Creating Change: Key policy and regulatory developments over the past year

Key policy and regulatory developments over the past year

During the past 12 months, the key focus areas of policy and regulatory developments in the power sector have broadly pertained to easing stress in the thermal power segment, promoting electric vehicles (EVs), managing renewable energy sources, and boosting the hydropower segment. One of the key recent policy announcements was the approval of the High Level Empowered Committee’s recommendation with respect to stressed thermal power plants (TPPs) such as coal linkages for short-term power purchase agreements (PPAs) and increasing e-auction quantity of coal for the power sector. Meanwhile, in the hydropower segment, categorisation of large-scale hydro projects under renewable energy was a significant development. Besides this, the guidelines for setting up of charging infrastructure and the roll-out of the second phase of Faster Adoption and Manufacture of Electric Vehicles (FAME) scheme are expected to give a shot in the arm to the country’s electric mobility plans.

Meanwhile, on the regulatory front, new tariff regulations, approval of compensatory tariff for Adani Power Limited’s (APL) Mundra TPP, discussion papers on redesigning of the ancillary service mechanism and the electricity market by the Central Electricity Regulatory Commission (CERC) were some of the notable developments.

Key policy developments

  • Stressed assets: In March 2019, the cabinet approved the recommendations of the HLEC constituted to suggest measures for the resolution of stressed power projects. One of the key approved policy measures is the amendment to the SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) mechanism to allow coal linkages to be used against short-term PPAs. Other measures for the thermal segment include allowing central and state generators to act as aggregators for power procurement from stressed assets; increasing e-auction quantity of coal for the sector; and keeping PPAs, fuel supply agreements and other clearances alive even if a project is referred to the National Company Law Tribunal or acquired by any other entity.
  • Measures to promote hydropower: One of the key policy announcements in March 2019 was the categorisation of large hydropower projects under renewable energy. These projects will now qualify for non-solar renewable purchase obligations (RPOs) and for incentives such as financial assistance and cheaper credit. Further, the Ministry of Power (MoP) has stated that hydro purchase obligations (HPOs) will be notified separately within non-solar RPOs. Besides this, other policy measures announced for the hydro segment include providing flexibility to developers to determine tariffs by backloading of tariffs after increasing the project life to 40 years, increasing the debt repayment period to 18 years, introducing an escalating tariff of 2 per cent, and providing budgetary support for funding flood moderation.
  • EVs: In December 2018, the government issued the final policy guidelines for public charging infrastructure for EVs. As per the guidelines, setting up of public charging infrastructure will be a delicensed activity. The guidelines propose that there be at least one charging station for every 9 square km area. Further, one charging station is proposed to be set up every 25 km on both sides of highways. Another key development with regard to EVs was the launch of FAME II by the cabinet on March 1, 2019. It entails a total outlay of Rs 100 billion and will be implemented from 2019-20 to 2021-22 focusing on three areas – demand incentives, establishment of a network of charging stations and administration of the scheme, including its publicity.
  • Aggregate power procurement scheme: In April 2019, the central government concluded the second round of auctions for medium-term power procurement (from 2,500 MW of capacity) under its Pilot Scheme II. The lowest bid price discovered was Rs 4.41 per unit, 4 per cent higher than the Rs 4.24 per unit discovered in the previous round, while supply bids of 2,520 MW were received (as against bids for 1,900 MW received in the previous round). Jindal Power Limited offered the highest quantity at 515 MW. Other bidders included Adani Korba West (295 MW), JSW Energy (290 MW) and Essar Power Mahan (200 MW).
  • UNNATEE: In March 2019, the Bureau of Energy Efficiency released the draft national strategy plan document – Unlocking National Energy Efficiency Potential (UNNATEE) – describing a framework and implementation strategy to establish a clear linkage between energy supply-demand scenarios and energy efficiency opportunities. The document establishes national targets for energy efficiency savings and an roadmap for the next 14 years (2017-31). The report estimated the country’s total energy saving potential target to be 86.9 million tonnes of oil equivalent by 2031, in a moderate scenario, with the implementation of current policies and programmes and technological penetration. Further, the energy savings investment potential is estimated to be Rs 8,408.52 billion by 2031 under the moderate savings scenario.
  • Cross-border electricity guidelines: In December 2018, the MoP issued new guidelines for the import and export of electricity. These guidelines repeal the earlier provision under which only companies fully owned by the governments of the concerned countries or those having at least 51 per cent equity investment by Indian companies could export to the Indian market after obtaining a one-time approval from the designated authority in India. Further, the guidelines have allowed mutual agreements between Indian and cross-border entities under the overall framework of country-to-country agreements. The new guidelines also permit the participating entities to trade on the Indian exchanges in the day-ahead market.
  • Report on flexibilisation of TPPs: In April 2019, the Central Electricity Authority released a report on Flexible Operation of Thermal Power Plant for Integration of Renewable Generation. The report lays down a multipronged approach for flexibilisation of coal-based generation. It suggests the reallocation of hydro and gas generation from off-peak hours to peak hours, and use of flexible power from pumped and battery storage systems along with two-shift operations of old and small coal-fired plants.
  • Draft amendments to Tariff Policy, 2016: In May 2018, the MoP issued draft amendments to the Tariff Policy, 2016. Among other things, the draft amendments propose that any change in domestic duties, levies, charges, surcharges, cess and taxes after the award of a project will be allowed as a pass-through; state regulatory commissions will not consider aggregate technical and commercial (AT&C) losses exceeding 15 per cent for tariff determination after March 31, 2019; discoms will be penalised for unscheduled load shedding without valid reasons; and the direct benefit transfer mechanism will be adopted for providing subsidies to consumers.
  • Renewable energy: In February 2019, the Cabinet Committee on Economic Affairs (CCEA) launched the Kisan Urja Suraksha evam Utthaan Mahabhiyan (KUSUM). The scheme entails central aid of Rs 344.22 billion for providing financial and water security to farmers by harnessing solar energy capacity of 25.75 GW by 2022. The scheme comprises three components – deployment of 10,000 MW of decentralised ground-mounted, grid-connected renewable power plants; installation of 1.75 million stand-alone solar-powered agricultural pumps; and the solarisation of 1 million grid-connected solar powered agricultural pumps. Also, in February 2019, the CCEA approved the setting up of 12,000 MW of grid-connected solar photovoltaic projects with an estimated viability gap funding of Rs 85.8 billion. The projects are estimated to entail a total investment of about Rs 480 billion and will be set up in four years, from 2019-20 to 2022-23. During the same month, the CCEA approved Phase II of the Grid Connected Rooftop Solar Programme for achieving a cumulative capacity of 40,000 MW from rooftop solar projects by 2022. The programme will be implemented with a total central financial assistance of Rs 118.14 billion.

Key regulatory developments

  • Tariff regulations: In March 2019, the CERC issued the Terms and Conditions of Tariff Regulations, 2019, for the next tariff period from April 1, 2019 to March 31, 2024. Under the regulations, the debt-equity ratio and return on equity have been maintained at 70:30 and 15.5 per cent respectively. However, the rate of interest on working capital has been linked to a one-year marginal cost of funds-based lending rate plus 350 basis points, as against the earlier State Bank of India base rate plus 350 basis points.
  • Update compensatory tariff: In April 2019, the CERC approved a tariff revision for APL’s PPAs for 2,000 MW capacity of the 4,620 MW Mundra TPP in Gujarat. The CERC’s decision is in line with the Gujarat government’s high-powered committee recommendations about the revision in the tariff structures of PPAs for stressed projects in the state. The commission has allowed a revision in energy charges on account of an increase in the price of imported coal, subject to a ceiling of $110 per tonne for 6,322 kCal per kg grade of coal. Further, the fixed charges have been reduced by 20 paise per unit, following lenders taking a cut on some portion of the debt repayment.
  • DSM amendment regulations: In November 2018, the CERC notified the Deviation Settlement Mechanism [DSM] and Related Matters, (Fourth Amendment) Regulations, 2018. Under the amendment, the CERC has revised the deviation charges and linked them to the daily average clearing price in the day-ahead market (DAM) at the power exchanges. The linking of DSM rates with DAM prices is expected to ensure better demand estimation and accurate scheduling by discoms.
  • Redesigning ancillary service mechanism: In September 2018, the CERC issued a discussion paper on “Re-Designing Ancillary Service Mechanism in India”. The paper assesses the performance of the current framework of frequency support and the current balancing ancillary services mechanism, and suggests next-generation reforms by way of introduction of auction-based procurement of ancillary services.
  • Redesigning the electricity market: In July 2018, the CERC issued a discussion paper on “Redesigning Real Time Electricity Market in India”. The paper outlines the improvements required to ensure market operations closer to real time for better harnessing the intermittent renewable energy and optimally utilising resources in the intra-day time horizon. The real-time market redesign suggested seeks to introduce two elements – change from continuous trade to uniform auction in the intra-day market of the power exchange and gate closure.
  •  Five-minute scheduling for thermal/hydro, and hydro as FRAS: In July 2018, the CERC passed an order to implement pilots on 5 minute scheduling, metering, accounting and settlement for thermal/hydro and on fast response ancillary services (FRAS) through hydro projects. The Power System Operation Corporation, in coordination with Power Grid Corporation of India Limited, will implement 5-minute metering at hydro stations in the northern, eastern and north-eastern regions, and at thermal stations with automatic generation control in all five regions. Further, FRAS from storage/ pondage-based hydro stations can act as a robust mechanism to handle the intermittency of renewable energy generation.

The recent policy and regulatory initiatives augur well for power sector development. Overall, these steps are expected to assuage the stress on the thermal power segment, promote cleaner and more efficient power generation, and ensure a stable and robust electricity grid in the country.