Why in news?
The Electricity (Amendment) Bill is expected to come up for passage by Parliament in the Winter Session.
What is the Bill about?
- The Bill proposes changes to the 2003 Electricity Act.
- The changes are intended to increase reliability and reduce risk in the power sector.
- In particular, the problem of failing on power purchase agreements (PPAs) is being taken up.
What does it address?
- PPA is a contract between the one who generates electricity and one which is looking to purchase it.
- PPAs are sometimes broken or renegotiated by distribution companies (discoms).
- This has led to changes in the cash flow of power plants, rendering them unprofitable.
- In some cases, this has led to investments in generation turning into non-performing assets.
- This is, in turn, contributing to the ongoing bad loans crisis in public sector banks.
What are the key changes made?
- The draft amendments suggest penalties for failing to honour PPAs.
- It prescribes up to Rs 10 million a day, and the suspension or even cancellation of a licence.
- It is also proposed that cross subsidisation of power be phased out.
- Cross-subsidisation refers to discoms charging higher prices from certain users to make up for under-charging others.
- E.g. cross subsidies of household consumers by industrial purchasers of power
What is the rationale?
- In India, consumers are not often charged the amount that their power actually costs.
- Given this, the interventions in favour of generation or distribution companies always end up at greater cost down the line.
- Even the UDAY scheme is no exception to this rule.
- But addressing this is more a political call and hence the problems in the power sector are primarily political.
- So making pricing system fairer, more rational, and more predictable is crucial to develop a sustainable power sector.
- Essentially, the idea behind the Bill is that ending cross subsidies would rationalise power consumption and pricing.
- It will force an increase in the tariffs that are charged to lower-end households and to farmers.
What lies ahead?
- Certainly, there is no substitute for the political resolve to rationalise tariffs.
- Yet there are other alternatives for medium-term stability which though depend on sustainable pricing in the long run.
- The Rural Electrification Corporation that depends on lending to the power sector is not so much at risk.
- This is because they benefit from an escrow structure in which they are assured of access to their borrowers’ revenue.
- Something similar might have to be worked out by the Reserve Bank of India for the generation companies.
- This is essential if the power sector is to revive in spite of the discoms’ ill health.
Source: Business Standard
