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Commoditising power

By Sudha Mahalingam

Power generation is the primary contributor to greenhouse gas emissions in India. But government policy, as stated in the Electricity Act 2003, fails to address the environmental concerns arising from the unbridled burning of fossil fuels. Instead, it puts the premium on financial sustainability of power utilities, completely neglecting environmental sustainability

Electricity is a concurrent subject under the provisions of the Indian Constitution. Yet, for nearly six decades, two central laws, viz the Electric Supply Act 1948 and the Indian Electricity Act 1910, defined the rules of business in the generation, transmission and supply of electricity in the country. In 2003, the Indian Parliament repealed the two laws and replaced them with a comprehensive new legislation that would usher in a new era in the structure and functioning of the electric supply industry. The Electricity Act 2003 came into effect in June 2005. It is seen as the culmination of a decade-long experiment with a new governance paradigm in India's power sector.

The new law does herald a paradigm shift in the manner in which electricity will be generated and supplied in this country. The centrepiece of the new legislation is 'open access', a mechanism through which limited markets are sought to be introduced in the business of electric supply. The proposed markets will be limited to those who consume more than 1 megawatt of electricity per year. These consumers can now source their electric supply directly from any generator or utility, while all those who consume less than this threshold limit will continue to depend solely on their respective local utilities. In effect, this would mean that only large industrial and commercial consumers can reap the benefits of contestability in electric supply, creating a wedge among consumers. Apart from this, the new law also liberalises electricity generation, doing away with the need to obtain a licence for setting up power-generating stations, except in the case of large hydroelectric projects. And finally, it sets up independent regulators, distancing the government from the politically sensitive task of tariff-setting.

As India moves away from the era of vertically-integrated state-owned monopoly utilities to unbundled, corporatised and occasionally privatised utilities regulated by independent regulators, how does the new legal regime factor in key concerns relating to social and environmental aspects of power supply? Does the new law ensure equity in access to electric supply in a country where more than half the households still remain unconnected? Does the new law extend the hope that India's poor and rural households will literally and finally see light at the end of the tunnel, regardless of their ability to pay? How does the Electricity Act 2003 address the growing environmental concerns arising from unbridled burning of fossil fuels? After all, the national communication submitted by India's Ministry of Environment and Forests to the Kyoto Secretariat unambiguously acknowledges power generation as the primary contributor to greenhouse gas emissions. Does the new law internalise this and other environmental imperatives in its framework?

Unfortunately, the new law fritters away a golden opportunity to put the power sector on the path of sustainable and equitable development. At best, the Electricity Act 2003 makes a nodding concession to the environmental and social aspects of the power sector, almost as an afterthought. The thrust is on restoring the financial viability of India's beleaguered state electricity boards and, as such, its provisions are designed to address this concern, not the concerns of equity or environment, except in passing. The new law emphasises cost-recovery through cost-reflective tariffs and phased reduction and eventual elimination of cross-subsidies, with its attendant adverse consequences for affordability, especially of poor and marginalised sections of society.


The Electricity Act 2003 is a detailed piece of legislation divided into 18 parts and 185 sections. It is a measure of the importance India's policymakers assign to the environmental dimension of electric supply that only two provisions actually address the environment, and that too tangentially.

In the context of the obligations of the licensee in the transmission and supply of electricity, Section 67 (1) states that the 'appropriate authority' may stipulate the avoidance of public nuisance, environmental damage and unnecessary damage to public and private property by such works. Thus, environment is lumped along with public nuisance, etc, more as an afterthought. In this context, it is noteworthy that environmental damage occurring in the transmission and supply of electricity is unlikely to be significant, whereas environmental damage caused by power generation from fossil fuels can be considerable. Yet, the law completely ignores this aspect.

Nearly three-quarters of India's electricity comes from burning fossil fuels, of which coal alone accounts for 73%. In fact, the power sector consumes 78% of coal produced in the country. Indian coal has up to 50% flyash for which, thus far, no safe disposal has been worked out. Besides, burning coal releases enormous quantities of greenhouse gases. Increasing the share of natural gas in the thermal power basket will have a salutary effect on the environment. Increasing the share of renewables could be another option, but the law is silent on the relative environmental desirability of different fuels used for thermal power generation. It does not stipulate development of the sector in an environmentally sustainable manner.

Section 61 in Part VII of the Electricity Act 2003 contains the only concession made by the law to the environment. This provision requires the electricity regulatory commissions to promote "co-generation and generation of electricity from renewable sources of energy". At present, renewable sources including wind energy, solar and biomass constitute less than 3% of total electricity generation in the country. Increasing their share to even 10% of the total will require meticulous planning and enormous investments in renewable energy. A mere mandate to the regulators to 'promote' renewable energy without providing the necessary wherewithal can hardly achieve the desired results. Besides, even if the regulators would like to comply with this mandate, there are not enough sources of renewable energy in many states. While regulators can perhaps provide incentives for renewable energy through appropriate tariffs, and hope that entrepreneurs will come forward to set them up, they are themselves powerless to ensure that this happens.

Section 4 requires the central government to prepare, in consultation with state governments, a national policy to permit stand-alone systems including those based on renewable sources of energy and non-conventional sources of energy for rural areas. This does find expression in the National Electricity Policy, albeit with a caveat. The policy recommends the establishment of distributed generation to 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 utilised even where grid connectivity exists, provided it is found to be cost-effective". Thus, financial cost, rather than cost to the environment, seems to be the deciding factor when it comes to renewables.

In the context of environment, hydroelectricity could be a double-edged solution. While hydel power does not release greenhouse gases, big dams entail huge efforts in relief, relocation and rehabilitation. Besides, seismicity and vulnerability to flooding make them less than optimal solutions from the environmental point of view. Currently, hydroelectricity constitutes nearly a quarter of the electricity produced in India. The sole provision in the new law that addresses hydroelectric projects focuses almost exclusively on factors other than the environment. Section 8 (a) of the Electricity Act 2003 requires the concerned authority to ensure that the proposed river-works will not prejudice prospects for the best ultimate development of the river or its tributaries for power generation, consistent with the requirements of drinking water, irrigation, navigation, flood control or other public purposes, and "for this purpose, the authority shall satisfy itself, after consultation with the state government, the central government, or such other agencies as it may deem appropriate, that an adequate study has been made of the optimum location of dams and other river-works".

Thus it is evident that the environment was far from the minds of our legislators when they drew up the provisions of the Electricity Act 2003. Nevertheless, it must be pointed out that like all other sectors, the electricity sector is also subject to environmental laws, rules and regulations of the Government of India. The Ministry of Environment and Forests, Government of India, is the nodal administrative agency for environmental regulation. The Environmental Impact Assessment (EIA) Notification of the MoEF requires all projects -- including power-generation projects -- to obtain environmental clearance. EIA requires the project promoter to prepare an assessment of the potential impact of his/her project on the environment and the mitigation measures proposed to be taken to minimise such impact. The law has provisions for conducting public hearings, although this is observed more in the breach as some studies show. Similarly, the power sector is also subject to the provisions of the Environmental Protection Act.

Equitable access

As mentioned earlier, the thrust of the new law is on restoring the financial viability of electric utilities rather than equity or affordability of electric supply. However, there are a few provisions that do address rural electrification. In a significant but insufficient measure, the law allows any person to generate and distribute electricity in a rural area without having to obtain a licence. This provision is expected to facilitate extension of electric supply to hitherto unconnected areas, provided there is adequate demand accompanied by capacity to pay. Note the operative phrase, 'capacity to pay'.

In another half-hearted measure ostensibly aimed at protecting the interests of marginal consumers currently cross-subsidised by industrial and commercial consumers, Section 40 Ac (ii) of the Electricity Act 2003 requires any consumer availing of 'open access' to pay a cross-subsidy surcharge determined by the regulator. This cross-subsidy surcharge is expected to compensate the utility for charging certain sections of consumers -- mostly agriculturists -- tariffs that do not cover full cost to supply. However, in the same breath, the law also requires the regulator to set a time frame for progressive elimination of cross-subsidies. Section 61 further states that the tariffs should progressively reflect cost of supply of electricity.

The irony is that if every consumer has to pay the full cost of what it costs to supply his/her premises, industrial consumers drawing high tension power will pay the lowest tariffs, while rural consumers who draw power at low voltage and for whom long lines have to be drawn to carry power, will pay the steepest tariffs. Thus, there is an inherent inequity in the law which requires consumers with the lowest capacity to pay the steepest tariffs even as industrial consumers can get away with substantially lower tariffs, if cross-subsidies are eliminated altogether, as envisaged by the law..

The law does provide that state governments could directly subsidise the marginal consumer category, and many state governments have been allocating substantial sums towards direct subsidy. But how long can resource-constrained state governments sustain direct subsidies is a moot point. If, for some reason, the state government is unable to fork out the subsidy, the utility is free to charge cost-reflective tariffs. Thus the new law is an attempt at commoditisation of electricity even as the National Electricity Policy formulated under Section 6 of the Electricity Act 2003 admits that electricity is a basic human need.

As for universal access, Section 6 states: "The appropriate government shall endeavour to supply electricity to all areas including villages and hamlets." There are other provisions which require the utility to supply power on demand, but this is circumscribed by the proviso that such supply is contingent on the ability of the consumer to pay for laying the necessary cables to his premises. Thus ability to pay is a sine qua non for securing access.

The Electricity Act 2003 does not make any reference to equity in access to electricity. The National Electricity Policy stresses the need to electrify rural households that still remain unconnected. However, it goes on to say: "Consumers, particularly those who are ready to pay a tariff which reflects efficient costs, have the right to get uninterrupted 24-hour 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." Thus, the emphasis is on consumers willing to pay, not those who cannot afford to pay cost-reflective tariffs. Nevertheless, the policy does want electricity to reach all households in the next five years, and that too at reasonable rates. If only policy statements and pious intent were horses, all poor households would ride them!

If the Electricity Act 2003 conveys one message loud and clear, it is that electricity is a commodity and those who can afford it can avail of it. As for the environment, the new law puts a premium on financial sustainability of utilities, to the utter neglect of environmental sustainability -- as though the two were mutually exclusive.

(Sudha Mahalingam is a Senior Fellow at the Nehru Memorial Museum and Library, New Delhi. An economist and lawyer by training, she specialises in reforms and energy security. Her focus areas are energy regulation, tariff setting and the geopolitics of energy security. She has also served as Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi, where she headed a Cluster on Energy, Environment and Economy)

InfoChange News & Features, June 2006