Market-based economic despatch model risks a legal tangle

July 01, 2021 5:30 AM

The market-based economic despatch (MBED) model violates the doctrine of mutuality, that holds contracts must be enforceable by each party against the other

The load generation balance report (LGBR) 2020-21 published by the Central Electricity Authority had pointed that “some of the planned outages of the generating units as per maintenance schedule of 2020-21 have not been undertaken by the utilities for the months of April and May, 2020 due to pan India lockdown in the wake of Covid-19 pandemic”.The load generation balance report (LGBR) 2020-21 published by the Central Electricity Authority had pointed that “some of the planned outages of the generating units as per maintenance schedule of 2020-21 have not been undertaken by the utilities for the months of April and May, 2020 due to pan India lockdown in the wake of Covid-19 pandemic”.

By Pramod Deo & Arijit Maitra

A recent article in this newspaper (bit.ly/3hlv3Eb), by Somit Dasgupta, explained in simple terms the market-based economic despatch (MBED) scheme proposed by the Centre; it argued that it may not be worthwhile to completely change the mode of governance of the sector for only 2% net savings. However, the article does not explicitly examine the legal issues involved. Hence, we focus here on the legal issues that need to be addressed to introduce the scheme even on a limited basis.

The preamble to the Act states “…to consolidate the laws relating to generation, transmission, distribution, trading and use of electricity and generally for taking measures conducive to the development of electricity industry, promoting competition therein, protecting the interest of consumers…..”. However, when we have what is known as the two-part generation tariff. The first is the fixed cost which has to be paid by the power purchaser irrespective of whether the plant generates or not, and the other is the variable cost, which is a function of the quantum of generation.

In 2008, the Central Electricity Regulatory Commission (CERC), in furtherance of the above objectives of the law, introduced a day-ahead market in the power exchanges, which follows centralised economic despatch principles. However, the share of this market segment after 12 years remains only about 4-5% of the total electricity generated in the country. Nearly 88% of electricity is sold through bilateral contracts both at the intra-state or inter-state level.

The design of MBED is to centralise—price discovery on power exchanges, and scheduling of power through National and Regional Load Despatch Centres (NLDC and RLDC). The stated objective of MBED is to meet the system load by despatching the least-cost generation mix. There will be a physical settlement of electricity as well as a financial settlement. The price discovered in the market is only limited to the variable cost of generation, whereas the purchasers i.e. the distribution utilities will continue to be liable to pay the fixed charges as per their extant contracts. Thus, fundamentally, the MBED model involves: (a) ‘Scheduling and Despatch’ and (b) ‘Settlement of Contracts’, where there would be a hedging arrangement known as bilateral contract settlement of refunding the difference between the market-clearing price and the contract price.

The MBED model violates the doctrine of mutuality, that holds contracts must be enforceable by each party against the other. The long-term contracts will be rendered redundant as a result of the mechanism proposed in the MBED model. The market-clearing price will override the variable charges determined under section 62 of the Electricity Act, making the tariff fixation exercise redundant. Similarly, a price discovered through competitive bidding being overridden by the market-clearing price is again not in consonance with section 63 of the Act.

Section 32(2) of the Act mandates the State Load Despatch Centre to schedule and despatch electricity “in accordance with the contracts entered into with the distribution licensees or the generating companies operating in that State”. Similarly, section 28(3)(a) mandates the Regional Load Despatch Centre to schedule and despatch electricity within the region “in accordance with the contract entered into with the distribution licensees or the generating companies operating in the region”. MBED does not align with the provisions of sections 28 and 32 since there will be a centralised “scheduling and despatch” and “settlement of contracts”.

In short, the so-called market-based MBED model will be ultra vires of various provisions of the Electricity Act. The subject of electricity is under Item 13 in the Concurrent List of the Constitution where the states as well as the Centre are both competent to legislate. The centralisation of the despatch and financial fixation settlement of electricity will conflict with this, and it may deprive the entry of “electricity” of all its content. As the Centre has been trying to amend the Act since December 2014, it will be appropriate that the MBED scheme is introduced by proposing appropriate amendments to the Act in consultation with all stakeholders—especially the state governments.

Deo is former chairman, CERC, and Maitra is legal expert (regulatory matters)

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