Electricity Act amendments imply privatisation in Indian electricity distribution

High-income economies have privatised their electricity distribution businesses to promote competition and efficiency in the power sector. Electricity regulator protects the interests of consumers. Electricity regulator acts as a legal and enforcement agency and balances the interests of both government and private investors.

Globally, distribution utility privatisations have affected the sectoral output positively by attracting new investments into the value chain and gradually increasing operational efficiency. However, an analysis by the World Bank in 2018 revealed that there is no significant difference across utility ownership types, concerning the efficiency and quality of services provided to commercial end-users. The World Bank tracks and rates the performance of electricity distribution in each country through its ‘Getting Electricity’ indicator’, a part of ease of ‘Doing Business’.

The indicator measures the time, procedures and costs to connect to the grid, as well as service reliability and tariffs for business consumers. The key findings of the analysis are – (i) most of the distribution utilities are public-owned, especially in Asia and the Middle East. Privatisation is prevalent in Western countries. (ii) Globally, distribution utilities, regardless of their ownership, are improving their efficiency to provide new connections. However, securing a new grid connection is equally cumbersome from public and private-owned utilities. (iii) Utility ownership has little correlation with power outages and commercial tariffs.

Power Ministry proposes Electricity Act Amendment Bill

Indian distribution utilities are largely state-owned and subsidy-driven. Regional governments provide direct subsidy payments to make-up utilities’ loss and industrial consumers pay higher tariffs to subsidise agricultural loads. According to the latest available estimates, Indian distribution utilities’ aggregate technical and commercial (AT&C) losses for major 26 states stood at 18% for FY 2018–19 and state-owned distribution utilities’ payment dues to the power generating companies as of April stood at $13.4bn.

In October 2019, the Power Ministry in India came up with a franchisee model plan for states to have multiple private franchisees as power suppliers, and distribution utilities would act as wholesale electricity suppliers. In February, the chief executive of the Power Ministry presented the foreword for the second wave of power reforms. The reforms include pushing state-owned distribution utilities to adopt privatisation models. State-owned distribution utilities are mostly loss-making as they sell electricity in India at a price lower than the cost, which usually does not offset their AT&C losses. Ministry intended to select utilities reporting more than 15% AT&C losses for privatisation.

In line with the above plans, on April 17, the Power Ministry in India issued a draft proposal for amendment of Electricity Act, 2003, in the form of draft Electricity Act (Amendment) Bill, 2020, – abbreviated as Bill, hereafter. The Bill aimed at providing legal clarity related to the adoption of public-private partnerships and franchising in the distribution segment. The Bill newly defines distribution sub-licensee that means an entity appointed by distribution utility to distribute electricity on its behalf in a stipulated area with the permission of local regulatory commission. Despite the appointment of sub-licensee, distribution utility shall continue to be licensee, and therefore, eventually responsible for ensuring quality and reliable service in its licensed area.

Covid-19 impact

Covid-19 lockdown measures had a negative impact on the Indian economy and the finances of federal and state governments. In the combat against Covid-19, the state governments have been spending a lot on healthcare systems and relief measures. These emergency spends shrink the state’s budgets for other capital expenses, salaries for staffs and new development schemes. The Government of Delhi’s tax collection has declined by 90% compared to 2019 and the government is planning to take loans and raise taxes in certain sectors. State of Maharashtra has suspended its entire capital works until Q1 2020 and the spending under government development schemes fell by 67% in 2020–2021.

In addition to the $265bn economic recovery stimulus package, the federal government in April announced a $12.5bn bailout package to state distributions utilities to pay off their dues to generators (i.e. a total of $13.4bn). As the economic crisis deepens, the federal government will find it difficult to continue supporting the loss-making distribution utilities in the future.

Hence, in this sense, the complete privatisation or partial franchising will be the way ahead for all inefficient distribution utilities. Utilities through their sub-licensee can develop areas of excellence through fresh investments. The Bill does not provide detailed functions, responsibilities and the modalities to appoint sub-licensees. Industry experts anticipate the auction procedure for the same shall be tedious. Such auctions will mostly attract the interest of domestic players.

Takeaway for international companies

With the rise in localised generation and distribution around the world, multinational utility majors might find the distribution sub-license or franchisee opportunity worth studying. Given the lower number of buyers and sellers in the market, the number of mergers and acquisitions (M&A) will be lower too. However, the value of such transactions shall be huge. M&A transactions for operational licenses (such as Reliance Infrastructure’s Delhi power distribution businesses) will involve several factors to analyse and negotiate, particularly understanding all potential regulatory approvals and procedures.

International investors will cautiously choose their consortium partners to understand the local risks in new auctions. The market will attract interests of specialised international service-providers for load flow and losses, evaluate system properties such as inertia and voltage.

Privatising utilities is a promising market for smart grid equipment manufacturers. To reduce the billing and collection losses, the government plans to convert all electricity meters into smart prepaid meters by 2022–2023. Phase 1 shall start with 250 million residential connections.

Industry response so far

Industry stakeholders believe privatisation will benefit both distribution utilities and consumers. Operational private licensees welcomed the amendments in Bill since the future electricity sector will have to evolve with increasing non-government investments. On 16 May, the power minister announced that the eight union territories, which are under the administrative control of the federal government, will be privatised.