Evolution of Policies of Indian Power Sector

Indian Power Sector
Evolution of Indian Power Sector from a Cocoon of a monopolistic environment to a perfectly competitive environment.

The power sector of India has been evolving, seeing the dynamics of India, be its huge geographical area, its political volatility and the changing demographic classification of the population since pre-independence era. The Indian electricity sector has traveled from a small municipality in West Bengal to every house hold, be it urban or rural area of the Country. The journey has been facilitated and regulated by different Policies enacted by the different Governments from time to time.

The major Acts, which were enacted and has given a shape to the present Indian power sector are, Indian Electricity Act- 1910, Indian Electricity (Supply) Act- 1948, the Electricity Regulatory Commission Act- 1998 and Indian Electricity Act- 2003. Following are some of the basic features which acted as milestones of the above Acts being enacted to show us the evolution of Indian Power Sector.

Indian Electricity Act- 1910:-

This Act was enacted during the pre-independence era of India, when supply of Electricity was limited to some small municipalities and factories. The control of the electricity sector was vested on the respective state governments.  This act provided the basic legal framework for the development of Indian Electricity Industry and envisaged the participation of private players in the field of Generation and distribution of electricity. Some of the milestones of the Act are as follows:

  • State Government can award Licenses to any person after its consultation with concerned State Electricity Board for supply of Power in a specific area. An area can have multiple licensees for the same purpose. This provided a road ahead for competition in the supply of power by private licensees.
  • The Licensee was permitted to lay down the basic network for the supply of electricity with the approval of the concerned State Governments.
  • Guidelines were provided for the licensees to supply electricity in their area as well as outside their area.
  • Provisions were made where a consumer can chose its supplier of electricity.
  • Provision for the formation of Central and State Advisory Boards, Appointment of Electrical Inspectors.
  • Provision for the formation of a Central Electricity Board to intake rules, for the whole or any part of the territories to regulate the generation, transmission, supply and use of energy.
  • Provision for penalizing against any criminal offences like theft of energy, supply of electricity by non-licensees etc.
  • Charges of electricity to be supplied by the Licensees had to be approved by the concerned State Governments.

Indian Electricity (Supply) Act- 1948:-

After the world war-II and Post-independence of India  it was necessary for reconstruction of the power sector in India. It was getting necessary to extend the horizon of Indian Electricity Sector from a small municipality to all urban, semi- urban and rural areas of the country. For making it possible, it was envisaged to divide the country into different regions and then controlling the regions through a central agency. This would give rise to a contiguous system and develop “Grid System” to control and monitor the electricity sector. Semi-autonomous bodies like State electricity boards were envisaged to be formed to administer the “Grid System”. So, Indian Electricity (Supply) Act- 1948 dealt mainly with the formation, powers and functions of State Electricity Boards, Central Electricity Authority and Generating companies towards the development of a Grid System. Some of the milestones of the Act are:

  • Provision for the Central Government for the constitution of Central Electricity Authority to develop a sound adequate and uniform national power policy; formulate short-term and perspective plans for power development and co-ordinate the activities of the planning agencies in relation to the control and utilisation of national power resources and act as a facilitator to the state governments, electricity boards and generating companies as an arbitrator, advisor for the efficient operation and efficient utilization of the power sector.
  • Provision for the formation of State Electricity Boards to forecast demand and proper management of resources towards generation, transmission and distribution of power in a most efficient way to the existing licensees as well as to the areas where power was not supplied.
  • The State Electricity Boards may time to time formulate such schemes to establish electricity infrastructure in the respective areas under the supervision of Central Electricity Authority.

Electricity Regulatory Commission Act- 1998:-

After the economic liberalization brought about in India during the year 1991, the demand for power grew rapidly throughout the country. The Electricity (Supply) Act- 1948 laid the foundation of “Grid System” in the country. To control the grid system, State Electricity Boards were created under the supervision of Central Electricity Authority. The State Electricity Boards were controlled by their respective State Governments, which gave rise to irrational retail tariffs, high level of cross-subsidies, poor planning and operation, inadequate capacity addition, the negligence of interest of the consumer, the limited involvement of private sector skills and resources. So it was highly necessary to have neutral bodies in both state and central level for restructuring of power sector. After proper deliberation with the State Governments, The Government of India adopted the Common Minimum National Action Plan for Power (CMNPP). The CMNPP proposed to create Central Electricity Regulatory Commission and State Electricity Regulatory Commissions to bring in policies to restructure the power sector. To implement the above proposal, the Electricity Regulatory Commission Bill, 1997 was introduced in the Lok Sabha and was enacted as Electricity Regulatory Commission Bill, 1998. Some of the milestones of the act are as follows:

  • Provision for the Central Government to establish Central Electricity Regulatory Commission to regulate:
    • Tariff of generating companies both owned by central government, owned other than the central government and generating companies selling electricity to more than one states.
    • Regulate and fix tariff of interstate transmission utilities.
    • To formulate policies and advise the central government to promote competition, efficiency and economy in the activities of the electricity industry.
    • Formulation of tariff policy for fair tariff to the consumers and efficient mobilization of adequate resources of the power sector.
    • To arbitrate or adjudicate upon disputes involving Generating Companies controlled by central government or transmission utilities involved in interstate transmission of Electricity.
  • Provision for the State Governments to establish State electricity Regulatory Commission to:
    • Investment and advice the state government for generation, transmission, distribution and supply of electricity to the entities operating within the state.
    • Terms and conditions of the licenses and issue licenses for transmission, bulk supply, distribution or supply of electricity.
    • Require licensees to formulate perspective plans and schemes in co-ordination with others for the promotion of generation, transmission, distribution, supply and utilization of electricity, quality of service and to devise proper power purchase and procurement process
    • Set standards for the electricity industry, promote competitiveness, lay down and enforce safety standards, formulation of state power policy, record information regarding generation, transmission and distribution of power, adjudicate in the disputes, coordinate with environmental regulatory agencies within the state.
  • Provision for the central and state commissions to formulate tariff to encourage efficiency, economical use of the resources, good performance, optimum investments with safeguarding the interest of the consumers.

Electricity Act- 2003:-

Indian Electricity Act-1910, Electricity (Supply) Act- 1948 and Electricity Regulatory Commission Act- 1998 laid the foundation for the development of a legal framework, Grid System, private partition and formation of independent bodies for policy formulation for the electricity sector of the country respectively. However, power supply to every household of the country still remained a challenge. It was necessary to enact a law which would be conducive to development of electricity industry, promoting competition by encouraging private participation, safeguarding the interest of different classes of consumers, rationalization of electricity tariff, formulation of transparent policies on subsidies thus minimizing cross-subsidies, cooperate with environmental laws and efficient utilization of resources.  To address these issues, Electricity (Amendment) Bill, 2003 was introduced in the parliament. After deliberation for almost three years, Electricity Act was enforced in the year 2003. The salient features of the Act, which cleared the path for a vast power sector reform, are as follows:

  • The Central Government would prepare National Electricity Policy, National Tariff policy, in consultation with the State Governments and the Central Electricity Authority for development of the power system based on optimal utilization of resources such as coal, natural gas, nuclear substances or materials, hydro and renewable sources of energy. The Central Electricity Authority to prepare National Electricity Plan every five years in accordance with National Electricity Policy.
  • De-licensing of Generation of Electricity, however generation of Electricity from Hydro Power Stations require the concurrence of Central Electricity Authority. Provision for Captive generating plant with right to open access for transmitting electricity from the generating station to the destination of use.
  • License for transmission, distribution and trading of Electricity, however license is not required for
    • Distribution licensee for trading in its area of distribution;
    • Government doesn’t require license for transmission, distribution or trading;
    • Generation and distribution of electricity in rural area.
  • Construction of Regional and State Load Despatch Centers for optimum scheduling and dispatch of electricity within the region or state in accordance to the contracts entered into with the licensees or the generating companies operating in the region or state. Provision for the Central Government to establish a National Load Despatch Centre for optimum scheduling and dispatch of electricity among the regions.
  • Provision for the formation of Central and State transmission utility for inter-state and intra- state transmission of electricity. The CTU and STUs were barred from the business of trading of Electricity.
  • The state commission would introduce open access in distribution in phases. Open access would be allowed before the elimination of cross- subsidy on the payment of a surcharge in addition to the wheeling charges. The state commission would progressively reduce the surcharge and cross-subsidy.
  • The appropriate Commission would determine tariff of generating companies, transmission licensees, and distribution licensees in commercial principle keeping in mind to encourage competition, efficiency, good performance, optimum investment, reduction of cross-subsidies and most importantly safeguard the interest of the customers.
  • The appropriate Commission would formulate multi-year tariff principles, formulate tariff for co-generation and generation from Renewable energy sources such as to promote competition and private participation.
  • The Central Electricity Authority (CEA) as established vide the Electricity (Supply) Act- 1948, will act more as a technical advisory institution rather than a regulatory authority. The main functions of the CEA would be to advice the Central Government to prepare National Electricity Policy, prepare National Electricity Plan, set technical standards for power plants and transmission lines and connectivity to grid, specify grid standards, specification of meters, train the people engaged in the electricity sector, collect and record data concerning the generation, transmission and distribution of electricity.
  • The appropriate regulatory commissions as established vide Electricity Regulatory Commission Act- 1998 would act as independent bodies and would advise the Central and State Governments as the case may be for the formulation of National Electricity Policy; tariff of generating stations, inter-state and intra-state licensees, distribution licensees; issue of licenses for transmission, distribution and trading of electricity; specify grid code for transmission and distribution; fix trading margin in inter-state and intra-state trading of electricity.
  • Provision for the establishment for Appellate Tribunal for Electricity to hear pleas against the orders of the adjudicating officer or the Appropriate Commission.

The above brief summary showcasing various acts being enacted from time to time showing how the Indian power sector evolved from a cocoon of a monopolistic environment to a perfectly competitive environment. The regulation of the power sector was transferred from the confinement of the Centre and State Governments to independent bodies. The Electricity Act- 1910 laid the foundation of a legal framework, the Electricity (Supply) Act- 1948 paved the way for a contiguous Grid System, the Electricity Regulatory Commission Act- 1998 created independent bodies to formulate policies to make the Indian Power Sector more efficient and finally the Electricity Act- 2003 converted the Indian Power sector to a market with potential for investment by private parties giving rise to competition, efficiency in operation along with safeguard of consumers.

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