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The One Mega-Watt Conundrum

Open access in the power sector, which the government operationalised recently, can be a gamechanger for large consumers only if critical changes are made to power trading platforms and regulators put some key checks and balances in place.

When the ministry of power issued a letter on November 30, 2011 operationalising open access in the power sector, it was considered a possible gamechanger in power sector reforms. Open access was a major cornerstone of the Electricity Act of 2003. It was introduced to ensure large electricity consumers choice and cheaper power via open access to their local distribution company’s wires.

Can this actually happen? The question rests on a host of practical issues that need to be considered before open access can truly create the kind of open market in power that the Electricity Act aimed at. It took eight years to actually get started when the ministry of power sent its November 30 letter titled “Opinion from M/o. Law and Justice on the operationalisation of open access in power sector”, to all electricity regulatory commissions, state governments and the state power utilities.

The stand projected in the letter is twofold: (i) that consumers with demand exceeding one megawatt (Mw) are perforce required to draw supplies from sources other than their local distribution company; and (ii) even if these consumers do continue to draw electricity from the local distribution company (discom), the rates must be negotiated between the two and, therefore, the state electricity regulatory commissions must cease to determine the retail energy tari􀃠s by restricting themselves to determining only the wheeling charges and cross-subsidy surcharge.

The letter requests the recipients to take the necessary steps for implementing these two provisions, in effect, operationalising open access in the power sector. All that is very well, but the first question is: where is the power? The amount of power available from traders and the two power exchanges is meagre. Moreover, the two power exchanges currently provide a platform for transactions on only a day-ahead basis where delivery of power takes place the day after the bid is placed. The weekly contracts require that the contracted amount of power be available for a week. That would leave a huge gap to be supplied through bilateral contracts with generating stations.

Assuming that executing bilateral contracts would be a cakewalk for all these consumers, there is a strong possibility that they would be left in the lurch when generating stations stop operations for any reason, as they frequently do. If, as the ministry has suggested, there is a cessation of the relationship between these consumers and their local discoms, these consumers cannot demand the supply of backup power or standby power from the discoms. The local discom, therefore, may need to be designated as the default supplier in contracts with generating companies.

Also, it will require regulators with extraordinary expertise to streamline the mostly unscientific basis on which power tariffs are fixed by the state electricity boards. If negotiating rates is the new mantra, there is reason to doubt whether these utilities have the necessary expertise to design the rates on an economic basis in the first instance so that meaningful negotiations with the one-Mw consumers can take place. Moreover, the negotiated prices arrived at should not be higher than that the regulators would have determined.

Besides, according to the Statement of Objects and Reasons of the Electricity Act, 2003, Parliament intended to restrict the provisions of Section 49, which deals with “agreements with respect to supply and purchase of electricity”, to a transaction between the consumer and a generating company or a trader. In any case, without the separation of wires and supply functions, how can consumers negotiate rates with their local discoms?

Some consumers may choose to buy cheaper power using open access during certain times of the day or night. This, however, introduces a degree of uncertainty in the longterm power procurement planning of discoms. Outbound one-Mw consumers may have to shell out additional charges to offset the liquidated damages and penalties under the stranded power purchase agreements of the discoms.

It follows from this that (i) the cost of power from sources other than the local discom would need to be aggressively low; (ii) the power exchanges would need to introduce longterm (fortnightly, monthly, yearly) contracts and hence approach the Supreme Court of India to let them introduce these long-term contracts by disposing of urgent civil appeals from the Forward Market Commission which has claimed sole jurisdiction on contracts for which payment and delivery is beyond 11 days; (iii) the discoms need to continue standby support and universal service obligations to one-Mw consumers; and (iv) regulators need to build a safety net for these consumers.

Though no one can be forced to take open access, the ministry’s letter would surely force the state electricity boards and the state power utilities to provide open access on demand. But it is only if the checks and balances discussed here are in place that open access can surely be the game-changer it was intended to be.

This article was originally published in the Business Standard on 23rd January 2012.

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