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Legislating Sustanibility: The Impact of Power Sector Deregulation

Power is an essential component of infrastructure development as it affects a country's economic growth and welfare. Electricity reform has been largely regarded as a critical component of developing countries' efforts to enhance their economic prospects. The shift of the power sector from a regulated to a deregulated structure has various beneficial and negative consequences.

Until the 1990s, Indian public sector utility firms were in charge of energy production, distribution, and transmission. Since 1991, various regulatory changes have been implemented to increase private sector participation, which has improved the industry's performance. The private sector can now invest in all three elements of electricity: generation, transmission, and distribution.

The Indian power industry has and is also currently facing numerous challenges in respect to efficient deregulation policies, leading this blog to throw light on the involvement of various stakeholders in deregulation policies, including the government and several national entities, the private sector, and consumers.

History & Evolution of Indian Power Sector

In an urban setting, a day without power can widely hamper the routine functioning to a great extent. This shows the widespread impact it has on the progress of a nation. Hence, the regulation of this sector has been a top priority since pre-independence. The introduction of the Electricity Act, of 1910 primarily addressed the aspects of safety concerns and established a legal framework regarding the regulation and workings of the power sector.

After the independence, both the union and state government decided to delegate the development of the electricity sector to respective states through the creation of State Electricity Boards (SEBs) under the Electricity Act, of 1948. After several years of regulating the sector, they started to face several financial complications which led the government to establish two central public sector utilities: NTPC (National Thermal Power Corporation Limited) which focuses on thermal generation and NHPC (National Hydro Power Corporation Limited) focusing on hydropower.

Only after the 1990s, the first step towards limited competition, privatisation was taken by opening the sector for private Independent Power Producers (IPPs). However, the low financial ability of SEB and the increased role of private competitors, and regulatory boards The Electricity Regulatory Commissions Act, passed in 1998, established the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commission (SERC).

After several amendments, the 2014 amendment bill, historically brought a structural reform in the Indian energy sector and amending the 2003 Act to (i) bring in further competition and efficiency in the distribution sector, (ii) rationalise tariff determination, and (iii) promote renewable energy. They are making it mandatory for entities to procure electricity from a market representing renewable energy sources.

Moreover, The Electricity (Amendment) Bill, 2022 was introduced which permits several distribution licence holders, or discoms, to function in the same supply region. Discoms are required to use their network to distribute power. The Bill does away with this prerequisite. According to the Bill, a discom has to let all other discoms operating in the same area non-discriminatory open access to its network, subject to specified fees. The Act also gives SERCs the authority to define discoms renewable purchasing obligations (RPOs).

Difference Between Regulated & Deregulated Market

The distinction is quite straightforward. In a regulated electrical framework, there is just one primary corporation, known as Utility. This utility owns the complete infrastructure, including wires, cables, transformers, and poles. It has two responsibilities: first, to acquire power from producing businesses, and second, to sell and distribute it to its customers.

In a deregulated market, there are minimal extra players engaged. The utility still owns the infrastructure, but its only function is to provide power. Deregulated markets allow electrical service companies to compete and sell electricity directly to consumers.

The benefits of a deregulated system are twofold: it increases competition among service providers, which leads to cheaper costs for consumers, and it unleashes latent demand, encouraging additional firms to join in competition and provide better rates and services to end customers. However, the advantages differ from state to state and also by demographic and geographic character.

Impact of Research & development in Green Sector by Private Sector

The private sector has been increasingly strengthening its market grip in the sector and its regulations, especially in the renewable energy sector. Ever since then country has been witnessing rapid growth in research towards green house energy supporting the idea of sustainability.

As per the International Renewable Energy Agency, the distribution looks like, 95% of the built renewable capacity comes from private enterprises, 2% from the national government, and 3% from state governments. This has impacted the increasing market percentage of renewable energy industries like hydropower, wind power solar power, and biomass power in India in recent years.

As of November 2023, India's installed non-fossil fuel capacity, which includes major hydro and nuclear power, has expanded by 396% in the last 8.5 years to exceed 179.57 GW, or over 42% of the nation's total capacity. With a 9.83% annual growth in renewable energy additions in 2022, India had the highest growth. As of January 2024, the installed solar energy capacity has grown by thirty times during the previous nine years, to 74.30 GW. The National Institute of Solar Energy (NISE) has projected that India has a solar energy potential of 748 GW. Since 2014, the installed capacity of renewable energy, especially large hydro, has expanded by over 128%.

India has also seen a significant increase in FDI, according to data from the Department for Promotion of Industry and Internal Trade (DPIIT), during the course of the last three fiscal years and the current fiscal year, the nation has received FDI equity investments totalling USD 6,137.39 million in the renewable energy industry. Renewable energy is expected to create new job opportunities in the country. Renewable energy job prospects can revolutionise the rural economy. The renewable energy sector may assist in alleviating poverty by producing more jobs.

Faced Complications
Although India has made significant progress towards sustainable development in the power sector, there are still many complications and challenges for further growth which need our attention.
  • While the existing lines for transmission and distribution are facing the challenge of time, installing new ones will also be a costly matter. The integration of renewable systems in areas remote from traditional power plant locations necessitates the installation of new power lines.
    India does not have a regulatory framework for the renewable sector. Further, the procedures and frameworks in Indian states vary, which is often not a favourable condition for investors.
  • In India, the PLF measures the current utilisation to the maximum capacity of the plant, which remains persistently low with minimal initiative made to improve it.
  • Extreme weather conditions frequently trigger blackouts in various locations making it extremely difficult to maintain businesses and damaging electronic devices that rely on them.
  • The lack of awareness about the technologies, smart grids, improved resource definition, and improved information availability are some examples, that present a significant obstacle in acquiring extensive land for constructing renewable plants.

Current Models of Deregulation in Practice

Restructuring in models has been taking place across the globe for several decades. Two of these models which have been widely implemented and lead as the current trends are the Transmission System Operator (TSO) model and the Independent System Operator (ISO) model.

The ISO model allows transmission businesses to own, manage, and govern generation and distribution companies. An independent system operator is established to promote open access and competitive markets. The TSO model integrates grid operation and ownership into a single body. This entity is responsible for developing the transmission infrastructure and providing equitable access to all market participants. TSOs must maintain neutrality to promote market efficiency.

The Indian Power Sector is on the brink of significant transformation in the current year (2020-2029), characterized by significant shifts in demand growth, energy sources, and market dynamics. Therefore, deregulation in the electrical power system demands necessitates an uninterrupted power supply for consumers. The 2014 changes provided a glimpse into the future by requiring entities to acquire electricity from renewable energy markets. However, there are still many technological changes and regulations that are needed to mark India's contribution to sustainable urban living.

The primary hurdle with stated amendments would be to identify the institutional structure, define roles, and address several implementation challenges before implementing the mechanism. Furthermore, because electricity is a concurrent issue, the problem would be convincing governments to participate in the process to ensure the success of this event.

Written By:

  1. Vanshita Vijh,
  2. Laxmi Kale

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