Power Reforms: Policy and regulatory round-up

Policy and regulatory round-up

Over the past one year, the Ministry of Power (MoP) has been making efforts towards achieving self reliance with respect to the country’s energy needs and meeting its climate change commitments. It is also pushing distribution reforms to improve the sector’s viability through its Ujwal Discom Assurance Yojana (UDAY) and the Power for All scheme. This, in turn, is expected to improve power demand, which, of late, has not kept pace with the increase in supply. There is also greater focus on increasing transparency and fair competition through the implementation of electronic competitive bidding systems across the sector.

The Central Electricity Regulatory Commission (CERC) has been playing a proactive role in defining the regulatory framework for the sector in accordance with emerging needs – be it introducing concepts like the new transmission planning methodology or floating staff papers on new areas such as energy storage and national open access registry or amending the existing regulations to keep them relevant.

Key policy measures

Revised Mega Power Policy: In March 2017, the government amended the Mega Power Policy, 2009 for 25 provisional mega power projects aggregating about 32 GW. The time period for furnishing the final mega certificates to the tax authorities to avail of the benefits for importing equipment duty-free has been extended to 120 months (instead of the earlier 60 months) from the date of import. The policy was due to end on March 31, 2017, but has now been extended up to 2022. These projects have to enter into long-term power purchase agreements (PPAs) within this extended period to get the benefits. Of the eligible projects, only 11 GW has been commissioned and the remaining is stranded due to a lack of PPAs. This amendment is expected to provide a fresh lease of life to independent power producers (IPPs) for the remaining projects, aggregating 21 GW.

Distribution reforms: During the second half of 2016-17, 10 states joined UDAY, taking the total number of states to 27. The scheme is making considerable progress with states like Haryana, Chhattisgarh and Rajasthan together saving close to Rs 60 billion through a reduction in interest cost. Achieving a turnaround is, however, dependent on drastically reducing aggregate technical and commercial losses and closing the gap between the average cost of supply and the revenue realised.

Competitive bidding: In December 2016, the MoP amended the revised guidelines for the procurement of short-term power (more than one day to one year), issued in March 2016, to provide greater clarity on the e-reverse auction (e-RA) system introduced by it.

Soon after, the ministry also released new guidelines for power procurement for the medium term (one to five years) from power stations set up on a finance-own-operate basis. These are also applicable to plants built on design-build-finance-operate-own basis.

Earlier, in August 2016, the government extended the scope of the Discovery of Efficient Electricity Price (DEEP) e-bidding portal to include medium-term power procurement. At the same time, it also launched the “e-Trans” web portal to introduce e-RA for tariff-based competitive bidding of transmission projects.

Focus on clean energy: India’s ratification of the United Nations Framework Convention on Climate Change’s Paris Agreement in October 2016 has resulted in greater focus on clean energy. The government revised its capacity addition target for solar parks by another 20,000 MW in Union Budget 2017-18. The cumulative target now stands at 40,000 MW.

The wind segment switched from the traditional feed-in tariff regime to competitive bidding for project allocation, with the Solar Energy Corporation of India (SECI) successfully concluding the first e-RA for 1,000 MW in February 2017. The first tender auctioned by SECI was oversubscribed by nearly 2.6 times and saw prices falling to a record low of Rs 3.46 per unit.

Earlier, in September 2016, the MoP released an order regarding the waiver of interstate transmission charges and losses for electricity generated from solar and wind energy projects in line with the revised National Tariff Policy, 2016.

Focus on reducing power costs and coal imports: In February 2017, the MoP notified the methodology for the use of domestic coal

allocated to states by IPP stations. This is in continuation of the ministry’s previous notification, released in June 2016, wherein it had allowed flexibility in the utilisation of coal among state and central generating stations. The state supplying the coal could invite tariff bids from IPPs for the use of domestic coal from its aggregated coal allocation and the IPPs would supply power to the state in lieu of the transfer of this coal. Through this policy, the MoP has clarified its intent to improve the efficiency of coal-based power generation across states.

The government is also focusing on reducing dependence on imported coal and achieving self-reliance (in terms of domestic coal) for coal-based generation. It is in dialogue with the Tamil Nadu government to set up the Cheyyur ultra mega power plant based on domestic coal instead of imported coal.

Discontinuation of the Scheme for Utilisation of Stranded Gas-based Generation Capacity: The two year-old scheme that offered imported gas at subsidised rates to stranded and underutilised power stations was discontinued on March 31, 2017. The Power System Development Fund provided financial support under the scheme and the government has concluded two auctions for the allocation of gas supplies to stranded power plants since its introduction in April 2015.

Guidelines on cross-border trade: The MoP notified these guidelines in December 2016 in line with the SAARC framework agreement for energy cooperation signed in November 2014. The need for greater clarity on policy with respect to cross-border trade through the power exchanges resulted in the formulation of these guidelines, which could prove to be a turning point in the creation of a regional electricity market and a robust cross-border electricity infrastructure.

Advisory on sourcing supercritical units: In January 2017, the MoP extended the timeline for the Central Electricity Authority’s advisory to central and state sector generating companies to incorporate the condition of setting up phased indigenous manufacturing facilities in their bids for boilers and turbine generators for supercritical units. The advisory originally issued in February 2010 had expired in October 2015. It has now been extended by three years up to January 2020 and is expected to have a positive impact on domestic equipment providers.

Key regulatory measures

Issue of compensatory tariff: In April 2017, the Supreme Court disallowed Tata Power Company and Adani Power to charge compensatory tariffs on account of the Indonesian coal price hike issue pertaining to the companies’ respective power plants in Mundra, Gujarat. The court has set aside earlier orders by the Appellate Tribunal for Electricity (April 2016) and the CERC (December 2016), which allowed compensatory tariffs to the two companies to cover the difference in the coal prices – the price based on the coal sales agreements and the price of coal ex-Indonesia. The Supreme Court has directed the CERC to use a fresh approach to resolve the matter.

New transmission planning approach: The CERC notified the draft transmission planning regulations in April 2017. The main objective for separate regulations on transmission planning is to align the planning mechanism with changes in the power sector scenario such as the development of the power market, integration of renewables and increasing congestion. The proposed transmission planning is expected to ensure holistic transmission system development which is not solely dependent on PPAs but also takes into account other factors such as the projected generation and demand scenario, the quantum of power anticipated to be drawn or injected by various connected customers, etc.

Revised renewable energy certificate (REC) prices: CERC-determined floor and forbearance prices for RECs have been reduced significantly from April 1, 2017 – the floor price for solar RECs has been reduced from Rs 3,500 to Rs 1,000 and that for non-solar RECs from Rs 1,500 to Rs 1,000. Experts opine that this is expected to have an adverse impact on newly established REC projects and lead to an increase in the inventory of unsold RECs. However, most captive and open access customers may find it easier to buy RECs than to purchase renewable power to meet their obligations.

Intra-state availability-based tariff (ABT): In July 2016, the Forum of Regulators adopted the Scheduling, Accounting, Metering and Settlement of Transactions in Electricity (SAMAST) report submitted by a committee constituted by it. This relates to intra-state implementation of the ABT mechanism which is operating smoothly at the interstate level. Given the planned renewable energy capacity addition and the rapid evolution of new market mechanisms, there is a need for creating a supportive institutional set-up at the state load despatch centre level for long-term sustainability.

CERC staff papers: In November 2016, the CERC published a staff paper on “National Open Access Registry – Technology Solution to Short Term Open Access Process”. The staff paper analyses the procedural issues in availing of open access and subsequently provides a solution in the form of electronic registry which will act as a repository of approvals and transactions and help increase transparency and efficiency.

In January 2017, it published another staff paper – “Introduction of Electricity Storage System in India”. The paper covers in detail the probable grid-level applications of electricity storage systems, an operational framework and the recovery of electricity storage services. This is relevant in the context of the rapidly increasing share of renewable energy, which is expected to reach 175 GW by 2022.

Others: The CERC notified the regulations for the terms and conditions for tariff determination from renewable energy sources for a control period of three years beginning April 1, 2017.

In April 2017, it also notified the fifth amendment to the Indian Electricity Grid Code. This contains modifications related to the definition of spinning reserve and additional clauses related to the scheduling and despatch of power from interstate generating stations for the operation of ancillary services.

In February 2017, CERC amended the rules for the grant of connectivity, long-term access and medium-term open access in interstate transmission, whereby it redefined “long term” and “medium term” and added new regulations with respect to the underutilisation of long-term access and medium-term open access.

The CERC also approved procedures for the transaction of energy saving certificates (ESCerts) in February 2017. In the following month, it determined the fees and charges for ESCert registration and issuance.

Overall, several defining policy and regulatory measures were taken during the past year based on emerging sector needs.