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Electricity reforms – Centre – State relations

Electricity reforms – Centre - State relations

UPSC CSE Mains Syllabus: GS-3- Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

Recently, the Centre has suggested two major policies to reform the energy distribution sector.  

Reforms suggested:

  1. 1.The reform of power tariff policy — announced as part of the stimulus package.
  3. 2.The recent comprehensive proposal to amend the Electricity Act 2003.


Discoms follow two-part tariff policy, mandated by the Ministry of Power in the 1990s at the behest of the World Bank.

Long term PPA:

  • As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA).
  • Under this theypaid a fixed cost to the power generator.
  • This is irrespective of whether the State draws the poweror not.

Overestimation of demand:

The PPAs signed were based on optimistic projection of power demand estimated by the Central Electricity Authority (CEA).

  • The 18th Electric Power Survey (EPS)overestimated peak electricity demand for 2019-2020 by 70 GW. The 19th EPS published in 2017, by 25 GW.
  • DISCOMs locked into long-term contractsend up providing perpetual fixed costs for power not drawn. 
  • For eg: NTPC Limited’s Kudgi (Karnataka) alone received Rs. 4,800 crore as idle fixed costs during 2018-19.

Factor of renewable energy:

  • SInce 2010, solar and wind power plants were declared as “must-run”.
  • This meant that DISCOMs absorb all renewable power, in abundant of mandatory renewable purchase obligations.
  • This entailed further idle fixed costs payable on account of two-part tariff PPAs.

Power demand peaks after sunset:

  • In the absence of viable storage, every megawatt of renewable power requires twice as much spinning reserves to provide energy.
  • DISCOMs, especially in the southern region, have had to integrate large volumes of infirm power,even as the demand growth envisaged in the 18th EPS failed to materialise.
  • In 2015 the Centre announced a target of 175 gigawatts of renewable power by 2022.
  • To achieve this Centre offered concessions to renewable energy developers. This might have aggravated the burden of DISCOMs.

The Electricity (Amendment) Bill, 2020:

  • The amendment proposes sub-franchisees– Under this the distribution licensees, can appoint another entity for distribution of electricity on its behalf, within its area of supply.
  • There are chances of private participationin this. Going by past privatisation experiments, private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction.
  • The amendment proposes even greater concessions to renewable power developers, with its cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.
  • It seeks to eliminate in one stroke, the cross-subsidies in retail power tariff. This means each consumer category would be charged what it costs to service that category. Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses. This means rural masses need to pay higher.
  • Cross subsidy has its pros and cons. However, State governments are already struggling with direct power subsidies may affect their finances.
  • State regulators will henceforth be appointed by a central selection committee. This is seen as affecting the Centre – State balance.
  • Establishment of a centralised Electricity Contract Enforcement Authoritywhose members and chairman will again be selected by the same selection committee referred above.
  • The power to adjudicate upon disputesrelating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority, ostensibly to protect and foster the sanctity of contracts.

The author of the article argues that,

All these measures will weaken the control of States over an industry supplying a basic human necessity such as electricity but also arm the Centre with a pincer-like weapon which could choke the distribution utilities/companies (DISCOM) and jeopardise the country’s energy security.

(However, from the exam point of view both the pros and cons of these measures need to be analysed before coming to a conclusion.)

Source:” The Hindu“.

Possible UPSC CSE Mains Question:

The recent electricity reforms announced by the Centre may alter the Centre State power balance. Analyse.  Also, discuss whether it will improve the position of the DISCOMS.