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2020-05-28 / HFE Team

The Era Of Reforms For the Power Sector

The Era of Reforms for the Power Sector

The government has decided to turn the COVID-19 crisis into an opportunity for the power sector to usher in a new era of reforms. Principally amongst them are the 90,000 crore liquidity infusion and the amendments to the Electricity Act. Here is a rundown of the steps taken to make the power sector viable.

₹90,000 Crore Liquidity

As part of its 20 Lakh Crore “AtmaNirbhar Bharat” Package, the government announced, amongst multiple other measures, an INR 90,000 Cr liquidity infusion for the discoms against receivables. This will significantly benefit the industry by addressing one of the major pain points of non-payment and delayed payment of dues by discoms. These loans are to be given against state government guarantees to clear the dues of gencos and will be linked to specific activities such as digital payments, clearing outstanding dues of discoms by the state governments, and encouraging the discoms to reduce financial and operational losses. The government has also announced its intention to increase the adoption of smart prepaid meters across the country.

Key Takeaways:

• PFC/REC to infuse liquidity of INR 90,000 cr to DISCOMs against receivables
• Loans to be given against State guarantees for exclusive purpose of discharging liabilities of Discoms to Gencos
• Linkage to specific activities/reforms: Digital payments facility by Discoms for consumers, liquidation of outstanding dues of state government's plan to reduce financial and operational losses
• Central Public Sector Generation Companies shall give rebate (fixed charges) to Discoms which shall be passed on to the final consumer
• Smart prepaid meter

Electricity Act Amendments

This has been a long-pending reform for the sector. The government has come up with the proposed changes and amendments to the Electricity Act, 2003. There are numerous structural changes proposed which will guide the industry to the next phase in its development.

Some of the key changes proposed are as follows:

• Formation of an Electricity Contract Enforcement Authority, which shall decide upon matters regarding specific contracts related to purchasing or sale of power and thus, contractual sanctity, will be enforced by law.
• Formation of a National Renewable Energy Policy to promote the generation of electricity from renewable sources of energy and prescribe a minimum percentage of the purchase of electricity from renewable and hydro sources.
• Reinforcement of payment security mechanism to address legacy payment issues.
• Ensuring that tariffs reflect the cost of supply of electricity and reduction in cross-subsidies.
• Discoms can engage franchisees or sub-distribution licensees to distribute electricity on their behalf in a particular area within its area of supply.
• Deemed adoption of tariff in case the same is not done within a specific period.

These amendments are a paradigm shift for the industry and will work towards opening up many new opportunities for the power sector.

Tariff Policy Reforms

As part of the tariff policy reforms, which aim to reduce the burden on consumers due to discom inefficiencies, the government has laid out “standards of service.” It will penalize discoms for non-adherence to the same (e.g., penalties on discoms for load shedding). It has also identified that there will be a progressive reduction in cross-subsidies and direct benefit transfer for subsidies to the end consumer. The tariff policy again encourages timely payment to the gencos.

Some of the key objectives of the Policy:
• DISCOM inefficiencies not to burden consumers
• Standards of Service and associated penalties for DISCOMs
• DISCOMs to ensure adequate power; load-shedding to be penalized
• Progressive reduction in cross subsidies
• Time bound grant of open access
• Generation and transmission project developers to be selected competitively
• Timely payment of Gencos
• DBT for subsidy


Privatization

The government has also taken a significant step toward privatizing the power sector by announcing the privatization of discoms in Union territories. This is expected to lead to better service to consumers and improvement in operational and financial efficiency in Distribution while simultaneously providing a model for emulation by other Utilities across the country.


Policy Reforms to fast track investment

• Project development cell in each ministry to prepare investible projects, coordinate with investors and central / state governments.
• Incentive schemes for promotion of new champion sectors will be launched in sectors such as solar PV, manufacturing, advances cell battery storage etc.

Key Insights

Impact on Utilities:

• Privatization of power utilities in union territories which will serve as a model for utilities in other parts of the country.
• Improved financial and operational efficiencies in power distribution once privatized.
• The relief announced by the FM and will be directed to clear the dues of the Gencos.
• All payments owed due to non-payment of cross-subsidies will be paid using this liquidity. 
• DISCOMs will have to stay competitive to be able to access funds through PFC/REC, and they will also have to open Letters of Credit to GENCOs to purchase power. This is a way to make the DISCOMs and the power sector viable. Load-shedding will attract penalties.

Impact on Developers:

• Timely payment to Gencos.
• Introduction of smart prepaid meters to speed payment process.
• Time bound grant for open access.
• Progressive reduction in cross subsidies.
• DBT for subsidies.
• For the period of lockdown, the Ministry of Power has asked its Central Public Sector Undertakings (CPSUs) to defer the fixed charges against the power not drawn, and after when the economy re-opens those fixed charges will be paid in three equal instalments without interest. This will be a huge relief to the industry.

Impact on Consumers:

• Discom inefficiencies will not burden consumers.
• Discom will be passing on rebate by Central government to consumers, therefore cheaper power.
• The industry that CPSUs those are in generating business have been instructed to give a discount of 20-25 per cent on the cost of the power drawn by the DISCOMS during this period as a virtue of which the cost of the power drawn will come down by 20-25 per cent.
• Direct benefit Transfer and smart prepaid meter to be strongly implemented so that consumers can buy what they want to consume. This is being done keeping in mind the lower economic strata.

 

 

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