Electricity (Amendment) Bill - Reviving the Power Sector

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