Reviewing The Electricity Act 2003

People’s Democracy

Organ of the Communist Party of India (Marxist)


No. 23

June 06,

The Electricity Act 2003: Real Initiatives Needed –




Common Minimum Programme of the new UPA government has finally accepted what the
people concerned with the crisis of the power sector have been demanding all
along: a re-look at the power policies followed for the last one and half
decades. The CMP’s acceptance of reviewing the Electricity Act should not be
restricted to just an examination of the provisions of the Act but also of the
philosophy underlying it. This is doubly important as the Congress, as a party
had supported the Act in Parliament and had vigorously pursued the same policies
in many of their states that Chandra Babu had followed in Andhra. The private
entry in generation earlier, trifurcation of the SEBs and then distribution,
have all been followed in Orissa, Delhi and Madhya Pradesh. While Delhi is now
feeling the after effects of privatisation — with tariffs for electricity
slated to take a very steep rise and the supply being still very poor — states
such as Madhya Pradesh have paid a very high price with prolonged power cuts and
rates for electricity shooting up for the farmers S N Roy, former chairman
Central Electricity Authority, had predicted that these power policies would
bankrupt the farmers and impose very high costs on the consumers leading to
political instability. It is for the Congress to realise this and look at the
sector afresh without its ideological blinkers of a neo-liberal economic order.



elements of the current so-called reform policy in the power sector has
consisted of the following:

  • Separation
    of generation, transmission and distribution

  • Allowing
    private entry as Independent Power Producers or as Transmission Companies

  • Privatising

  • Changing
    fuel policy to allow hydro-carbons instead of coal

  • Allowing
    power trading companies to trade in electricity

  • Encouraging
    captive power plants and giving them additional incentives to supply to the

  • Withdraw
    the state from rural electrification

  • Remove
    all cross-subsidies

we look at individual components of the policies, it can be shown that each of
them has failed. Enron, GVK Industries, Essar Power all have sold power at high
costs to the SEBs driving them further into the red. The privatisation of
generation, whether in Orissa earlier or in Delhi now has not brought in any
benefits to the consumer and have actually increased the outflow from the state
exchequer. The hydrocarbon policy, which encouraged naphtha as fuel, has been a
disaster, imposing a cost of fuel per unit of Rs 4-5, way beyond the current
tariffs can sustain. But the more important issue is to address the underlying
assumptions of these policies and examine their validity.


this article we will examine the issues related to the costs of generating power
and will leave power trading, privatisation of distribution and rural
electrification for later.





underlying assumption of the power policy has been the neo-liberal belief that
markets are the only way to improve efficiencies and lower costs. Recognising
that power sector is a monopoly — both transmission and distribution networks
are costly and difficult to duplicate — the policy was to separate generation
from the monopoly elements of transmission and distribution. With this, it was
argued that competition in generation would lower the cost of electricity as
generators vie with each other to supply cheaper and cheaper electricity. We
will leave out the question whether in a scarcity situation, there can be any
meaningful competition. The question to ask here is has such competition lowered
the price of electricity anywhere in the country or for that matters anywhere in
the world?


record of private power generators in India have been that they have asked for
and reached Power Purchase Agreements (PPAs) that have grossly inflated plant
costs and secured rates for electricity well over what it is costing the SEBs to
generate. The Enron is only the most infamous of the PPAs; the other ones
starting from the various PPAs in Andhra to the ones proposed for Maheswhar were
hardly better. It was just their smaller size did not cause as much damage. The
net result has been a very severe pressure on the costs of supplying
electricity. About 10 years back, it used to cost Rs 1.20 to produce one unit of
electricity; it costs around Rs 2.60-2.80 to produce the same today. A large
measure of pushing up the cost of generating electricity was providing various
incentives to the private IPPs, which were then also availed off by NTPC. The
net result has been a huge outflow from the SEBs to NTPC and IPPs. At a
conservative estimate, this outflow has not been less than Rs 100,000 crore in
the last 10 years. No wonder the SEBs have become more and more sick as the
reforms have gathered strength.


situation in the rest of the world in no different. Whether it is the
Californian case, where market “competition” drove up the cost of power to
five times its earlier cost to UK, where the power companies after
“competition” made windfall profits, the picture has been exactly the same
as in India. The power markets are easy to rig and such competition leads to
cartels and profiteering. 




fuel policy has seen a switch to Natural Gas, Liquefied Natural Gas (LNG) and
Naphtha. Mercifully, the naphtha route is dead, though the damage it has
inflicted, particularly on the Maharashtra (Dabhol) and Kerala (Kayamkulam) SEBs,
have been very high. The LNG route continues to be encouraged as more and more
combined cycle plants come up with Natural Gas as the fuel.


problem with the Natural Gas route is that it depends on the price of gas. If we
allow Indian Natural Gas prices to be indexed to international fuel prices as is
being pushed by the petroleum ministry, this will mean that cost of electricity
in India would hinge on the price of crude, an extremely volatile commodity.
This also does not take into account that the indigenous Natural Gas supply may
not be enough and we will have to supplement this with imported LNG. Here again,
imported LNG would be, in all likelihood, tied to international oil prices. 
Any shift to Natural Gas would have to take into account how gas will be
priced in the country and not based on piecemeal policy making.


is not that basing our power programme to coal is without problems. We have seen
that coal prices in India have gone up steeply as the governments of the day
have not been able to address the problems posed by the coal mafia and improve
the performance of the coalmines. The price of coal has doubled in the last 10
years and so has its freight. The net result has been accentuating the push on
the cost of generating power.


there no solutions to lowering or containing the price of generating
electricity? There are obviously two components to the cost of generation,
capital cost and fuel cost. If we look at these two issues separately, we will
see that alternate solutions exist. However, this demands a change in mindset
that the current economic establishment is not prepared to do





most important way to reduce the cost of capital equipment is to purchase same
number of units in bulk: take advantage of economies of scale that such
manufacture of equipment would entail. If we can place an order on BHEL for say
30 coal fired units of 250 MW units for the next five years, this will allow
BHEL to procure material in bulk and therefore allow them to quote much lower
prices. This would also give a big boost to Indian industry as they would then
be supplying various equipment to BHEL and would have an assured order book.
There could be various ways of financing this programme using imaginative
methods, some of which have been detailed by professor Prabhat Patnaik
elsewhere. But the central point here is that even without such methods of
financing, the costs of equipment would come down drastically if we can decide
on a stable procurement policy.


each SEB procures plants independently with various financial aid and loan
packages. Quite often, they are tied by their financing to take either the
global bidding route or tied import of equipment from the country giving the
loan. All this leads to very high cost of equipment, which ultimately gets
passed on to the consumer as high power tariffs.


fuel issue needs to address is what should be the fuel policy for the power
sector. Here again if Natural Gas is to be used, it must be based on fixed long
term price regime and not linked to international prices. Further, we should
avoid, as far as possible the import of fuel for the power sector. The second
component of fuel policy is to take a hard look at the coalmines and various
central levies that are being imposed on the power sector including high freight
charges by the Railways. 

this demands hard work and detailed plans. Unfortunately, reforms in India has
come to mean mouthing a few slogans and washing ones hands off to let markets
take care of everything, from a lack of understanding of the power sector to
solving the problems of the sector. That markets have failed from California to
UK has not dampened the enthusiasm of the proponents of neo-liberalism. It is
time that the government addressed the real problems of the sector with some
real initiatives: and not fictitious reforms as of the earlier government.

Be Concluded)