National Electricity Policy

The Gazette of India

EXTRAORDINARY

PART I – Section 1

PUBLISHED BY AUTHORITY

No…., New Delhi, Dated ….

Ministry of Power

New Delhi,

Dated the 12th, February, 2005

RESOLUTION

No. 23/40/2004-R&R (Vol.II)

1.0 INTRODUCTION

1.1 In compliance with section 3 of the Electricity Act 2003
the Central Government hereby notifies the National Electricity Policy.

1.2 Electricity is an essential requirement for all facets
of our life. It has been recognized as a basic human need. It is a critical
infrastructure on which the socio-economic development of the country
depends. Supply of electricity at reasonable rate to rural India is essential
for its overall development. Equally important is availability of reliable
and quality power at competitive rates to Indian industry to make it globally
competitive and to enable it to exploit the tremendous potential of employment
generation. Services sector has made significant contribution to the growth
of our economy. Availability of quality supply of electricity is very
crucial to sustained growth of this segment.

1.3 Recognizing that electricity is one of the key drivers
for rapid economic growth and poverty alleviation, the nation has set
itself the target of providing access to all households in next five years.
As per Census 2001, about 44% of the households do not have access to
electricity. Hence meeting the target of providing universal access is
a daunting task requiring significant addition to generation capacity
and expansion of the transmission and distribution network.

1.4 Indian Power sector is witnessing major changes. Growth
of Power Sector in India since its Independence has been noteworthy. However,
the demand for power has been outstripping the growth of availability.
Substantial peak and energy shortages prevail in the country. This is
due to inadequacies in generation, transmission & distribution as
well as inefficient use of electricity. Very high level of technical and
commercial losses and lack of commercial approach in management of utilities
has led to unsustainable financial operations. Cross-subsidies have risen
to unsustainable levels. Inadequacies in distribution networks has been
one of the major reasons for poor quality of supply.

1.5 Electricity industry is capital-intensive having long
gestation period. Resources of power generation are unevenly dispersed
across the country. Electricity is a commodity that can not be stored
in the grid where demand and supply have to be continuously balanced.
The widely distributed and rapidly increasing demand requirements of the
country need to be met in an optimum manner.

1.6 Electricity Act, 2003 provides an enabling framework for
accelerated and more efficient development of the power sector. The Act
seeks to encourage competition with appropriate regulatory intervention.
Competition is expected to yield efficiency gains and in turn result in
availability of quality supply of electricity to consumers at competitive
rates.

1.7 Section 3 (1) of the Electricity Act 2003 requires the
Central Government to formulate, inter alia, the National Electricity
Policy in consultation with Central Electricity Authority (CEA) and State
Governments. The provision is quoted below:

“The Central Government shall, from time to time, prepare
the National Electricity Policy and tariff policy, in consultation with
the State Governments and the Authority for development of the power
system based on optimal utilization of resources such as coal, natural
gas, nuclear substances or materials, hydro and renewable sources of
energy”.

Section 3 (3) of the Act enables the Central Government to review or
revise the National Electricity Policy from time to

time.

1.8 The National Electricity Policy aims at laying guidelines for accelerated
development of the power sector, providing supply of electricity to all
areas and protecting interests of consumers and other stakeholders keeping
in view availability of energy resources, technology available to exploit
these resources, economics of generation using different resources, and
energy security issues.

1.9 The National Electricity Policy has been evolved in consultation
with and taking into account views of the State Governments, Central Electricity
Authority (CEA), Central Electricity Regulatory Commission (CERC) and
other stakeholders.

2.0 AIMS & OBJECTIVES

The National Electricity Policy aims at achieving the following objectives:

• Access to Electricity – Available for all households in next five
  years
• Availability of Power – Demand to be fully met by 2012. Energy and
  peaking shortages to be overcome and adequate spinning reserve to be
  available.
• Supply of Reliable and Quality Power of specified standards in an
  efficient manner and at reasonable rates.
• Per capita availability of electricity to be increased to over 1000
  units by 2012.
• Minimum lifeline consumption of 1 unit/household/day as a merit good
  by year 2012.
• Financial Turnaround and Commercial Viability of Electricity Sector.
• Protection of consumers’ interests.

3. NATIONAL ELECTRICITY PLAN

3.1 Assessment of demand is an important pre-requisite for planning capacity
addition. Section 3 (4) of the Act requires the Central Electricity Authority
(CEA) to frame a National Electricity Plan once in five years and revise
the same from time to time in accordance with the National Electricity
Policy. Also, section 73 (a) provides that formulation of short-term and
perspective plans for development of the electricity system and coordinating
the activities of various planning agencies for the optimal utilization
of resources to subserve the interests of the national economy shall be
one of the functions of the CEA. The Plan prepared by CEA and approved
by the Central Government can be used by prospective generating companies,
transmission utilities and transmission/distribution licensees as reference
document.

3.2 Accordingly, the CEA shall prepare short-term and perspective plan.
The National Electricity Plan would be for a short-term framework of five
years while giving a 15 year perspective and would include:

• Short-term and long term demand forecast for different regions;
• Suggested areas/locations for capacity additions in generation and
  transmission keeping in view the economics of generation and transmission,
  losses in the system, load centre requirements, grid stability, security
  of supply, quality of power including voltage profile etc. and environmental
  considerations including rehabilitation and resettlement;
• Integration of such possible locations with transmission system and
  development of national grid including type of transmission systems
  and requirement of redundancies; and
• Different technologies available for efficient generation, transmission
  and distribution.
• Fuel choices based on economy, energy security and environmental
  considerations.

3.3 While evolving the National Electricity Plan, CEA will consult all
the stakeholders including state governments and the state governments
would, at state level, undertake this exercise in coordination with stakeholders
including distribution licensees and STUs. While conducting studies periodically
to assess short-term and long-term demand, projections made by distribution
utilities would be given due weightage. CEA will also interact with institutions
and agencies having economic expertise, particularly in the field of demand
forecasting. Projected growth rates for different sectors of the economy
will also be taken into account in the exercise of demand forecasting.

3.4 The National Electricity Plan for the ongoing 10th Plan period and
11th Plan and perspective Plan for the 10th, 11th & 12th Plan periods
would be prepared and notified after reviewing and revising the existing
Power Plan prepared by CEA. This will be done within six months.

4.0 ISSUES ADDRESSED

The policy seeks to address the following issues:

• Rural Electrification
• Generation
• Transmission
• Distribution
• Recovery of Cost of services & Targetted Subsidies.
• Technology Development and Research and Development (R&D)
• Competition aimed at Consumer Benefits
• Financing Power Sector Programmes Including Private Sector Participation.
• Energy Conservation
• Environmental Issues
• Training and Human Resource Development
• Cogeneration and Non-Conventional Energy Sources
• Protection of Consumer interests and Quality Standards

5.1 RURAL ELECTRIFICATION

5.1.1 The key development objective of the power sector is supply of
electricity to all areas including rural areas as mandated in section
6 of the Electricity Act. Both the central government and state governments
would jointly endeavour to achieve this objective at the earliest. Consumers,
particularly those who are ready to pay a tariff which reflects efficient
costs have the right to get uninterrupted twenty four hours supply of
quality power. About 56% of rural households have not yet been electrified
even though many of these households are willing to pay for electricity.
Determined efforts should be made to ensure that the task of rural electrification
for securing electricity access to all households and also ensuring that
electricity reaches poor and marginal sections of the society at reasonable
rates is completed within the next five years.

5.1.2 Reliable rural electrification system will aim at creating the
following:

(a) Rural Electrification Distribution Backbone (REDB) with at least
one 33/11 kv (or 66/11 kv) substation in every Block and more if required
as per load, networked and connected appropriately to the state transmission
system

(b) Emanating from REDB would be supply feeders and one distribution
transformer at least in every village settlement.

(c) Household Electrification from distribution transformer to connect
every household on demand.

(d) Wherever above is not feasible (it is neither cost effective nor
the optimal solution to provide grid connectivity) decentralized distributed
generation facilities together with local distribution network would be
provided so that every household gets access to electricity. This would
be done either through conventional or non-conventional methods of electricity
generation whichever is more suitable and economical. Non-conventional
sources of energy could be utilized even where grid connectivity exists
provided it is found to be cost effective.

(e) Development of infrastructure would also cater for requirement of
agriculture & other economic activities including irrigation pump
sets, small and medium industries, khadi and village industries, cold
chain and social services like health and education.

5.1.3 Particular attention would be given in household electrification
to dalit bastis, tribal areas and other weaker sections.

5.1.4 Rural Electrification Corporation of India, a Government of India
enterprise will be the nodal agency at Central Government level to implement
the programme for achieving the goal set by National Common Minimum Programme
of giving access to electricity to all the households in next five years.
Its role is being suitably enlarged to ensure timely implementation of
rural electrification projects.

5.1.5 Targetted expansion in access to electricity for rural households
in the desired timeframe can be achieved if the distribution licensees
recover at least the cost of electricity and related O&M expenses
from consumers, except for lifeline support to households below the poverty
line who would need to be adequately subsidized. Subsidies should be properly
targeted at the intended beneficiaries in the most efficient manner. Government
recognizes the need for providing necessary capital subsidy and soft long-term
debt finances for investment in rural electrification as this would reduce
the cost of supply in rural areas. Adequate funds would need to be made
available for the same through the Plan process. Also commensurate organizational
support would need to be created for timely implementation. The Central
Government would assist the State Governments in achieving this.

5.1.6 Necessary institutional framework would need to be put in place
not only to ensure creation of rural electrification infrastructure but
also to operate and maintain supply system for securing reliable power
supply to consumers. Responsibility of operation & maintenance and
cost recovery could be discharged by utilities through appropriate arrangements
with Panchayats, local authorities, NGOs and other franchisees etc.

5.1.7 The gigantic task of rural electrification requires appropriate
cooperation among various agencies of the State Governments, Central Government
and participation of the community. Education and awareness programmes
would be essential for creating demand for electricity and for achieving
the objective of effective community participation.

5.2 GENERATION

5.2.1 Inadequacy of generation has characterized power sector operation
in India. To provide availability of over 1000 units of per capita electricity
by year 2012 it had been estimated that need based capacity addition of
more than 1,00,000 MW would be required during the period 2002-12.

5.2.2 The Government of India has initiated several reform measures to
create a favourable environment for addition of new generating capacity
in the country. The Electricity Act 2003 has put in place a highly liberal
framework for generation. There is no requirement of licensing for generation.
The requirement of techno-economic clearance of CEA for thermal generation
project is no longer there. For hydroelectric generation also, the limit
of capital expenditure, above which concurrence of CEA is required, would
be raised suitably from the present level. Captive generation has been
freed from all controls.

5.2.3 In order to fully meet both energy and peak demand by 2012, there
is a need to create adequate reserve capacity margin. In addition to enhancing
the overall availability of installed capacity to 85%, a spinning reserve
of at least 5%, at national level, would need to be created to ensure
grid security and quality and reliability of power supply.

5.2.4 The progress of implementation of capacity addition plans and growth
of demand would need to be constantly monitored and necessary adjustments
made from time to time. In creating new generation capacities, appropriate
technology may be considered keeping in view the likely widening of the
difference between peak demand and the base load.

Hydro Generation

5.2.5 Hydroelectricity is a clean and renewable source of energy. Maximum
emphasis would be laid on the full development of the feasible hydro potential
in the country. The 50,000 MW hydro initiative has been already launched
and is being vigorously pursued with DPRs for projects of 33,000 MW capacity
already under preparation.

5.2.6 Harnessing hydro potential speedily will also facilitate economic
development of States, particularly North-Eastern States, Sikkim, Uttaranchal,
Himachal Pradesh and J&K, since a large proportion of our hydro power
potential is located in these States. The States with hydro potential
need to focus on the full development of these potentials at the earliest.

5.2.7 Hydel projects call for comparatively larger capital investment.
Therefore, debt financing of longer tenure would need to be made available
for hydro projects. Central Government is committed to policies that ensure
financing of viable hydro projects.

5.2.8 State Governments need to review procedures for land acquisition,
and other approvals/clearances for speedy implementation of hydroelectric
projects.

5.2.9 The Central Government will support the State Governments for expeditious
development of their hydroelectric projects by offering services of Central
Public Sector Undertakings like National Hydroelectric Power Corporation
(NHPC).

5.2.10 Proper implementation of National Policy on Rehabilitation and
Resettlement (R&R) would be essential in this regard so as to ensure
that the concerns of project-affected families are addressed adequately.

5.2.11 Adequate safeguards for environmental protection with suitable
mechanism for monitoring of implementation of Environmental Action Plan
and R&R Schemes will be put in place.

Thermal Generation

5.2.12 Even with full development of the feasible hydro potential in
the country, coal would necessarily continue to remain the primary fuel
for meeting future electricity demand.

5.2.13 Imported coal based thermal power stations, particularly at coastal
locations, would be encouraged based on their economic viability. Use
of low ash content coal would also help in reducing the problem of fly
ash emissions.

5.2.14 Significant Lignite resources in the country are located in Tamil
Nadu, Gujarat and Rajasthan and these should be increasingly utilized
for power generation. Lignite mining technology needs to be improved to
reduce costs.

5.2.15 Use of gas as a fuel for power generation would depend upon its
availability at reasonable prices. Natural gas is being used in Gas Turbine
/Combined Cycle Gas Turbine (GT/CCGT) stations, which currently accounts
for about 10 % of total capacity. Power sector consumes about 40% of the
total gas in the country. New power generation capacity could come up
based on indigenous gas findings, which can emerge as a major source of
power generation if prices are reasonable. A national gas grid covering
various parts of the country could facilitate development of such capacities.

5.2.16 Imported LNG based power plants are also a potential source of
electricity and the pace of their development would depend on their commercial
viability. The existing power plants using liquid fuels should shift to
use of Natural Gas/LNG at the earliest to reduce the cost of generation.

5.2.17 For thermal power, economics of generation and supply of electricity
should be the basis for choice of fuel from among the options available.
It would be economical for new generating stations to be located either
near the fuel sources e.g. pithead locations or load centres.

5.2.18 Generating companies may enter into medium to long-term fuel supply
agreements specially with respect to imported fuels for commercial viability
and security of supply.

Nuclear Power

5.2.19 Nuclear power is an established source of energy to meet base
load demand. Nuclear power plants are being set up at locations away from
coalmines. Share of nuclear power in the overall capacity profile will
need to be increased significantly. Economics of generation and resultant
tariff will be, among others, important considerations. Public sector
investments to create nuclear generation capacity will need to be stepped
up. Private sector partnership would also be facilitated to see that not
only targets are achieved but exceeded.

Non-conventional Energy Sources

5.2.20 Feasible potential of non-conventional energy resources, mainly
small hydro, wind and bio-mass would also need to be exploited fully to
create additional power generation capacity. With a view to increase the
overall share of non-conventional energy sources in the electricity mix,
efforts will be made to encourage private sector participation through
suitable promotional measures.

Renovation and Modernization (R&M)

5.2.21 One of the major achievements of the power sector has been a
significant increase in availability and plant load factor of thermal
power stations specially over the last few years. Renovation and modernization
for achieving higher efficiency levels needs to be pursued vigorously
and all existing generation capacity should be brought to minimum acceptable
standards. The Govt. of India is providing financial support for this
purpose.

5.2.22 For projects performing below acceptable standards, R&M should
be undertaken as per well-defined plans featuring necessary cost-benefit
analysis. If economic operation does not appear feasible through R&M,
then there may be no alternative to closure of such plants as the last
resort.

5.2.23 In cases of plants with poor O&M record and persisting operational
problems, alternative strategies including change of management may need
to be considered so as to improve the efficiency to acceptable levels
of these power stations.

Captive Generation

5.2.24 The liberal provision in the Electricity Act, 2003 with respect
to setting up of captive power plant has been made with a view to not
only securing reliable, quality and cost effective power but also to facilitate
creation of employment opportunities through speedy and efficient growth
of industry.

5.2.25 The provision relating to captive power plants to be set up by
group of consumers is primarily aimed at enabling small and medium industries
or other consumers that may not individually be in a position to set up
plant of optimal size in a cost effective manner. It needs to be noted
that efficient expansion of small and medium industries across the country
would lead to creation of enormous employment opportunities.

5.2.26 A large number of captive and standby generating stations in India
have surplus capacity that could be supplied to the grid continuously
or during certain time periods. These plants offer a sizeable and potentially
competitive capacity that could be harnessed for meeting demand for power.
Under the Act, captive generators have access to licensees and would get
access to consumers who are allowed open access. Grid inter-connections
for captive generators shall be facilitated as per section 30 of the Act.
This should be done on priority basis to enable captive generation to
become available as distributed generation along the grid. Towards this
end, non-conventional energy sources including co-generation could also
play a role. Appropriate commercial arrangements would need to be instituted
between licensees and the captive generators for harnessing of spare capacity
energy from captive power plants. The appropriate Regulatory Commission
shall exercise regulatory oversight on such commercial arrangements between
captive generators and licensees and determine tariffs when a licensee
is the off-taker of power from captive plant.

5.3 TRANSMISSION

5.3.1 The Transmission System requires adequate and timely investments
and also efficient and coordinated action to develop a robust and integrated
power system for the country.

5.3.2 Keeping in view the massive increase planned in generation and
also for development of power market, there is need for adequately augmenting
transmission capacity. While planning new generation capacities, requirement
of associated transmission capacity would need to be worked out simultaneously
in order to avoid mismatch between generation capacity and transmission
facilities. The policy emphasizes the following to meet the above objective:

• The Central Government would facilitate the continued development
  of the National Grid for providing adequate infrastructure for inter-state
  transmission of power and to ensure that underutilized generation capacity
  is facilitated to generate electricity for its transmission from surplus
  regions to deficit regions.
• The Central Transmission Utility (CTU) and State Transmission Utility
  (STU) have the key responsibility of network planning and development
  based on the National Electricity Plan in coordination with all concerned
  agencies as provided in the Act. The CTU is responsible for the national
  and regional transmission system planning and development. The STU is
  responsible for planning and development of the intra-state transmission
  system. The CTU would need to coordinate with the STUs for achievement
  of the shared objective of eliminating transmission constraints in cost
  effective manner.
• Network expansion should be planned and implemented keeping in view
  the anticipated transmission needs that would be incident on the system
  in the open access regime. Prior agreement with the beneficiaries would
  not be a pre-condition for network expansion. CTU/STU should undertake
  network expansion after identifying the requirements in consultation
  with stakeholders and taking up the execution after due regulatory approvals.
• Structured information dissemination and disclosure procedures should
  be developed by the CTU and STUs to ensure that all stakeholders are
  aware of the status of generation and transmission projects and plans.
  These should form a part of the overall planning procedures.
• The State Regulatory Commissions who have not yet notified the grid
  code under the Electricity Act 2003 should notify the same not later
  than September 2005.

5.3.3 Open access in transmission has been introduced to promote competition
amongst the generating companies who can now sell to different distribution
licensees across the country. This should lead to availability of cheaper
power. The Act mandates non-discriminatory open access in transmission
from the very beginning. When open access to distribution networks is
introduced by the respective State Commissions for enabling bulk consumers
to buy directly from competing generators, competition in the market would
increase the availability of cheaper and reliable power supply. The Regulatory
Commissions need to provide facilitative framework for non-discriminatory
open access. This requires load dispatch facilities with state-of-the
art communication and data acquisition capability on a real time basis.
While this is the case currently at the regional load dispatch centers,
appropriate State Commissions must ensure that matching facilities with
technology upgrades are provided at the State level, where necessary and
realized not later than June 2006.

5.3.4 The Act prohibits the State transmission utilities/transmission
licensees from engaging in trading in electricity. Power purchase agreements
(PPAs) with the generating companies would need to be suitably assigned
to the Distribution Companies, subject to mutual agreement. To the extent
necessary, such assignments can be done in a manner to take care of different
load profiles of the Distribution Companies. Non-discriminatory open access
shall be provided to competing generators supplying power to licensees
upon payment of transmission charge to be determined by the appropriate
Commission. The appropriate Commissions shall establish such transmission
charges no later than June 2005.

5.3.5 To facilitate orderly growth and development of the power sector
and also for secure and reliable operation of the grid, adequate margins
in transmission system should be created. The transmission capacity would
be planned and built to cater to both the redundancy levels and margins
keeping in view international standards and practices. A well planned
and strong transmission system will ensure not only optimal utilization
of transmission capacities but also of generation facilities and would
facilitate achieving ultimate objective of cost effective delivery of
power. To facilitate cost effective transmission of power across the region,
a national transmission tariff framework needs to be implemented by CERC.
The tariff mechanism would be sensitive to distance, direction and related
to quantum of flow. As far as possible, consistency needs to be maintained
in transmission pricing framework in inter-State and intra-State systems.
Further it should be ensured that the present network deficiencies do
not result in unreasonable transmission loss compensation requirements.

5.3.6 The necessary regulatory framework for providing non-discriminatory
open access in transmission as mandated in the Electricity Act 2003 is
essential for signalling efficient choice in locating generation capacity
and for encouraging trading in electricity for optimum utilization of
generation resources and consequently for reducing the cost of supply.

5.3.7 The spirit of the provisions of the Act is to ensure independent
system operation through NLDC, RLDCs and SLDCs. These dispatch centers,
as per the provisions of the Act, are to be operated by a Government company
or authority as notified by the appropriate Government. However, till
such time these agencies/authorities are established the Act mandates
that the CTU or STU, as the case may be, shall operate the RLDCs or SLDC.
The arrangement of CTU operating the RLDCs would be reviewed by the Central
Government based on experience of working with the existing arrangement.
A view on this aspect would be taken by the Central Government by December
2005.

5.3.8 The Regional Power Committees as envisaged in section section 2(55)
would be constituted by the Government of India within two months with
representation from various stakeholders.

5.3.9 The National Load Despatch Centre (NLDC) along with its constitution
and functions as envisaged in Section 26 of the Electricity Act 2003 would
be notified within three months. RLDCs and NLDC will have complete responsibility
and commensurate authority for smooth operation of the grid irrespective
of the ownership of the transmission system, be it under CPSUs, State
Utility or private sector.

5.3.10 Special mechanisms would be created to encourage private investment
in transmission sector so that sufficient investments are made for achieving
the objective of demand to be fully met by 2012.

5.4 DISTRIBUTION

5.4.1 Distribution is the most critical segment of the electricity business
chain. The real challenge of reforms in the power sector lies in efficient
management of the distribution sector.

5.4.2 The Act provides for a robust regulatory framework for distribution
licensees to safeguard consumer interests. It also creates a competitive
framework for the distribution business, offering options to consumers,
through the concepts of open access and multiple licensees in the same
area of supply.

5.4.3 For achieving efficiency gains proper restructuring of distribution
utilities is essential. Adequate transition financing support would also
be necessary for these utilities. Such support should be arranged linked
to attainment of predetermined efficiency improvements and reduction in
cash losses and putting in place appropriate governance structure for
insulating the service providers from extraneous interference while at
the same time ensuring transparency and accountability. For ensuring financial
viability and sustainability, State Governments would need to restructure
the liabilities of the State Electricity Boards to ensure that the successor
companies are not burdened with past liabilities. The Central Government
would also assist the States, which develop a clear roadmap for turnaround,
in arranging transition financing from various sources which shall be
linked to predetermined improvements and efficiency gains aimed at attaining
financial viability and also putting in place appropriate governance structures.

5.4.4 Conducive business environment in terms of adequate returns and
suitable transitional model with predetermined improvements in efficiency
parameters in distribution business would be necessary for facilitating
funding and attracting investments in distribution. Multi-Year Tariff
(MYT) framework is an important structural incentive to minimize risks
for utilities and consumers, promote efficiency and rapid reduction of
system losses. It would serve public interest through economic efficiency
and improved service quality. It would also bring greater predictability
to consumer tariffs by restricting tariff adjustments to known indicators
such as power purchase prices and inflation indices. Private sector participation
in distribution needs to be encouraged for achieving the requisite reduction
in transmission and distribution losses and improving the quality of service
to the consumers.

5.4.5 The Electricity Act 2003 enables competing generating companies
and trading licensees, besides the area distribution licensees, to sell
electricity to consumers when open access in distribution is introduced
by the State Electricity Regulatory Commissions. As required by the Act,
the SERCs shall notify regulations by June 2005 that would enable open
access to distribution networks in terms of sub-section 2 of section 42
which stipulates that such open access would be allowed, not later than
five years from 27th January 2004 to consumers who require a supply of
electricity where the maximum power to be made available at any time exceeds
one mega watt. Section 49 of the Act provides that such consumers who
have been allowed open access under section 42 may enter into agreement
with any person for supply of electricity on such terms and conditions,
including tariff, as may be agreed upon by them. While making regulations
for open access in distribution, the SERCs will also determine wheeling
charges and cross-subsidy surcharge as required under section 42 of the
Act.

5.4.6 A time-bound programme should be drawn up by the State Electricity
Regulatory Commissions (SERC) for segregation of technical and commercial
losses through energy audits. Energy accounting and declaration of its
results in each defined unit, as determined by SERCs, should be mandatory
not later than March 2007. An action plan for reduction of the losses
with adequate investments and suitable improvements in governance should
be drawn up. Standards for reliability and quality of supply as well as
for loss levels shall also be specified ,from time to time, so as to bring
these in line with international practices by year 2012.

5.4.7 One of the key provisions of the Act on competition in distribution
is the concept of multiple licensees in the same area of supply through
their independent distribution systems. State Governments have full flexibility
in carving out distribution zones while restructuring the Government utilities.
For grant of second and subsequent distribution licence within the area
of an incumbent distribution licensee, a revenue district, a Municipal
Council for a smaller urban area or a Municipal Corporation for a larger
urban area as defined in the Article 243(Q) of Constitution of India (74th
Amendment) may be considered as the minimum area. The Government of India
would notify within three months, the requirements for compliance by applicant
for second and subsequent distribution licence as envisaged in Section
14 of the Act. With a view to provide benefits of competition to all section
of consumers, the second and subsequent licensee for distribution in the
same area shall have obligation to supply to all consumers in accordance
with provisions of section 43 of the Electricity Act 2003. The SERCs are
required to regulate the tariff including connection charges to be recovered
by a distribution licensee under the provisions of the Act. This will
ensure that second distribution licensee does not resort to cherry picking
by demanding unreasonable connection charges from consumers.

5.4.8 The Act mandates supply of electricity through a correct meter
within a stipulated period. The Authority should develop regulations as
required under Section 55 of the Act within three months.

5.4.9 The Act requires all consumers to be metered within two years.
The SERCs may obtain from the Distribution Licensees their metering plans,
approve these, and monitor the same. The SERCs should encourage use of
pre-paid meters. In the first instance, TOD meters for large consumers
with a minimum load of one MVA are also to be encouraged. The SERCs should
also put in place independent third-party meter testing arrangements.

5.4.10 Modern information technology systems may be implemented by the
utilities on a priority basis, after considering cost and benefits, to
facilitate creation of network information and customer data base which
will help in management of load, improvement in quality, detection of
theft and tampering, customer information and prompt and correct billing
and collection . Special emphasis should be placed on consumer indexing
and mapping in a time bound manner. Support is being provided for information
technology based systems under the Accelerated Power Development and Reforms
Programme (APDRP).

5.4.11 High Voltage Distribution System is an effective method for reduction
of technical losses, prevention of theft, improved voltage profile and
better consumer service. It should be promoted to reduce LT/HT ratio keeping
in view the techno economic considerations.

5.4.12 SCADA and data management systems are useful for efficient working
of Distribution Systems. A time bound programme for implementation of
SCADA and data management system should be obtained from Distribution
Licensees and approved by the SERCs keeping in view the techno economic
considerations. Efforts should be made to install substation automation
equipment in a phased manner.

5.4.13 The Act has provided for stringent measures against theft of electricity.
The States and distribution utilities should ensure effective implementation
of these provisions. The State Governments may set up Special Courts as
envisaged in Section 153 of the Act.

5.5 RECOVERY OF COST OF SERVICES & TARGETTED SUBSIDIES

5.5.1 There is an urgent need for ensuring recovery of cost of service
from consumers to make the power sector sustainable.

5.5.2 A minimum level of support may be required to make the electricity
affordable for consumers of very poor category. Consumers below poverty
line who consume below a specified level, say 30 units per month, may
receive special support in terms of tariff which are cross-subsidized.
Tariffs for such designated group of consumers will be at least 50 % of
the average (overall) cost of supply. This provision will be further re-examined
after five years.

5.5.3 Over the last few decades cross-subsidies have increased to unsustainable
levels. Cross-subsidies hide inefficiencies and losses in operations.
There is urgent need to correct this imbalance without giving tariff shock
to consumers. The existing cross-subsidies for other categories of consumers
would need to be reduced progressively and gradually.

5.5.4 The State Governments may give advance subsidy to the extent they
consider appropriate in terms of section 65 of the Act in which case necessary
budget provision would be required to be made in advance so that the utility
does not suffer financial problems that may affect its operations. Efforts
would be made to ensure that the subsidies reach the targeted beneficiaries
in the most transparent and efficient way.

5.6 TECHNOLOGY DEVELOPMENT AND R&D

5.6.1 Effective utilization of all available resources for generation,
transmission and distribution of electricity using efficient and cost
effective technologies is of paramount importance. Operations and management
of vast and complex power systems require coordination among the multiple
agencies involved. Effective control of power system at state, regional
and national level can be achieved only through use of Information Technology.
Application of IT has great potential in reducing technical & commercial
losses in distribution and providing consumer friendly services. Integrated
resource planning and demand side management would also require adopting
state of the art technologies.

Special efforts would be made for research, development demonstration
and commercialization of non-conventional energy systems. Such systems
would need to meet international standards, specifications and performance
parameters.

5.6.2 Efficient technologies, like super critical technology, IGCC etc
and large size units would be gradually introduced for generation of electricity
as their cost effectiveness is established. Simultaneously, development
and deployment of technologies for productive use of fly ash would be
given priority and encouragement.

5.6.3 Similarly, cost effective technologies would require to be developed
for high voltage power flows over long distances with minimum possible
losses. Specific information technology tools need to be developed for
meeting the requirements of the electricity industry including highly
sophisticated control systems for complex generation and transmission
operations, efficient distribution business and user friendly consumer
interface.

5.6.4 The country has a strong research and development base in the electricity
sector which would be further augmented. R&D activities would be further
intensified and Missions will be constituted for achieving desired results
in identified priority areas. A suitable funding mechanism would be evolved
for promoting R& D in the Power Sector. Large power companies should
set aside a portion of their profits for support to R&D.

5.7 COMPETITION AIMED AT CONSUMER BENEFITS

5.7.1 To promote market development, a part of new generating capacities,
say 15% may be sold outside long-term PPAs . As the power markets develop,
it would be feasible to finance projects with competitive generation costs
outside the long-term power purchase agreement framework. In the coming
years, a significant portion of the installed capacity of new generating
stations could participate in competitive power markets. This will increase
the depth of the power markets and provide alternatives for both generators
and licensees/consumers and in long run would lead to reduction in tariff.

For achieving this, the policy underscores the following:-

1. It is the function of the Central Electricity Regulatory Commission
   to issue license for inter-state trading which would include authorization
   for trading throughout the country.
2. The ABT regime introduced by CERC at the national level has had a
   positive impact. It has also enabled a credible settlement mechanism
   for intra-day power transfers from licenses with surpluses to licenses
   experiencing deficits. SERCs are advised to introduce the ABT regime
   at the State level within one year.
3. Captive generating plants should be permitted to sell electricity
   to licensees and consumers when they are allowed open access by SERCs
   under section 42 of the Act .
4. Development of power market would need to be undertaken by the Appropriate
   Commission in consultation with all concerned.
5. The Central Commission and the State Commissions are empowered to
   make regulations under section 178 and section 181 of the Act respectively.
   These regulations will ensure implementation of various provisions of
   the Act regarding encouragement to competition and also consumer protection.
   The Regulatory Commissions are advised to notify various regulations
   expeditiously.
6. Enabling regulations for inter and intra State trading and also regulations
   on power exchange shall be notified by the appropriate Commissions within
   six months.

5.8 FINANCING POWER SECTOR PROGRAMMES INCLUDING PRIVATE SECTOR PARTICIPATION

5.8.1 To meet the objective of rapid economic growth and “power
for all” including household electrification, it is estimated that
an investment of the order of Rs.9,00,000 crores at 2002-03 price level
would be required to finance generation, transmission, sub-transmission,
distribution and rural electrification projects. Power being most crucial
infrastructure, public sector investments, both at the Central Government
and State Governments, will have to be stepped up. Considering the magnitude
of the expansion of the sector required, a sizeable part of the investments
will also need to be brought in from the private sector. The Act creates
a conducive environment for investments in all segments of the industry,
both for public sector and private sector, by removing barrier to entry
in different segments. Section 63 of the Act provides for participation
of suppliers on competitive basis in different segments which will further
encourage private sector investment. Public service obligations like increasing
access to electricity to rural households and small and marginal farmers
have highest priority over public finances.

5.8.2 The public sector should be able to raise internal resources so
as to at least meet the equity requirement of investments even after suitable
gross budgetary support from the Government at the Centre and in the states
in order to complete their on-going projects in a time-bound manner. Expansion
of public sector investments would be dependent on the financial viability
of the proposed projects. It would, therefore, be imperative that an appropriate
surplus is generated through return on investments and, at the same time,
depreciation reserve created so as to fully meet the debt service obligation.
This will not only enable financial closure but also bankability of the
project would be improved for expansion programmes, with the Central and
State level public sector organizations, as also private sector projects,
being in a position to fulfil their obligations toward equity funding
and debt repayments.

5.8.3 Under sub-section (2) of Section 42 of the Act, a surcharge is
to be levied by the respective State Commissions on consumers switching
to alternate supplies under open access. This is to compensate the host
distribution licensee serving such consumers who are permitted open access
under section 42(2), for loss of the cross-subsidy element built into
the tariff of such consumers. An additional surcharge may also be levied
under sub-section (4) of Section 42 for meeting the fixed cost of the
distribution licensee arising out of his obligation to supply in cases
where consumers are allowed open access. The amount of surcharge and additional
surcharge levied from consumers who are permitted open access should not
become so onerous that it eliminates competition that is intended to be
fostered in generation and supply of power directly to consumers through
the provision of Open Access under Section 42(2) of the Act. Further it
is essential that the Surcharge be reduced progressively in step with
the reduction of cross-subsidies as foreseen in Section 42(2) of the Electricity
Act 2003.

5.8.4 Capital is scarce. Private sector will have multiple options for
investments. Return on investment will, therefore, need to be provided
in a manner that the sector is able to attract adequate investments at
par with, if not in preference to, investment opportunities in other sectors.
This would obviously be based on a clear understanding and evaluation
of opportunities and risks. An appropriate balance will have to be maintained
between the interests of consumers and the need for investments.

5.8.5 All efforts will have to be made to improve the efficiency of operations
in all the segments of the industry. Suitable performance norms of operations
together with incentives and disincentives will need to be evolved along
with appropriate arrangement for sharing the gains of efficient operations
with the consumers . This will ensure protection of consumers’ interests
on the one hand and provide motivation for improving the efficiency of
operations on the other.

5.8.6 Competition will bring significant benefits to consumers , in which
case, it is competition which will determine the price rather than any
cost plus exercise on the basis of operating norms and parameters. All
efforts will need to be made to bring the power industry to this situation
as early as possible, in the overall interest of consumers. Detailed guidelines
for competitive bidding as stipulated in section 63 of the Act have been
issued by the Central Government.

5.8.7 It will be necessary that all the generating companies, transmission
licensees and distribution licensees receive due payments for effective
discharge of their operational obligations as also for enabling them to
make fresh investments needed for the expansion programmes. Financial
viability of operations and businesses would, therefore, be essential
for growth and development of the sector. Concerted efforts would be required
for restoring the financial health of the sector. For this purpose, tariff
rationalization would need to be ensured by the SERCs. This would also
include differential pricing for base, intermediate and peak power.

5.8.8 Steps would also be taken to address the need for regulatory certainty
based on independence of the regulatory commissions and transparency in
their functioning to generate investor’s confidence.

5.8.9 Role of private participation in generation, transmission and distribution
would become increasingly critical in view of the rapidly growing investment
needs of the sector. The Central Government and the State Governments
need to develop workable and successful models for public private partnership.
This would also enable leveraging private investment with the public sector
finances. Mechanisms for continuous dialogue with industry for streamlining
procedures for encouraging private participation in power sector need
to be put in place.

Transmission & Distribution Losses

5.8.10 It would have to be clearly recognized that Power Sector will
remain unviable until T&D losses are brought down significantly and
rapidly. A large number of States have been reporting losses of over 40%
in the recent years. By any standards, these are unsustainable and imply
a steady decline of power sector operations. Continuation of the present
level of losses would not only pose a threat to the power sector operations
but also jeopardize the growth prospects of the economy as a whole. No
reforms can succeed in the midst of such large pilferages on a continuing
basis.

The State Governments would prepare a Five Year Plan with annual milestones
to bring down these losses expeditiously. Community participation, effective
enforcement, incentives for entities, staff and consumers, and technological
upgradation should form part of campaign efforts for reducing these losses.
The Central Government will provide incentive based assistance to States
that are able to reduce losses as per agreed programmes.

5.9 ENERGY CONSERVATION

5.9.1 There is a significant potential of energy savings through energy
efficiency and demand side management measures. In order to minimize the
overall requirement, energy conservation and demand side management (DSM)
is being accorded high priority. The Energy Conservation Act has been
enacted and the Bureau of Energy Efficiency has been setup.

5.9.2 The potential number of installations where demand side management
and energy conservation measures are to be carried out is very large.
Bureau of Energy Efficiency (BEE) shall initiate action in this regard.
BEE would also make available the estimated conservation and DSM potential,
its staged implementation along with cost estimates for consideration
in the planning process for National Electricity Plan.

5.9.3 Periodic energy audits have been made compulsory for power intensive
industries under the Energy Conservation Act. Other industries may also
be encouraged to adopt energy audits and energy conservation measures.
Energy conservation measures shall be adopted in all Government buildings
for which saving potential has been estimated to be about 30% energy.
Solar water heating systems and solar passive architecture can contribute
significantly to this effort.

5.9.4 In the field of energy conservation initial approach would be voluntary
and self-regulating with emphasis on labelling of appliances. Gradually
as awareness increases, a more regulatory approach of setting standards
would be followed.

5.9.5 In the agriculture sector, the pump sets and the water delivery
system engineered for high efficiency would be promoted. In the industrial
sector, energy efficient technologies should be used and energy audits
carried out to indicate scope for energy conservation measures. Motors
and drive system are the major source of high consumption in Agricultural
and Industrial Sector. These need to be addressed. Energy efficient lighting
technologies should also be adopted in industries, commercial and domestic
establishments.

5.9.6 In order to reduce the requirements for capacity additions, the
difference between electrical power demand during peak periods and off-peak
periods would have to be reduced. Suitable load management techniques
should be adopted for this purpose. Differential tariff structure for
peak and off peak supply and metering arrangements (Time of Day metering)
should be conducive to load management objectives. Regulatory Commissions
should ensure adherence to energy efficiency standards by utilities.

5.9.7 For effective implementation of energy conservation measures, role
of Energy Service Companies would be enlarged. Steps would be taken to
encourage and incentivise emergence of such companies.

5.9.8 A national campaign for bringing about awareness about energy conservation
would be essential to achieve efficient consumption of electricity.

5.9.9. A National Action Plan has been developed. Progress on all the
proposed measures will be monitored with reference to the specific plans
of action.

5.10 ENVIRONMENTAL ISSUES

5.10.1 Environmental concerns would be suitably addressed through appropriate
advance action by way of comprehensive Environmental Impact Assessment
and implementation of Environment Action Plan (EAP).

5.10.2 Steps would be taken for coordinating the efforts for streamlining
the procedures in regard to grant of environmental clearances including
setting up of ‘Land Bank’ and ‘Forest Bank’.

5.10.3 Appropriate catchment area treatment for hydro projects would
also be ensured and monitored.

5.10.4 Setting up of coal washeries will be encouraged. Suitable steps
would also be taken so that utilization of fly ash is ensured as per environmental
guidelines.

5.10.5 Setting up of municipal solid waste energy projects in urban areas
and recovery of energy from industrial effluents will also be encouraged
with a view to reducing environmental pollution apart from generating
additional energy.

5.10.6 Full compliance with prescribed environmental norms and standards
must be achieved in operations of all generating plants.

5.11 TRAINING AND HUMAN RESOURCE DEVELOPMENT

In the new reforms framework ushered by Electricity Act 2003, it is particularly
important that the electricity industry has access to properly trained
human resource. Therefore, concerted action would be taken for augmenting
training infrastructure so that adequate well-trained human resource is
made available as per the need of the industry. Special attention would
need to be paid by the industry for establishing training infrastructure
in the field of electricity distribution, regulation, trading and power
markets. Efforts should be made so that personnel of electricity supply
industry both in the private and public sector become more cost-conscious
and consumer-friendly.

5.12 COGENERATION AND NON-CONVENTIONAL ENERGY SOURCES

5.12.1 Non-conventional sources of energy being the most environment
friendly there is an urgent need to promote generation of electricity
based on such sources of energy. For this purpose, efforts need to be
made to reduce the capital cost of projects based on non-conventional
and renewable sources of energy. Cost of energy can also be reduced by
promoting competition within such projects. At the same time, adequate
promotional measures would also have to be taken for development of technologies
and a sustained growth of these sources.

5.12.2 The Electricity Act 2003 provides that co-generation and generation
of electricity from non-conventional sources would be promoted by the
SERCs by providing suitable measures for connectivity with grid and sale
of electricity to any person and also by specifying, for purchase of electricity
from such sources, a percentage of the total consumption of electricity
in the area of a distribution licensee. Such percentage for purchase of
power from non-conventional sources should be made applicable for the
tariffs to be determined by the SERCs at the earliest. Progressively the
share of electricity from non-conventional sources would need to be increased
as prescribed by State Electricity Regulatory Commissions. Such purchase
by distribution companies shall be through competitive bidding process.
Considering the fact that it will take some time before non-conventional
technologies compete, in terms of cost, with conventional sources, the
Commission may determine an appropriate differential in prices to promote
these technologies.

5.12.3 Industries in which both process heat and electricity are needed
are well suited for cogeneration of electricity. A significant potential
for cogeneration exists in the country, particularly in the sugar industry.
SERCs may promote arrangements between the co-generator and the concerned
distribution licensee for purchase of surplus power from such plants.
Cogeneration system also needs to be encouraged in the overall interest
of energy efficiency and also grid stability.

5.13 PROTECTION OF CONSUMER INTERESTS AND QUALITY STANDARDS

5.13.1 Appropriate Commission should regulate utilities based on pre-determined
indices on quality of power supply. Parameters should include, amongst
others, frequency and duration of interruption, voltage parameters, harmonics,
transformer failure rates, waiting time for restoration of supply, percentage
defective meters and waiting list of new connections. The Appropriate
Commissions would specify expected standards of performance.

5.13.2 Reliability Index (RI) of supply of power to consumers should
be indicated by the distribution licensee. A road map for declaration
of RI for all cities and towns up to the District Headquarter towns as
also for rural areas, should be drawn by up SERCs. The data of RI should
be compiled and published by CEA.

5.13.3 It is advised that all State Commissions should formulate the
guidelines regarding setting up of grievance redressal forum by the licensees
as also the regulations regarding the Ombudsman and also appoint/designate
the Ombudsman within six months.

5.13.4 The Central Government, the State Governments and Electricity
Regulatory Commissions should facilitate capacity building of consumer
groups and their effective representation before the Regulatory Commissions.
This will enhance the efficacy of regulatory process.

6.0 COORDINATED DEVELOPMENT

6.1 Electricity being a concurrent subject, a well-coordinated approach
would be necessary for development of the power sector. This is essential
for the attainment of the objective of providing electricity-access to
all households in next five years and providing reliable uninterrupted
quality power supply to all consumers. The State Governments have a major
role, particularly in creation of generation capacity, state level transmission
and distribution. The Central Government would assist the States in the
attainment of this objective. It would be playing a supportive role in
fresh capacity addition and a major role in development of the National
Grid. The State Governments need to ensure the success of reforms and
restoration of financial health in distribution, which alone can enable
the creation of requisite generation capacity. The Regulatory Commissions
have the responsibility of ensuring that the regulatory processes facilitate
the attainment of this objective. They also have a developmental role
whose fulfillment would need a less formal and a consultative process.

The Electricity Act, 2003 also provides for mechanisms like “Coordination
forum” and “Advisory Committees” to facilitate consultative
process. The Act also requires the Regulatory Commissions to ensure transparency
in exercise of their powers and in discharge of their functions. This
in no way means that the Regulatory Commissions should follow formal judicial
approach. In fact, quick disposal of matters would require an approach
involving consultations with stakeholders.

6.2 Under the Act, the Regulatory Commissions are required to perform
wide-ranging responsibilities. The appropriate Governments need to take
steps to attract regulatory personnel with required background. The Govt.
of India would promote the institutional capability to provide training
to raise regulatory capacity in terms of the required expertise and skill
sets. The appropriate Governments should provide financial autonomy to
the Regulatory Commissions. The Act provides that the appropriate Government
shall constitute a Fund under section 99 or section 103 of the Act, as
the case may be, to be called as Regulatory Commission Fund. The State
Governments are advised to establish this Fund expeditiously.

(Ajay Shankar)

Additional Secretary to the Government of India