The Ministry of Power (MoP) has released the much awaited Draft Electricity (Amendment) Bill, 2020, which proposes many critical changes to the existing Electricity Act, 2003. These amendments were essential since the electricity sector in India has been evolving with increasing non-government investments and structural changes throughout the value chain. Some of the important proposals in the bill include: establishing an Electricity Contract Enforcement Authority (ECEA) addressing contract disputes, disallowing regulatory asset creation, reducing cross-subsidies and separating state subsidies from tariff by introducing DBT, ensuring strict compliance of RPOs (and including hydro in RPO), providing legal backing to LDCs to make despatch conditional to payment security, expediting tariff adoption by regulators, proposing ‘distribution sub-licensees’ (aimed at expediting partial / complete discom privatisation), and formalising procedure for selection of members of Commissions for greater transparency.
The MoP had been working on the National Tariff Policy and this draft for the last one year, but was facing objections to some of the proposals, mainly the higher say which the Centre will have after the amendments. However, due to the financial stress emerging from Covid-19, state discoms are now facing increased liquidity concerns and lack of availability of funds at viable rates, giving GoI an upper hand in the negotiations. Another key point to note is the timeline – stakeholders, including the states, have to submit their comments within 21 days, post which a financial package will be provided. After this, the Bill will be placed in the Union Cabinet for approval and is expected to be tabled in the monsoon session of Parliament (most probably in Jul’20) for it to be passed.
Key beneficiaries: The amendments are aimed at improving the viability of the entire sector resulting in its rerating. Private players including Torrent Power and CESC will benefit on the discom privatisation front, while payment improvements will benefit gencos like NTPC, JSW Energy and other PSU gencos and transcos.
Top picks: Our top picks in the sector remain NTPC and CESC
· Bill addresses several critical issues: The Bill picks up from where UDAY scheme’s timelines ended, i.e., 31st Mar’20. Even though UDAY was successful in reducing AT&C and annual discom losses, it was unable to make some key structural changes due to the concurrent nature of the sector. The Bill tries to address those crucial pending issues. Of the many proposals mentioned, we believe some of the most critical are: 1) formation of ECEA for contractual dispute resolution in a time-bound manner (ensuring sanctity of contracts, which were lately being challenged by many); 2) disallowing creation of regulatory assets, and focusing on recovering entire cost of supply in tariffs and reducing cross-subsidies (which is the biggest reason for the current discoms’ liquidity crunch as they were selling 40-45% of their volumes to industry, which contributed 65-70% of their revenues); 3) exclusion of state subsidies in tariff determination, which will pave the way for DBT for the subsidised consumers (reducing power theft); 4) inclusion of hydro in RPOs; 5) proposing distribution sub-licensees / franchisees (aimed at partial/complete privatisation, especially for discoms that are unable to reform and meet the proposed stringent criteria); 6) streamlining and simplifying selection of members of Commissions, improving transparency and independence in decision-making.
· Aimed at improving viability of the entire sector: If the Bill is passed in Parliament even with some minor changes, it will be a landmark reform as it will improve the viability of the entire sector. The proposed amendments have the potential to revive demand by reducing unscheduled power cuts by discoms due to their inability to pay for power procurement, revive the capex cycle especially in distribution, comfort investors in the sector whose confidence was shaken by the Andhra renewables PPA cancellation issue last year, provide aggrieved parties to contracts a definitive recourse, and uphold contract sanctity. Thus, the Bill has the potential to rerate the sector in a major way.
Please find attached report