Last month, six energy producing companies won rights to set up wind power projects in Gujarat and sell power to the State’s utility firm. In the auctions, where those who offer to sell electricity at the least prices are the winners, four companies quoted ?2.44 a unit of electricity, and two others quoted a paisa more.
Similarly, in the previous auctions, several wind and solar companies have come forward to sell electricity at prices well under ?3.
However, you and I are buying power at upwards of ?6; factories pay even more, even as high as ?12.
It should be a simple matter for the company that owns the factory to tell the wind energy company in Gujarat, “Hey, you are selling power at ?2.44; I’ll pay you (say) ?6, why don’t you sell it to me?” Simple, right?
Then, why isn’t it happening?
Electricity Act, 2003
The push to make such deals possible came in the form of the Electricity Act in 2003. The central idea of the Act, which is still hailed as a ‘landmark legislation’ for the power sector, was the creation of an open market for electricity, where anyone could produce power anywhere and sell it to anyone else at mutually agreed prices.
In developed countries, consumers can switch suppliers over the laptop. But in India, a decade and half after the legislative framework came into being, a free and open market for power, as it exists for instance, for telecom, is still elusive.
The reason is that State governments, through the electricity distribution companies (discoms) owned by them, are still a monopoly, and exhibit monopolistic tendencies — their instinct is to make their customers pay for their inefficiencies.
There again, only some customers pay, while the others have to be subsidised and what better strategy than to make the paying customers pay more to defray the costs of the subsidies?
In an open market, the customers who are thus made to pay more would go to other suppliers if they find them economical. But in a monopoly, the monopolist would not let the customer deal directly with the supplier.
While on paper, there is scope for a large consumer of power to directly purchase power from a supplier, by-passing over the State discom, in practice this has proved to be difficult because the owner of the discom, viz., the State government, has control over such direct transactions.
“State governments use the respective State Load Dispatch Centre (which routes the power) as the instrument of control,” observes Daljit Singh, visiting scholar at Brookings India, who studied the issue for a paper titled ‘Newer Challenges for Open Access’, in April 2017.
Mr. Singh counted at least 239 orders passed by the Central Electricity Regulatory Commission, the federal electricity regulator, pertaining to ‘denial of open access’. Pretty often, the load dispatch centre was not sport.
State governments have often seized upon a certain provision (Section 11) in the Electricity Act, which allows them to force a power producer in that State not to supply outside the borders. The provision was meant for use in rare circumstances of emergency-like power shortage, but many States (Tamil Nadu, Odisha, Andhra Pradesh and Rajasthan, for example) have taken liberties with the interpretation.
Perhaps the clearest case of States putting the kibosh on free market is that of the ‘cross-subsidy surcharge’ (CSS). This is a surcharge that a discom levies on a customer for defraying costs of free or subsidised power to some sections of the society. Ideally, the costs of such subsidies should come from the State government’s own funds, but other customers are made to pay for it.
‘Subsidy must decrease’
The Electricity Act allows CSS, but the idea clearly was that the charge “shall be progressively reduced and eliminated”.
Instead, the CSS is only increasing. Assam, for example, saw CSS rise from 54 paise in 2016-17 to ?1.31 in 2017-18; Bihar 79 paise to ?1.79 and A.P. ?1.61 to ?1.65.
A ‘consultation paper’ on open access produced by the Ministry of Power in August last year sums up the position of the State government, seeking a rise in CSS. This is happening even when there is recognition that CSS is not quite the way to provide free or subsidised power to some sections of society — incidentally, some of whom, such as rich farmers, do not at all deserve the freebie.
The National Tariff Policy of 2016 is clear on that point. In Section 8.3, it says “direct subsidy is a better way to support the poorer categories of consumers than the mechanism of cross subsidising the tariff across the board.”
Add to this the ‘additional surcharge’ which is meant to compensate discoms for the fixed cost of their long-term contracted capacity, which is stranded as a result of consumers moving to Open Access (OA). For this, the discoms have to “conclusively demonstrate” that the assets are stranded due to consumers moving out, but often this is not done. In some States, additional surcharge has is as high as ?1.60.
These charges, collectively known as ‘open access charges’ have made a free market economically unviable. In several of its presentations, the Indian Energy Exchange, which is one of the two energy exchanges in the country, speaks of “open access charges being set high in order to restrict open access.” “With the rise of renewables, increased market dynamics and tighter grid operation rules, utilities (discoms) have started restricting or tightening rules around open access,” says Vishal Pandya, an energy markets experts and co-founder and director, REConnect, a consultancy.
For their part, the discoms have their own defence for why they frown at open access. Customers leaving them has adverse financial implications, at a time when they are hard up on cash. On the flip side, whether they do enough to improve their efficiencies and keep their house in order, is moot.
There are structural issues in improving discom efficiencies. A case in point is the instance in Karnataka, where the unions stopped substation automation because it would render staff surplus, requiring them to be transferred.
’Centre-State mismatch’
At the heart of the the absence of a free market for electricity is the mismatch of perception of the central and State governments. While the Centre wants a vibrant, 24-by-7 market, the States are more concerned about their immediate finances and electoral issues.
“Development of a shared perspective or vision for the sector by the Centre and the States is highly desirable,” says Mr. Singh. “However, that would be difficult to achieve in the current political climate.”
On top of all this is the proposed New Electricity Act which proposes to separate “carrier and content”, meaning the transmission lines will be like tolled highways for use by anybody, while the power itself could be supplied by anybody, so that the consumer will have a choice to switch seamlessly between suppliers. The draft of the legislation is gathering dust in the Parliament.