by R36,284 crore but this is much lesser to the R2.43 lakh crore cost the economy bears because of power shortfall. To put this in perspective, this amount is sufficient to set up around 40 thermal power plants of 1,000 MW each!

So what are the typical issues that bother, say, a mid-size steel manufacturer in one of the power-deficient states, who is willing to buy power but has no access In various states, while consumers cannot purchase power from utilities other than those in the state, generators too are forbidden from selling power outside the state. Industries in such states either shut down operations or keep operating using diesel generator (DG) sets. The cost of power generation using DG sets varies between R15-18/unit. Using diesel, which is mostly imported, has a ripple effect on the economy making the rupee weak against foreign currencies.

Despite Electricity Acts principal goal of giving a choice to consumers and generators, various state governments have been found using provisions of the same law to stonewall open access. Some of the progressive states like Haryana and Gujarat recently moved to restrict open access to avail power via means other than retail supply. On the other hand, Uttar Pradesh, facing excessive shortage, does not allow industries to source power through open access. As per Section 11 of the Act, for instance, state governments have the right to issue directions to a generator in case of extraordinary circumstances. States have been invoking this Section as well as Section 37 at will to limit open access.

Another reason which impeded growth of open access is the historical distortions in tariff setting principle which makes tariff subsidised for domestic consumers. Thus, the state distribution utilities dread the sight of their wealthy consumers migrating to open access to meet their demand.

Various states have devised their own computation of open access charges to deter customers from moving to the open market to buy power. Highly inflated cross-subsidy surcharges automatically shut out the option of buying power from an alternate source.

It is surprising that states have

either altered the formula or introduced additional calculations to beef up the cost seven though The National Tariff Policy, 2006, provided a well laid out formula for the determination of cross-subsidy surcharge. There have been cases where the landed cost of power, which would otherwise have been below R5 per unit, may rise to

R7-8 due to these additional

surcharges. This may make the purchase unviable.

While there are several other issues including a creaky transmission system and absence of dedicated feeders, those primarily fall under infrastructure and can be addressed with investments over a period of time. What needs to be addressed on an urgent basis is the lack of will to implement the spirit of the Electricity Act in toto and remove the bottlenecks that have so far shackled competition. Till that is done, large swathes of the nation will remain power starved despite ample power generation. In a nation eager to bounce back to 9% plus growth, there can be no bigger travesty!

S R Sethi

The author is advisor to the University of Petroleum & Energy Studies (UPES) and former member, DERC