Dept.

of IME, IIT Kanpur

Short-term Course
Challenges and Implementation Issues post Electricity Act 2003 :
Regulatory, Policy & Technical Solutions

April 10-14, 2004

Emerging Market Scenario in

Indian Power Sector :
An Assessment of Reforms
Dr. Anoop Singh
Dept of Industrial and Management Engg.
IIT, Kanpur ©
This document can be downloaded from: www.iitk.ac.in/ime/anoops

50+ Years of Indian Power Sector

ƒ Generation Capacity has grown from 1362
MW in 1947 to about 108,000 MW now.
ƒ Per Capita Consumption has increased from
178 kWh (1985-86) to over 370 kWh.
ƒ 493127 Villages of 587258 villages have been
electrified.

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 Perils of Power Sector
ƒ Demand growth has outpaced that of supply.
ƒ Energy shortage was 7.1 % in 2003-04
ƒ Peak shortage was 11.2 % in 2003-04

ƒ Peaking shortages reached 20.49 % in 1992-

93 and energy shortages reached 11.7 % in
1996-97.

Perils of Power Sector (Contd.)

ƒ Deterioration in operational efficiency.
ƒ The commercial losses of SEBs (without
subsidy) during 2001-02 were estimated to be
Rs. 33177crore as compared to Rs. 11305 crore
during 1996-97. With subsidy payable by State
Govt., the above figures are Rs. 24837 crore and
Rs.4674.31 crore respectively.
ƒ The gap between average cost of supply and
average tariff has increased from 50 paise/kWh
in 1996-97 to 110 paise/kWh in 2001-02.

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 Compulsions to Reform
ƒ Erosion of Financial viability of the SEB’s. Financial
distress on state governments led to diversion of
funds from needy sectors lie health, education etc.
ƒ Growing peaking and energy shortages.
ƒ Poor operational efficiency - Actual T & D losses
higher than reported T&D losses.
ƒ Lack of rational tariff structure. Poor collection
efficiency.
ƒ Deterioration in quality of supply & service to
consumers.
ƒ Absence of competition leading to monopolistic
exploitations.

Compulsions to Reform (contd.)

ƒ Technical advances no longer require vertically
integrated electric monopolies for optimal system
efficiency.
ƒ The decade of 80’s and early nineties witnessed
reforms and restructuring of the sector in the U.K.
and the USA.
ƒ Taking lead from the U.K and USA model,
developing countries like Argentina, Chile, Brazil,
Pakistan and Philippines also initiated the reforms
process.
ƒ Need for Economic Reforms - Shift in ideology:
State should encourage private sector participation
where feasible.

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 What did Reform mean in Indian
Context?
ƒ The reform models adopted in the developed
countries were oriented towards introducing
competition and developing a market
mechanism for trading in power.
ƒ In India, the initial reform model was initially
designed for functional unbundling of the
vertically integrated utilities and Setting up of
Regulatory Commissions.

Power Sector Reforms Post 1991 -

Historical Landmarks
ƒ 1991- Opening up of Power Sector for IPPs (Private
Power Policy & Mega Power Policy)
ƒ Unbundling & Privatisation of Orissa Electricity Board
and setting up of State Regulatory Commission.
ƒ Unbundling SEBs in Haryana & AP, and setting up of
State Regulatory Commission.
ƒ 1998 – Electricity Reform Act & Establishment of CERS
& SERCs
ƒ Conference of Chief Ministers / Power Ministers (2001)
ƒ 2001 - Electricity Bill Introduced
ƒ 2002 - Privatisation of DVB
ƒ 2003 – Electricity Act 2003

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 What did reforms achieve so far.
ƒ Transparency in Tariff Determination
ƒ Tariff Rationalisation
ƒ Reduction in cross subsidy
ƒ Some improvement in operational
efficiency.
ƒ Reassessment of T & D losses leading to
greater transparency

What it didn’t
ƒ T & D losses did not improve significantly
ƒ Metering of all consumers not achieved
ƒ Tariff increase for politically sensitive consumer
segments has been difficult.
ƒ Promised subsidy by state governments was
delayed / deferred.
ƒ Power Shortage scenario continues.
ƒ Slow private investment in power generation.

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 Unfulfilled Dreams!
ƒ IPPs (Independent Power Producers)
evinced interest for adding about 95000
MW capacity, Only 6500 MW was added
during the eighth and ninth five year plans
(1992-2002).

Need for Deepening of Reform

ƒ Many State Governments could not fathom
courage to undertake politically sensitive
reforms. There was also a need to enter into the
next phase of ‘market’ reforms.
ƒ .... The emergence of Electricity Act…..
ƒ Electricity Act 2003 is an attempt towards
introducing competitive regime in the Indian
power sector.

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 Electricity Act 2003
After a number of drafts and amendments in Lok
Sabha and Rajya Sabha, Electricity Act 2003
came into effect from 10th June 2003. It
replaced the existing three legislations governing
the power sector,
ƒ Indian Electricity Act, 1910
ƒ Electricity (Supply) Act, 1948
ƒ Electricity Regulatory Commissions Act, 1998.

Key provisions of the Act

ƒ De-licensing of thermal generation (Sec 7) and captive
generation. (Sec 9)
ƒ Provision for license free generation and distribution in
the rural areas (Sec 14) and provision for management
of rural distribution by panchayats, cooperative
societies, non-government organisations, franchisees
etc. (Sec 13)
ƒ Non-discriminatory open access in transmission. (Sec.
38 (2)(d))
ƒ Open access in distribution to be introduced in phases.
Provision for cross-subsidy surcharge on direct sale to
consumers till cross subsidy is gradually phased out.
(Sec 42 (2))

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 Key provisions of the Act (Contd.)
ƒ Multiple licensing in distribution. (Sec 14)
ƒ Power Trading recognised as a distinct activity
(Sec 14) with ceilings on trading margins to be
fixed by the Regulatory Commissions.
ƒ Levying of cross-subsidy surcharge for direct
sale bypassing existing utilities.
ƒ Adoption of multi-year tariff principles. (Sec 61)
ƒ Mandatory metering of all electricity supplies by
June 2005.

The Emerging Market

Structure

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 SEBs
ƒ State Electricity Boards (SEB) were created in 1948.
ƒ The State Electricity Boards were vertically
integrated state monopoly, it was responsible for
Generation, Transmission & Bulk Supply as well as
Distribution within the respective state.
ƒ The SEB’s did manage to achieve capacity additions
and systems expansion. However, plagued with very
high T&D losses, non-compensatory tariff, lack of
investments etc., the financial sustainability of the
SEB’s have become doubtful.

Structure of the Industry

ƒ Generation – Central, State & Private Licensees,
IPPs
ƒ Transmission – Central, State, Pvt.
ƒ Distribution – State (SEBs) & Private Licensees

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 Vertically Integrated SEBs

Vertically
T Integrated SEBs

C C C

Segments of the Electricity Markets

Five main segments of the power sector are,

ƒ Generation Genco
ƒ Transmission
ƒ Bulk Supply } T & BS Transco

ƒ Distribution
ƒ Retail Supply } D & RS Discos

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 Restructured Power Sector – Pre
Electricity Act 2003

IPPs G Limited Competition for

the market

T & BS

Regulated
Market D & RS

C C C

Electricity Act 2003

From “Competition for the market”

to “Competition in the market”

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Restructured Power Sector – Emerging
Scenario (Post Electricity Act 2003)

IPPs G

T & BS
Competitive Market
Regulated Segments
Market D & RS

C C C

Constituents of Electricity Markets

More players in the power sector are,

ƒ Generation
ƒ Transmission
ƒ System Operator
ƒ Bulk Supply
ƒ Distribution
ƒ Retail Supply
ƒ Traders / Aggregators
ƒ CERC, SERC, CEA, MoP…

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 Post Electricity Act 2003 – Change in
Market Environment
ƒ Generation – SEBs, CPSUs, IPPs, Captive
ƒ Transmission – Open Access
ƒ System Operator – (currently embedded with
CTU) – key role in competitive markets
ƒ Bulk Supply - Traders & Market Mechanism
(Power Exchange / Pool)
ƒ Distribution – Phased open access
ƒ Retail Supply - Multiple Licensees
ƒ CERC, SERCs – monitoring market behaviour

The Emerging Maze - Post Electricity Act 2003

IPPs G Captive

Traders

T BS

D RS

C C C

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 Competitive Market in Power Sector
means (Hunt, 2001)
ƒ Many buyers and sellers, and non-abuse of
market power
ƒ Responsiveness of demand and supply to prices
ƒ Liquidity and efficiency in the market
ƒ Non-discriminatory access to transmission and
distribution network
ƒ Appropriate treatment of residual subsidies and
other non-market factors interfering with the
market

What is expected?
ƒ Markets to remain imperfect.
ƒ Bilateral contracts to continue to play a major
role for the time being.
ƒ Demand response can come only after large
customers are hooked through TOD metering
and distribution open access is operationalised.
ƒ Lack of investment in transmission capacity
could defeat competitive pressures.
ƒ Prudent reduction in cross-subsidy while
keeping consumers’ interest in mind.

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 Key Challenges
ƒ Operationalising open access
ƒ Market Design
ƒ Monitoring and preventing abuse of market power
ƒ Need to graduate from ABT and its introduction at
state level. (UI as indicator for ‘market for differences’)
ƒ Cross subsidy Management / Cross-subsidy
surcharge
ƒ Regulatory provisions for rural micro-enterprises –
price, quality and consumer services.

Emerging Issue
ƒ Pricing for Transmission, Ancillary Services and
Congestion Management
ƒ Market Design for Bulk Power (Exchange vs Pool).
Who would ‘make’ the market?
ƒ Transition Path to Full Retail Competition
ƒ Will Utilities remain Provider of Last Resort
(POLR)?
ƒ Should cross-subsidies be completely eliminated?
ƒ Is the time ripe for Performance Based Regulation?

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