India is set for a period of rapid demand and growth in the energy sector. Governments are winning elections just with the promises of complete electrification. Can this be achieved with the limited competition that still plagues this highly important space? Sarang Khanna, Researcher and Analyst at iPleaders, discusses the issues involving competition in the energy sector in India, with focus on electricity and its outreach.

Power is one of the most crucial components for economic and infrastructural growth of any country. India has an extremely diverse power sector with reliance on various sources of generation such as coal, oil, hydro, nuclear, wind, solar, etc. Naturally, the electricity demand in the country is increasing at a rapid pace which is bound to only shoot up in the years to come.

India ranks third in the Renewable Energy Country Attractiveness Index, and is becoming a popular destination to invest for foreign investors. In fact, the scope of the power sector is such, that between April 2000 and September 2017, the industry attracted US$ 12.3 billion in Foreign Direct Investment (FDI), accounting for 3.44 percent of total FDI inflows in India, according to a report.

The Government of India has also plans to provide electricity connections to over 40 million families in rural and urban areas by the end of 2018 under the Saubhagya Scheme plan. However, if we look at the practices and workings of the industry, we find that most of the sector is still Government controlled, with extremely limited private participation. The competition in this important sector is minimal, which is a hindrance in overall consumer welfare.

It was only after The Electricity Act, 2003 that there was introduction of competition in all segments of this sector. Before the 2003 Act came into existence, until 1991 the electricity sector was basically a monopolized sector claimed generally by the state. Administrative change expanded the supply of power and electricity to a bigger portion of the population.

The Electricity Act 2003 was enacted with the objective to introduce competition, protect consumer interests, and provide power for all. The Act provides for National Electricity Policy, Rural Electrification, Open access in transmission, phased open access in distribution, mandatory State Electricity Regulation Commissions (SERCs), license free generation and distribution, power trading, mandatory metering and stringent penalties for theft of electricity.

Yet, the competition in the energy, and also in the electricity sector, has been quite limited, and the reasons for which can broadly be attributed to policy and regulation  issues, structural issues, barrier to entry, abuse of dominant position, etc. Although, the sector is witnessing a significant shift in the way it operates, and more partners and officials are in high demand in this space that once had limited access so far. Having in-depth knowledge of energy laws and its regulations, can help young professionals spearhead the revolution and become change bearers in this evolving industry.

Let us try to look at the issues that have built up with situation in the electricity sector specifically, in what ways can it be overcome and allow more participation which will enhance accessibility and improve lives.

Understanding Electricity Processes At Large –

Generation (or production): Electricity is produced or created utilizing hydro, thermal, wind, atomic, and other renewable sources;

Transmission: After it is created, electricity is transmitted through high-power copper or aluminum transmission lines spread crosswise over geographic regions. Tremendous amount of power is exchanged and traded to high-voltage substations which then send lesser quantities to distribution substations.

Distribution: Electric power is conveyed by power or service administration lines from substations to clients including commercial enterprises, organizations, horticultural settings, and residential areas. There is further trading of power, which is also a vital segment as it serves to adapt up to the electricity deficiency in the nation.

Trading: It is essentially purchasing of electricity for resale. Electricity exchanging is a system used to meet fleeting deficiencies in electricity demands and guarantee overall resource optimization through the buying and resale of power by an authorized or licensed trader

Issues Pertaining to Competition in the Industry –

The limited number of private players working in the generation, transmission, and distribution markets shows the low level of competition in the segment. One of the reasons for this is the barriers to entry in the sector. Entrance of new firms in the electricity sector is thought to be damaged by the hindrances and barriers to entry postured by economies of scale required for generation, transmission and distribution, etc., furthermore because of regulation in the electricity tariff rates. On account of electricity supply, the technological advancements utilized frequently have high up front expenses and long resource lives.

This is the most valid in the transmission and distribution sectors which have high expenses, for example, the expense of building infrastructure like electrical cables, etc. These expenses can be considered responsible for the restraining infrastructure monopolistic environment in the transmission sector. The expenses being high in this segment makes the barriers to entrance considerably stronger. The electricity sector faces such competition issues as far as the generation, transmission and distribution end of the sector are concerned.

Upstream and downstream players are all usually coordinated and run by one firm rather than different autonomous firms. This closed  and regulated nature contributes towards instability in the competition and hampers the entrance of firms. Governments need to understand that permitting entrance of private firms would mean moving far from natural monopolistic model and easing way for new entrants and in turn benefitting the general consumer public. Thus, allowing effective competition has potential of regulating prices.

How To Achieve Fair Competition Practices in the Electricity Sector?

For buyers and consumers, increased competition means more decision making power, choices, and lower costs, enhanced quality, and expanded access to items. Producers also advantage through consumer benefit as businesses change in accordance with supply and demand means more profit, eventually. New firms and increased competition gives incentives to diminish expenses and upgrading development through innovation.

Let us look at some proposals that can effectively change the current scenario and  relax the entry to this restricted sector:  

Reducing Government Monopoly and Control Over Coal Allotments –

Auctioning can and must be considered as a viable technique for assigning coal blocks. Government ought to consider auctioning later on as selling the coal blocks will bring in competition to the sector. The government has, in fact, considered competitive bidding of coal blocks to ease competition.

In the electricity sector specifically, up till 2006, the Central and State governments controlled generation of nearly 57% and 32% respectively, while the transmission was 100% under the control of the government, according to this report by CCI and TERI. However, the scenario has witnessed a shift and made room for more private indulgence, but there is still a long way to go before electricity becomes a norm, rather than a luxury only accessible to a few.

Encouraging Private Mining –

Making strong steps towards empowering privatization of mining is important as more organizations will enter the business sector and this will increase the accessibility of coal as an asset for producing power.

Implementing Open Access –

Right now in the distribution segment, the networking of electrical cables supplying power to consumers are claimed and overseen by the state authorities. Other than making it difficult with respect to duty rates (how much is to be charged for the utilization of electrical cables, and how much for the supply of power), this also obstructs the execution of open access. Allowing open access from universal sources can be detrimental in increasing competition in this area.

Rationalising Tariffs –

Tariff rationalization is an essential to guarantee private investment in the sector.   There is an increased need to define the powers of the state governments in levying and controlling tariff.

At present, levy setting is finished by the SERCs at the command of the state government, despite the fact that an equation based tariff fixation mechanism exists. There is need to stick to the equation based tariff setting system that is based on the dynamics of  the market.

Misuse of the Authority Given to the State Government under the Electricity Act, 2003 –

Under the Electricity Act, appropriate state governments may indicate that a specific generating company might, in uncommon circumstances, operate and maintain any generating station as per the directions of the government.

This is a provision that has now turned into a standard norm, as opposed to being an exception. The government ought to take essential activities to alter its practices so that the law is used only as intended.

Certainly, there is a lot of scope for change and improvement in the power sector, and that change is clearly underway. Government policies are quickly adapting with evolving needs, to ensure more competition with relaxed entry and participation.

PSUs and other institutions need to be constantly updated with energy laws and competition laws. In addition, officials need help in order to adapt to these new changes. With FDI in the sector at an all time high, this is also a crucial time to establish yourself in an industry that is soon going to open its arms to more and more players. Keeping an eye and staying updated about the happenings in this sector is more important than it was before.

To ‘brighter’ future prospects!