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Powering the Indian Energy Sector: Why the new Electricity (Amendment) Bill is necessary but not sufficient to revive India’s broken energy economics

By Sidharth Wagle

Abstract

The provision of electricity, as a good, has two main components: its generation and its distribution. The Electricity (Amendment) Bill, 2022 focuses on reforming the distribution component of the Indian energy sector to remedy its long-standing malaise. This article analyzes the Bill and its potential impacts, specifically defending its necessity as an economic and public policy reform.

Introduction 

Energy generation in India occurs at a power plant, often public. The electricity is then bought by a utility company (often state-owned) and is distributed to consumers through existing electricity infrastructure. India has a power surplus and one of the finest electricity distribution grids internationally. Why, then, do a significant proportion of consumers receive unreliable, if at all available, electricity? Although this question has a nuanced answer, the simple one is this: the dictums of government policy involved in the regulation of the energy sector throttle competition and encourage fiscally unsustainable practices. These policies have saddled State-owned distribution companies (discoms) with roughly 1 lakh crore rupees in debt– a crushing vice on an energy sector whose major players are all State-owned. Additionally, the aggregate technical and commercial losses (AT&C losses), essentially a measure of the technological and billing effectiveness of a discom, are very high at 18-19% in India, whereas the figure is limited to 6% in developed countries like the United States– revealing a clear need for reform to increase efficiency and innovation. The Bill aims to revise the policies governing electricity management in India to resolve the aforementioned issues. 

For the sake of brevity, this article only analyzes those amendments which have proved particularly contentious. The two amendments that are analyzed are: (1) the requirement for open access to distribution networks, and (2) the requirement for purchase/payment security for allocation of electricity by the National Load Dispatch Centre. This article briefly introduces each amendment, explores its criticisms, and rebuts them as and when appropriate. 

Open Access

The Bill proposes the amendment of section 42 of the Electricity Amendment Act of 2003 (the current electricity regulatory framework) such that discoms are afforded “non-discriminatory open access” to all distribution infrastructure within the area they are licensed to operate in. Currently, discoms can only operate in an area if they have the ability to construct a separate distribution infrastructure, which is a capital and time-intensive requirement. This acts as a barrier to entry which limits the access of new firms to the market. The amendment would immediately increase competition by eliminating this high-cost barrier to entry into the distribution market, thus increasing the mobility of discoms to enter and exit the market by reducing sunk costs. In effect, this would eliminate the inefficiencies in the provision of electricity by facilitating the exit of loss-making companies and entry of more efficient competitors respectively. This increase in efficiency is not merely theoretical. Delhi underwent a similar privatization of the energy sector in 2002, which dropped its AT&C losses from 53% to 8%, signaling a massive increase in the efficiency of its discoms, and consequently in the access to electricity of its residents. 

NK Premachandran, a Minister of Parliament from Kollam (Kerala), during his remarks on the Bill, elucidated the first common criticism against this amendment. Premachandran argued that this amendment would permit private companies to effectively piggyback off public infrastructure, allowing private profit at the cost of the taxpayer. However, this is a fallacious argument due to a mischaracterization of public versus private interest. The role of public investment is to facilitate the provision of public goods, i.e. goods which would be normally underprovided by the market, such as infrastructure. In building electricity distribution systems, the States have already fulfilled this objective. The further near-monopoly of States on the distribution of electricity has so far resulted in bloated and debt-ridden public utility companies providing poor quality electricity services to consumers. Hence, the amendment does not allow the “indiscriminate privatization” of public infrastructure, but instead allows its more effective utilization as seen in Delhi, and as such serves the needs of the taxpayer better than the current situation. 

The second criticism originates from the People’s Commission on Public Sector and Services, who, in a letter, argued that the Bill would have an “adverse impact on utility employees”. This is indisputable. The competition introduced by the amendment will invariably force public discoms to trim unnecessary and redundant posts in order to more effectively compete with private companies, along with further cost-cutting measures. However, open access to distribution systems will create an increased demand for employment from new private entrants, meaning the overall decrease in employment will be limited. Secondly, increased competition in the distribution sector will lead to lower costs for enterprises (who currently pay the highest bracket of electricity tariffs), leading to increased employment and economic growth, potentially offsetting the loss of public sector jobs with the creation of more prosperous private sector jobs. In other words, the overall effect would be a redistribution of employment from the public sector to the private sector rather than a decrease. 

Purchase Security

The Bill puts forth an amendment to section 26 of the original Act such that the National Load Dispatch Centre- the body which controls allocation of electricity to State distribution networks- will not provide electricity until proof of  “adequate security of payment” is provided by the States to the Central Government. This requirement introduces an incentive for State-owned discoms to remain fiscally sustainable. 

So far public discoms have ostensibly attempted to exploit price subsidy mechanisms for votes, charging tariffs as low as below cost price for some consumers. At first glance, the provision of cheap electricity to vulnerable sections seems desirable. In line with this line of reasoning, the aforementioned letter has also argued that the amendment will “impose a heavy cost burden on the smaller subsidized consumers”. This view, however, is fallible. The market-distorting subsidies handed out by public discoms leads to their costs far outpacing their revenues, forcing them to borrow to finance this deficit. This debt is paid for by the taxpayer, meaning that although consumers are not explicitly charged for the service, they inevitably end up shouldering the majority of the cost burden, which is further augmented by interest payments. Additionally, this fiscal constraint on public discoms limits their ability for further capital investment, such as upgrading their technologies and expanding their grids. With the introduction of financial accountability, State-owned discoms will be forced to maintain sustainable balance sheets, hence lowering the tax burden and increasing the potential for long-term investment. 

Necessary Considerations

The above defense of the Electricity (Amendment) Bill, however, overlooks a few points. In regards to the redistribution of jobs explained in section II, the equity (or rather inequity) of this redistribution must be monitored carefully, as public employment is more likely to be inclusive of economically weaker sections of society, and as such increased private employment could lead to further income inequality. Secondly, the Bill not only increases the control of the Central Government over the state discoms by increasing the Central Electricity Regulatory Commission’s (CERC) regulatory power, but also provides little agency for States to create their own region-specific frameworks. This, as appropriately pointed out in the letter by the People’s Commission on Public Sector and Services, threatens the federal structure of India by overextending the powers of the Central Government to rein in the States. Finally, this essay has evaluated the Bill in a vacuum- examining its potential costs and benefits. However, it would be irresponsible to ignore the context in which it was introduced. The Bill was brought to the Lok Sabha without consultation of the affected stakeholders, including farmers and the States- a fundamental breach of the duties of a democratic government, whose policies must be formulated through rigorous public debate and inclusive consideration of stakeholders. 

Conclusion 

Although the Electricity Amendment Bill (2022) has flaws that must be addressed, it represents a necessary reform of the regulatory framework concerning the Indian energy sector. The Bill also enforces renewable energy requirements on discoms, mandates the creation of minimum tariff floors to prevent excessively low prices, and proposes the payment of wheeling charges to owners of a distribution system if it is used by other companies to incentivize the creation of new electricity infrastructure. These amendments, although not without their critics, are desirable, and as such, this article has not covered them in much detail. 

It remains to be seen, however, if these changes will suffice to rejuvenate the sector. Indeed, the Bill seems to simply be replacing State intervention with Central intervention, potentially sustaining the overregulation of energy markets, leading to little improvement. The Central Government, in tandem with the various stakeholders, then, should consider further market reforms to allow the electricity sector to regain competition and recover from its current bloated and inefficient state. 

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