Preparing for the Next Stage of Power Reform

Here is a snapshot of the recent changes brought in by the Ministry of Power (MoP) for easing the overall operation of the Indian power sector and of course improving profitability at all stages. All items of information are based on the inputs available from the MoP… - P. K. Chatterjee (PK)

For the Ministry of Power (MoP), October 2021 was the month for preparing for several future actions. Most interestingly, the Supreme Court of India has resolved the 10-year-long pending jurisdictional issue related to power market between CERC (Central Electricity Regulatory Commission) and SEBI (Securities and Exchange Board of India). MoP has taken review of several CPSUs (Central Public Sector Undertakings).

A step towards Power market reforms

On October 06, the long pending matter between SEBI and CERC regarding regulatory jurisdiction of Electricity Derivatives has finally got resolved with the Supreme Court favourably disposing of the matter in terms of the agreement reached upon by SEBI
and CERC.

MoP took the initiative of resolving the jurisdictional issue between SEBI and CERC with regard to various forms of contracts in electricity for Efficient Regulation of Electricity Derivatives by constituting a committee on 26th October, 2018, under the Chairmanship of the Additional Secretary, MoP with representatives from Department of Economic Affairs (Ministry of Finance), Central Electricity Authority, Central Electricity Regulatory Commission (CERC), Power System Operation Corporation Limited (POSOCO), Securities and Exchange Board of India (SEBI), Indian Energy Exchange, Power Exchange of India Limited and Multi Commodity Exchange to examine the technical, operational and legal framework for electricity derivatives and to give recommendation in this regard. Committee submitted its report on 30.10.2019 with the following recommendations:

Henceforth, all Ready Delivery Contracts and Non-Transferable Specific Delivery (NTSD) Contracts as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA) in electricity, entered into by members of the power exchanges, registered under CERC (Power Market) Regulations, 2010, shall be regulated by CERC subject to the following conditions, namely:

i) the contracts are settled only by physical delivery without netting;

ii) the rights and liabilities of parties to the contracts are not transferable;

iii) no such contract is performed either wholly or in part by any means whatsoever, as a result of which the actual delivery of electricity covered by the contract or payment of the full price therefore is dispensed with;

iv) no circular trading shall be allowed and the rights and liabilities of parties to the specific delivery contracts shall not be transferred or rolled over by any other means whatsoever;

v) the trading shall be done only by authorised grid connected entities or trading licensees on behalf of grid connected entities, as participants;

vi) the contracts can be annulled or curtailed, without any transfer of positions, due to constraints in the transmission system or any other technical reasons, as per the principles laid down by CERC in this regard. However, once annulled, same contract cannot be reopened or renewed in any manner to carry forward the same transaction.

vii) all information or returns relating to the trade, as and when asked for, shall be provided to CERC, who shall monitor the performance of the contracts entered into on the power exchanges.

  • Commodity Derivatives in electricity other than Non Transferable Specific Delivery (NTSD) Contracts as defined in SCRA shall fall under the regulatory purview of SEBI.
  • The Central Government reserves the right to impose additional conditions from time to time as it may deem necessary.
  • A Joint Working Group between SEBI and CERC shall be constituted with Terms of Reference as agreed in the Report of the Committee.

Based on the recommendations of the Committee both SEBI and CERC have come to an agreement that CERC will regulate all the physical delivery based forward contracts –  whereas the financial derivatives will be regulated by SEBI. MoP issued suitable order on 10.07.2020.

Benefits

This has opened the gate for introduction of longer duration delivery-based contracts in the power exchanges, which has been currently restricted to only 11 days due to the pendency of the case.

This will enable the DISCOMS and other large consumers to plan their short term power procurement more efficiently. Similarly, the commodity exchanges viz. MCX etc., can now introduce financial products viz. Electricity futures etc., which will enable the DISCOMS and other large consumers to effectively hedge their risks of power procurement.

This is a significant development and has the potential to change the landscape of the power market in the country. This will bring newer products in the power/commodity exchanges and attract increased participation from GENCOs, DISCOMs, large consumers etc., which will eventually deepen the power market.

This will further deepen the power market from the present level of approx. 5.5% of the volume to the targeted volume of 25% by 2024-25.

New rules for easier access to electricity transmission network

MoP has announced the change in the Electricity (Transmission System Planning, Development and Recovery of Inter-State Transmission Charges) Rules 2021. This paves the way for overhauling of transmission system planning, towards giving power sector utilities easier access to the electricity transmission network across the country.

At present, generating companies apply for Long Term Access (LTA) based on their supply tie-ups, while medium-term and short-term transmission access is acquired within the available margins. Based on LTA application, incremental transmission capacity is added. A number of sector developments, such as the increasing focus on renewable energy, and the development of the market mechanism, necessitated a review of the existing transmission planning framework based on LTA.

The rules underpin a system of transmission access, which is termed as a General Network Access (GNA) in the inter-state transmission system. This provides flexibility to the states as well as the generating stations to acquire, hold and transfer transmission capacity as per their requirements. Thus, the rules will bring in rationality, responsibility and fairness in the process of transmission planning as well as its costs. In a major change from the present system of taking transmission access, power plants will not have to specify their target beneficiaries. The rules will also empower state power distribution and transmission companies to determine their transmission requirements and build them. Also, states will be able to purchase electricity from short term and medium term contracts and optimize their power purchase costs.

Apart from introducing GNA, the rules also specify clear roles of various agencies involved in the transmission planning process. CEA shall prepare a short-term plan every year on rolling basis for next 5 years and perspective plan every alternate year on rolling basis for next 10 years. The Central Transmission Utility shall prepare an implementation plan for inter-state transmission system every year on rolling basis for up to next 5 years that will take into account aspects such as right–of-way and progress of the generation and demand in various parts of the country. The rules specify how the existing LTA would be transitioned into General Network Access. They also outline the recovery of GNA charges from the users of transmission network and assign the responsibility of billing, collection and disbursement of inter-state transmission charges to the Central Transmission Utility.

Benefits

For the first time, the rules have ensured that the transmission capacity can be sold, shared or purchased by the states and generators. The rules prescribe that excess drawal or injection over the GNA capacity sanctioned shall be charged at rates that are at least 25% higher and this will ensure that the entities do not under-declare their GNA capacity. CERC has been empowered to bring out detailed regulations on GNA in interstate transmission system.

The Central Government has notified these rules with a view to streamline the process of planning, development and recovery of investment in the transmission system.  The rules are aimed at encouraging investments in the generation and transmission sectors. These rules will enable the country to develop deeper markets.


By P. K. Chatterjee (PK)

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