Open Access

Recent Regulations/Amendments in Indian Power Sector

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A transparent Regulatory Framework is required for making the sector viable for its growth as well as invoking investor confidence in the sector. To meet the growing expectations of the manufacturers, investors and consumers, CERC (Central Electricity Regulatory Commission) has amended key regulations and issued orders that can lead to the betterment of the power sector. Some of the amendments done by the regulator can be summarized as follows:

Compensatory tariffs Approved: In Feb’14 CERC allowed compensatory tariff hikes for the two major power sector players namely Tata Power’s Mundra UMPP and Adani’s 4620 MW Coal Based Power Plant located in Gujarat.
( http://www.cercind.gov.in/2013/Reports/COMREP_CGPL.pdf) In lieu of the change in regulations of Indonesian Mining (2011)http://www.indonesiamininglaw.com/tag/iup/, the two players objected of suffering high landed cost of coal and thereby leading to loss on the exchequer’s pocket. Since the tariff revision is effective from April 1, 2013, CERC has directed the concerned DISCOMs to reimburse Rs 3.29 billion to Tata Power and Rs 3.89 billion. Some of the state DISCOMs (Rajasthan,Punjab,Maharashtra) have challenged CERC’s order before the Appellate Tribunal for Electricity (APTEL).Reliance also filed the petition concerning its Tilaiya UMPP in Madhya Pradesh. Adani has been allocated Lohara Coal Block for its project which covered around 75% of the coal requirement for the project but that came under the scanner of Ministry of Environment and Forest thereby leading Adani to hunt for alternate sources for fuel. This ultimately led to escalation of its levelised tariff as defined in the PPA.

Tariff Regulations : In feb’14 CERC came with the new Tariff regulations 2014-19,http://www.cercind.gov.in/2014/regulation/reg21.pdf which put forward many changes leading to strong repulsion from the major players in the market:
o Incentives for players have been linked to Plant Load Factor(PLF) as compared to Plant availability factor(PAF) as described in the earlier regulations.
o The base RoE(The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested) has been fixed on 15.5 % but FGMO,www.srldc.org/var/ftp/FGMO/FGM%20IN%20SR.ppt has been critically linked with it leading to tough times for Generators.
o Provision of PAT(Perform, Achieve and Trade)http://www.performachievetrade.com/ has also been included in the guidelines issues.
o Heat rate norms have been made more stringent for existing as well as new power plants. The factor has been changed to 1.045 from 1.063 (Kcal/KwH)
o The normative annual PAF has been reduced to 83 % from 85 %.
Responding to CERC Tariff Regulations, NTPC moved to courts against CERC mentioning that the PLF based incentive could hit their profitability.

IEGC Amendment: In Jan’14, CERC issued an amendment to IEGC regulations 2010, further tightening the frequency band to 49.9 Hz – 50.05 Hz from the earlier range of 49.7 Hz -50.2 Hz.http://www.cercind.gov.in/2014/regulation/noti18.pdf In addition to sandwiching the frequency range, Grid integrations has also been pushed further with the inter-connectivity of Raichur-Sholapur transmission line. In context with the change in IEGC regulations, Penalty charges related to deviation mechanism of Unscheduled Interchange (UI) has also been revised.

Open Access Regulations: Apart from the changes concerning LTOA (Long Tern Open Access) and MTOA (Medium Term Open Access) in Interstate Transmission Regulations, 2008 , there have been proposed amendments regarding the connectivity of renewable energy projects of 5 MW – 50 MW capacity with the interactive grid.

Power System Development Fund,http://powermin.nic.in/whats_new/pdf/Operationalization_of_Power_System_Development_Fund_Jan2014.pdf : CERC issues PSDF regulations 2014 replacing the earlier PSDF regulations 2010 and intents to push the investments in the transmission sector. The fund will be maintained through a collection of Congestion charges, deviation settlement charges and reactive energy charges. Primarily the fund will be used for capacity building in the transmission sector including installation of shunt capacitors, series compensators, VAR compensators etc.

PoC Tariff Regulations : In Feb’14 CERC issued a draft amendment regarding the sharing of Inter-state transmission charges and losses regulations, which incorporated the PoC methodology of determining the cost and losses to be shared by the users of the ISTS(Inter State Transmission System)

RE Tariff regulations: In Mar’14 the first amendment to the Terms and Conditions for Tariff determination from RE sources regulations were approved by CERC,http://www.cercind.gov.in/2014/whatsnew/SO354.pdf. The amendment aimed to address various issues faced by biomass plants.

NPEX Plan Shelved : In April’14, CERC passed an order withdrawing its permission for setting up the National Power Exchange (NPEX) http://www.pfcindia.com/Content/National_Power_Exchange_Limited.aspx .Promoters of the Exchange i.e NTPC,NHPC,PFC and TCS voluntarily applied for the closure of the exchange.

In the new future, further key orders are expected that will ultimately (perhaps) helps the revival of the sector.

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A Snapshot of Power Trading in India

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Power Trading has come a long way since trading has been recognized as a distinct entity in Electricity Act, 2003.

What is Power Trading?
Basically, Power trading is an activity of buying and selling of power at Power Exchanges, which are approved by Central Electricity Regulatory Commission (CERC)and moreover standardized Products are offered to buy and sell power. Thus Power is traded like a commodity at Power Exchanges like IEX (India Energy Exchange), PXIL(Power Exchange India Ltd.) Likewise shares trading are done on SENSEX etc & commodity trading at NCDEX etc.

What is Open Access?
Open Access allows large users of power having a connected load of 1 Megawatt (1MW) to buy cheaper power from the market.

Acc. To EA 2003 Sec 2(47) : “open access” means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission;

Types of Open Access:
• Inter State Open Access: When buying and selling entity belong to different states.
• Intra State Open Access : When buying and selling entity belong to same state.
Types of Power Trading?

Broadly Power trading can be sub classified on the basis of duration of contracts and energy trading platform.

Types of Exchange
Types of Exchange

What are the statutory requirements for Power Trading?
Some of statutory requirements notified by CERC are:
• Demand should be atleast 1000KVAH
• Connected to atleast 11KV line
• Should have 0.2S class CT/PT
• Should have 0.2S class ABT meter
• Consent from DISCOMs/SLDC to trade power.

List of Power Trading Licensee?

Acc. to CERC’s latest MMC report(08/11/2013),there are 65 Power trading licensees in power market, some of active ones are:
• Tata Power Trading Company Ltd.
• Jaypee Group
• Adani Enterprises Ltd.
• PTC India Ltd.
• Reliance Energy Trading Ltd.
• JSW Power Trading Corp.
• NVVN
• NETS (Lanco)
• MMTC Ltd.
• DLF Power Ltd.
• Jindal Steel and power Ltd.
• GMR Trading Ltd.

What are various Bid areas on Energy Exchange?

Bid Areas

What is HHI & its relevance in power market?

HHI stands for Herfindahl-Hirschman Index
A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000.In case of p
For the year 2012-13, HHI was 0.1437

Some Facts about Power Trading (Ref from CERC’s MMC Report)
• In 2011-12, Weighted Average price of electricity traded through Power Exchanges Rs 3.67 / unit and through trading licensees Rs 4.33 /unit.
• During the year 2012-13, 89% of the volume of electricity in IEX and 94% of the volume of electricity in PXIL was transacted at less than 6/kWh. 70% of the volume in IEX and 73% of the volume in PXIL was transacted at less than 4/kWh
• During 2012-13, only 179 million units of electricity was exclusively bought during peak hours under bilateral transactions from traders (exclusive of banking). This was 0.79% of the total electricity bought under bilateral transaction from traders (excluding banking). A major part of this, 93.24%, was bought on round the clock (RTC) basis, followed by 5.97% exclusively bought in periods other than peak periods. The per unit price of electricity procured on round the clock (RTC) basis was the cheapest (4.29/kWh), followed by electricity exclusively procured during non-peak hours (4.66/kWh) and electricity exclusively procured during peak hours (4.97/kWh).

Trend of Electricity

Open Access & Cross Subsidy

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The Electricity Act, 2003 (“the Electricity Act”) aims to put in place a regime where electricity generators and consumers could choose the entity to or from whom they want to sell or purchase power. To achieve this, the Electricity Act provides for non-discriminatory open access, which means that a generator or a consumer can require transmission or distribution licensees, that is, entities which own and operate the transmission and distribution systems, to allow them to transfer power through these systems to the intended recipient. The distribution licensee cannot deny such access except for technical reasons. Section 42(2) of the Electricity Act provides that the state regulatory commissions should allow open access subject to the payment of CS Surcharge. The section also states that CS Surcharge shall be progressively reduced and eliminated.

What is Cross Subsidy Surcharge?

Historically, Indian industrial and commercial consumers have been paying a higher tariff for the electricity they consume. This is in order to ensure that domestic and agricultural consumers receive power at a more affordable rate. This additional amount, known as cross-subsidy has continued under the Electricity Act, since regulators are allowed to set differential tariff based on the consumer category.

When an industrial or commercial consumer decides to purchase power from an independent generator and not from the distribution licensee in that area, that distribution licensee loses the cross subsidy amount. The CS Surcharge is imposed on the consumer to ensure that the distribution licensee does not pass on this additional amount to the domestic and agricultural consumers, which can result in a steep rise in the cost of power. The Electricity Act, however, recognizes that the ultimate goal is to eliminate cross-subsidy as concept, so that all consumers pay the same amount for electricity.

CS Surcharge has been, for the last several years, the single biggest roadblock to an open access regime, and the development of a market where a consumer can choose to purchase power from a generator of its choice. Most states have been charging a high level of cross subsidy (often in excess of Rs 1 per unit) which means that it does not make financial sense for a private operator to try and purchase power from a generator other than the distribution licensee, because after adding the cross-subsidy surcharge and other charges, he ends up paying a higher amount. Prohibitive cross subsidy surcharges in most states have meant that the option to purchase power from others has remained only on paper.

Measures to curb Cross Subsidy Surcharge

The Ministry of Power, Government of India (“the MoP”) has also been worried about the effect that the CS Surcharge has been having on the growth of the electricity market. The National Electricity Policy states that the imposition of CS Surcharge should not be onerous.

The National Tariff Policy, 2005 also states that the computation of CS Surcharge should be done in a manner that while compensating the distribution licensee, it does not constrain the introduction of competition through open access. The policy recognizes that “a consumer would obtain open access only if the payment of all the charges leads to a benefit for them”.

In case a consumer moves into open access, the CS Surcharge shall be calculated as the difference between (i) the tariff applicable to the relevant category of consumers; and (ii) the cost borne by the distribution licensee to supply electricity to consumers of the applicable class. The cost of supply is by the avoided cost method. This means that since the distribution licensee can be in a position to discontinue purchase of power at the higher margin or the merit order (a list of different prices at which the distribution licensee purchases power from various generators), the cost of supply will be computed as the aggregate of (a) the weighted average of the power purchase costs of the top five per cent of the merit order and (b) the distribution charges determined by the regulatory commission.

Open Access and its denial

Even though open access has been allowed in principle, the implementation has been dismal, since the generator requires a no-objection certificate from the State Load Despatch Centre (“the SLDC”). Under the Electricity Act, the SLDC is the statutory body responsible for the technical integrity and the functioning of the grid. However, because of the close relationship between the SLDC and the distribution licensees (the SLDCs are usually the state transmission licensee and were all initially a part of the now unbundled State Electricity Boards), SLDCs would often sit on open access applications, denying the generator the right to sell the power to third parties. In fact, the Central Electricity Regulatory Commission (“the CERC”) has had to amend its inter-state open access regulations to provide that in case the SLDC does not respond on an open access application within a specified period, the approval shall deemed to have been given.

The matter came to a head, when in 2009, Karnataka (and several other states) passed orders invoking emergency powers under Section 11 of the Electricity Act (which states that in extraordinary circumstances a generating company has to operate in accordance with the directions of the State Government) citing the power shortage in the state and prohibiting all independent power producers (“IPP”s) from selling power outside the state and denying all applications for open access. The IPPs challenged the imposition stating that the conditions under Section11 had not been satisfied. The High Court rejected the appeal and upheld the Section 11 orders. The matters are pending before the Supreme Court of India.

The CERC has always been opposed to the imposition of the Section 11 orders, claiming that the whole scheme of open access is jeopardised by these actions and has in fact filed a special leave petition against the decision of the Karnataka High Court. The CERC has even written to the MoP requesting the Government of India to challenge the order before the Supreme Court. Whilst the Government of India has not done so, the MoP has written to the Chief Ministers of various states stating that a ban on open access is not permitted under Section 11. The MoP has also been considering the amendment the Electricity Act to allow IPPs to sell power to consumers using open access without the intervention of the State Government.

The benefits of Open Access

Maharashtra is one of the few states where the regulatory commission decided that the CS Surcharge should be nil. One of the major factors behind this has been the severe power deficiency in Maharashtra. The MERC has reasoned that since there is not adequate power in any case, the state will benefit from industrial consumers moving away from purchasing power from the state utilities, which can then be supplied to other consumers. Despite the cross-subsidy being nil in Maharashtra, MSEDCL has been regularly denying open access applications. The order comes as a great relief for the industry since they would now be able to source power from independent generators under the open access route.

Interference in the open access regime is always going to be counter-productive. The answer is not to ban or prevent open access but to make sure that distribution licensees operate efficiently, that less electricity is lost due to technical inefficiencies in the grid, and that widespread theft of electricity is curtailed. Implementing the projected growth in generation will also increase competition and prices will be naturally rationalised. Further, while reduction in CS Surcharge will result in higher electricity cost for domestic consumers, it will also result in indirect benefits. Since electricity costs form a large part of the cost of manufacturing goods, lower electricity input costs will be passed on to consumers in the form of lower prices of goods.

Open access is more than a statutory provision under the Electricity Act, it is a vital philosophical stand on which the regime under the Act is built. Hamstringing open access with short-term objectives will do more harm than good.