Earlier, since Independence, the Indian power sector was dominated by state- and centrally-owned vertically integrated utilities. When the Indian economy opened up in the early 1990s, large-scale liberalisation and industrialisation led to a rapid increase in the demand for power. To meet this demand, the quantum of investment needed grew exponentially and could no longer be supported by the government. Hence, power generation was de-licensed and opened to private investment in 1991, resulting in Independent Power Plants (IPP). After five years, the focus shifted to unbundling of the State Electricity Boards (SEBs) to ensure better returns from the generation and transmission businesses.
In 1998, the Electricity Regulatory Commission Act was notified, that laid down provisions for establishing independent regulatory commissions at the state and central levels to regulate electricity prices. Eventually, the Electricity Act 2003 was formulated to address the changing needs of the power market. The Act focused on two elements: (a) “development of a competitive power market with transparent market-driven pricing mechanism that offers the consumers enough options to choose from”, and (b) “provide the right policy, legal and regulatory platform to the consumers for exercising their choice.” Based on these two core agendas, the Electricity Act 2003 has six major themes: (i) Reorganisation of the state owned vertically integrated electricity boards, (ii) Delicensing of power generation to enable higher investments, (iii) Trading and market development, (iv) Tariff and subsidies, (v) Consumer interest, and (vi) Open Access.
Promoting competition in the electricity sector is one of the cornerstones of the Electricity Act, 2003. In the spirit of encouraging competition, the central and state governments initiated various reform measures such as open access for consumers above 1 MW of load, competitive procurement of power, and competition in power transmission and distribution franchisee initiatives. To this end, State Electricity Regulatory Commissions (SERC) have been given the mandate to monitor and regulate state power utilities as well as power markets with a view to ensure power availability at competitive rates to all consumers.
However, the roadmap and implementation of open access to consumers, remained an area of discussion and debate. It is believed that open access – the last of the challenges can be effectively met with blockchain enabled smart metering, the revolutionary new concept discussed here.
Competition in Generation and Transmission segments
Post-liberalisation and following de-licensing, to attract significant investments from the private sector, a number of fiscal and financial incentives were offered under various schemes such as Mega Power Policy and tax holiday. After enacting the Electricity Act 2003, the Ministry of Power came out with competitive bidding guidelines for procurement of power, which allowed price discovery through market-based mechanism. This ensured a level ground for both private and public generation companies presenting them equal opportunities to access the market and more importantly, it ensured competitive prices to benefit the consumers.
Soon after, similar competitive bidding guidelines were put in place for enabling competition in power transmission as well and more than a dozen inter-state transmission projects were awarded under the competitive bidding regime. A number of states, too, embraced competitive bidding in power transmission to enable private sector investments in the sector. Thanks to competition in generation and transmission, today, distribution companies and open access consumers have the option of buying power from any generation company located at any place in the country that offers favourable prices.
Competition in Indian distribution segment
The Electricity Act, 2003 laid down the foundation for introducing competition at the consumer end through open access and provision for parallel licensees. However, in sharp contrast to generation and transmission sectors, private participation in the Indian electricity distribution sector has been very limited and the spirit of competition still at the nascent stages.
Issues plaguing consumer choice
Parallel Licensee Regime
The parallel licensee regime insofar as it requires distribution licensees in an area to distribute power “through their own distribution system within the same area” has potential adverse consequences on tariff. Each distribution licensee investing in its own network leads to replication of network and, as capital investment is a pass-through expense, it pushes up costs or tariffs for the end consumers.
Open access has not taken off very successfully even though all states have put in place regulations for open access for consumers above 1 MW of load. Operationalisation of open access has its own share of problems as detailed in the following sub-section. Pure play privatisation has had limited success in metros like Delhi, Mumbai and Kolkata. Distribution companies in some states are now adopting the distribution franchisee model which is showing signs of being a viable model to enable competition and investments in distribution sector. But the market today needs another reforms initiative, targeting end consumers of electricity. Blockchain can fill this void.
Roadmap of Open Access
In November 2011 the Ministry of Law and Justice, Government of India expressed its interpretation on the provisions of Electricity Act 2003, that consumers above 1 MW shall be deemed to be open access consumers and that SERCs can no longer continue to regulate the tariff for supply of electricity to any consumer of 1 MW and above. The need for discussion on introducing retail competition in electricity started gaining ground in light of this interpretation of the Act. There are various reasons that may be identified for the lacklustre operationalisation of open access in India, as briefly set out below:
- Power deficit scenario: The country’s power deficit scenario makes the power market a seller’s market that is not very conducive to open access buying of power. With power demand greater than supply, the non-regulated prices of electricity (through trading or discovered in power exchanges) remain high, thereby, eroding the extent of savings in power purchase cost envisaged through open access.
- Lack of regulatory consistency in determining wheeling charges and cross subsidy surcharge: There is no consistency in regulatory philosophy followed by state regulators in determination of wheeling charges and cross subsidy surcharge (paid by open access customers to distribution licensees). Due to unavailability of voltage wise data on cost of supply and distribution losses, state regulators have to allocate costs and losses between the wheeling and retail supply functions on the basis of assumptions.
- Conflict of interest: Existing distribution licensees are wary of losing their high-paying and cross subsidising consumers and hence, resist the concept of open access. Thus, conflict of interest is a major impediment in operationalisation of open access.
- Inadequate infrastructure: Another key issue impeding open access is the lack of adequate transmission and distribution infrastructure leading to congestion in the network. This requires heavy investment in not only transmission but also the distribution (wire) network but the most distribution utilities are too cash-strapped to make adequate investments in infrastructure.
- Lack of consumer awareness: Consumers, especially, smaller commercial or industrial users, are often at a loss about the process of open access along with specifics such as which trader or generator to approach, how to tie up power, prevailing market rates of buying power, etc. Consumers also fear the repercussions they may face from the distribution utility in terms of denial of technical support (such as repair of line breakdowns), denial of standby power in emergency, etc.
Lack of Regulatory Consistency in Open Access Charges
In October 2018, the Gujarat Electricity Regulatory Commission (GERC) issued an order stating that an additional surcharge of Rs 0.44 (~0.6¢)/kWh will be applicable over the half-year ending March 2019 for consumers availing power through open access from any source other than their respective distribution companies (Gujarat Urja Vikas Nigam Limited i.e. GUVNL’s DISCOMs).
For renewable energy sources, the surcharge will not apply if the open access is utilised for captive consumption. However, if the open access is being utilised to perform third party sale of energy generated from renewables, then the surcharge will apply.
Earlier, the Uttarakhand Electricity Regulatory Commission (UERC) had issued the terms and conditions of intra-state open access for the year 2018 under which the agency introduced a cross-subsidy surcharge for open access consumers.
On the other hand, recently, the Maharashtra Electricity Regulatory Commission (MERC) rejected the proposal made by Maharashtra State Electricity Distribution Company Limited (MSEDCL) to approve the levy of additional surcharge (wheeling charges) for rooftop solar projects in the state.
Thus, different SERCs have varied views on open access and the levy of surcharge on it. There is a need for a uniform methodology for the determination of various charges such as open access charges, cross-subsidy surcharge and additional surcharge across the country. This will also help in the growth of renewable energy generating sources.
Need to Promote Renewable Energy
India is the third largest emitter of greenhouse gases in the world, and if India continues with the current mix of fuel sources, the impact on world environment would be devastating. To address this grim situation, the government made plans to install 175 GW of additional renewable capacity by 2022, of which 100 GW would be solar. Coupled with a drop in the average price of solar electricity below that of its coal-fired counterpart, it is anticipated a good future for solar if the producers are given adequate opportunities to sell their surplus power. New concepts in energy trading and metering such as blockchain represent such opportunities.
What is a Blockchain?
Blockchain is a distributed digital transaction technology that allows for secure data storage and execution of smart contracts in peer-to-peer networks. The first blockchain was developed in the financial sector to serve as a basis for the cryptocurrency ‘Bitcoin’.
New applications add to the technology’s core functionality – decentralised storage of transaction data – by integrating mechanisms that allow for the actual transactions to be effected on a decentralised basis. These mechanisms, called ‘smart contracts’, operate on the basis of individually defined rules (e.g. specifications as to quantity, quality, price) that enable an autonomous matching of ‘distributed providers’ with their ‘prospective customers’.
Open Access using Blockchain
Blockchain can serve the power industry with its potential to unleash an energy revolution in which both utilities and consumers can produce and sell electricity. The smart home appliances connected to an energy trading platform could continuously look for the best offer and automatically shift to a new energy provider through a smart contract. This experience allows the customers to interact from their home or office directly to the energy sellers. Blockchain offers a reliable, low-cost technique to record and validate financial or operational transactions across a distributed network with no central point of authority. Similarly, the producer-consumers or “prosumers” can sell their surplus energy to other customers in the network directly through contracts established and validated through Blockchain.
Blockchain is a foundational technology that can be used to create new business models and underpin business, economic, and social infrastructure. While many blockchain use cases have been proposed for the energy industry, the one gaining the most traction at present is peer-to-peer (P2P) power trading, where owners of small-scale generation can sell excess generation directly to other consumers.
Today, centralised control of distributed energy resources (DER), such as solar generation, restricts to whom and when DER owners can sell their energy back to the grid. A blockchain-enabled P2P model allows much greater flexibility and could be a powerful enabler for a customer-centric transactive energy regime.
The smart contracts don’t have billing components around it and hence there are no infrastructure losses or accounting losses in the system. The “prosumers” can set personal preferences for the distribution of the energy they produce. One might decide to sell his excess energy for maximum profit, while another could choose to donate a portion to low-income consumers.
To support the development of blockchain-based solutions for the energy sector, numerous organisations have set up laboratories to build new blockchain applications such as distributed ledger solutions and its use-cases. These new applications when successfully adopted on a mass scale would have profound impact on the business models of the entire energy sector value chain.
How Blockchain works?
- Blockchain keeps a record of all data exchanges — this record is referred to as a “ledger” in the cryptocurrency world, and each data exchange is a “transaction”. Every verified transaction is added to the ledger as a “block”.
- It utilises a distributed system to verify each transaction — a peer-to-peer network of nodes.
- Once signed and verified, the new transaction is added to the blockchain and cannot be altered.
Buying and Selling Power using Blockchain
The blockchain technology (BCT) offers the following benefits in the electricity sector:
- Customers can turn into service providers by selling surplus energy produced through solar rooftops; opens up entrepreneurship avenues for many.
- Process of energy generation and distribution becomes more direct between suppliers and consumers requiring minimum interface and no middlemen. This will, among other things, reduce bills.
- Eliminates scope for any error or manipulation of the bill amount.
Using BCT, one can sell the surplus power generated from his solar rooftop to a neighbour rather than to the grid without the involvement of any middleman, including a discom. All this can be done in a completely decentralised system, automatically balancing demand and supply and transacting against a set of pre-coded set of rules.
Uttar Pradesh came forward to implement blockchain technology for renewable energy generation and supply. Critics believe that executing the idea might not be that easy in UP which had not been able to fully operationalise the open access system (where buyers have a choice) even 15 years after it was provided in the Electricity Act. They feel that UP needs to tackle various legal and regulatory issues before the blockchain idea is put to practice.
The UP Electricity Regulatory Commission (UPERC) feels otherwise and organised a conference in October 2018. UP plans to produce a lot of solar power that would make it the greenest pasture for investment in renewable energy and distribution sector. Hence, BCT is expected to play a significant role in extending the benefits of these investments and a change in ecosystem to the consumers.
Blockchain enabled Smart Meters
Implementation of the idea requires smart meter technology and blockchain with inbuilt smart contract functionality. These blockchain-enabled smart meters know when to buy and sell power and record all the transactions between various households. The payments, too, are made in a secure and decentralized setup without any intermediary.
Segregating Wire Business from Retail Business for Open Access
The reason why open access has not been able to take off in India can be traced back to the fact that distribution companies in India manage businesses of two different natures – wire business and retail business. The wire business by nature is a monopolistic and regulated-return earning business. Retail supply, on the other hand, is more conducive to providing consumer choice in the form of multiple suppliers, as it involves the purchase of electricity in bulk from generators and selling it to consumers, apart from customer service, billing, and collection of charges from consumers.
In a market structure, wherein the wire business as well as retail business are handled by a single distribution company, conflict of interest makes the distribution company wary of losing its retail segment to competition. Hence, the scope for introducing open access and retail competition is limited in this scenario. To overcome this issue, it is pertinent to segregate the wire business and retail business. In such a market all wire businesses will serve as common carriers and will be paid a reasonable regulated rate of return on their investments. The additional surcharge of Rs 0.44 (~0.6¢)/kWh that GERC has set for consumers availing power through open access could cover the charges of the wire business – namely that of the respective GUVNL’s DISCOMs.
The retail business could be made open to multiple companies operating in the same area, with end consumers having the choice to choose their retailers based on price and service quality. Retail competition is expected to enhance operational and cost efficiencies, and give the end consumer more choice. Cost efficiency is achieved as competitors try to reduce input costs, and operational efficiency is focused upon as performance becomes a major criterion for consumers exercising their choice amongst various suppliers. Competitive power retailers would buy electricity from generators or in the wholesale market and package it to meet varied consumer demands. Their commercial viability would depend on their ability to meet consumer preferences and, in the face of competition, this is expected to result in lower retail prices (as competitive suppliers cut margins) and greater effort by competing retailers on increasing efficiency and consumer welfare.
Therefore, by introducing competition in retail supply and making sure that the market functions well within the defined set of rules, market competition is expected to ensure service quality as well as appropriate pricing. Bringing in user choice through competition also helps in redefining the regulator’s role from being a price-setter to that of a monitoring body and arbitrator. In a competitive framework, the regulator’s role would be to establish guidelines or rules for the competitive retail market and strictly monitor the market for compliance, instead of fixing tariffs for every service.
Blockchain is in its early stages for energy and new crypto technology applications and advancements are regularly occurring. In the energy industry, big changes in open access are expected over the next few years as more and more companies are doing blockchain Proof of Concept (PoC), creating a business case and building a startup team for this disruptive technology.
To promote renewable DERs, it is necessary to create an open access ecosystem using blockchain enabled smart meters. Small pilots need to be implemented and tested. Private energy players should be given an opportunity by providing essential infrastructure like micro grids, smart meters and a blockchain platform. They can then act as an aggregator to connect all energy producing points in a village or a community along with the energy consumers together over the distributed blockchain platform. Such a move would promote competitive pricing and make energy more accessible for everyone in the grid. One would notice that utility operations, business models and organisation structure are being made flexible to adapt to fast changing circumstances brought about by the new applications around blockchain technology. Regulators, policy makers and utilities are eagerly watching the developments in this space closely, since now they all believe that blockchain technology can truly make open access a reality.