Electricity Act 2003 – Opportunities for Investment & Growth

1. Electricity Act 2003 – Opportunities for Investment & Growth Transmission Issues 22 July 2003 R Venkatraman, KPMG Consulting

2. Background • Indian Electric Transmission grid consists of nearly 5.7 Million km of high-voltage transmission lines.  • In recent years, the number of transactions and quantity of power flows on the transmission grid has increased significantly.  • At the same time, transmission investments have been declining.

3. 450MW 166MW 1168MW 150MW 500MW 140MW 1067MW 100MW 135MW 100MW 1180MW 330MW 1500MW 80MW 1170MW 420MW 100MW 1944MW 3187MW 3475MW 100MW 90MW 100MW Generation capacity addition is expected to continue at a brisk pace … State & private sector only. Central Sector not included

4. Generation capacity addition is expected to continue at a brisk pace … X Plan Target (2002-2007) The transmission grid will need to transport all this power to the consumer ….

5. Consequently, the impact on transmission will be significant • Massive new transmission capability needs to be built to match the increase in generation capacity • Existing transmission infrastructure needs to be significantly upgraded • Congestion management and system operations will be key • Information availability will need to raise dramatically • Robust monitoring mechanisms must be introduced

6. And, there are some pre-requisites • Non discriminatory open access and a strong market are pre-requisites for competition. • Return on Investment and depreciation mechanisms may need to be reviewed to make it attractive for investors. • A strong and reliable transmission network widens the market, making it more competitive by allowing more entities to compete. • Savings to the customers are expected from competition in generation sector. • Unless competing generators can reach consumers efficiently, competition in generation will not produce the benefits expected.

7. The Electricity Act seeks to address these issues through …. • Introduction of Open Access. • Creation of National Grid • Creating environment for private investments in transmission • Technical up gradations • Introduction of market mechanisms • Better coordination and planning by NLDC, RLDC, SLDC & DLDC(Discom/Area LDCs) Grid discipline, open access and investment promotion are critical action areas

8. 1. Grid Discipline 2. Non Discriminatory Open Access 3. New Investment in Transmission

9. The root causes of grid indiscipline • Power system control priorities • System security • Maintaining load / generation balance • Economic dispatch

10. Grid discipline – some issues • Grid discipline issues have resulted from • Absence of tools and guidelines • Lack of sufficient generation capacity • In ABT, adherence to drawal schedule may not solve the frequency problem if grid constituents continue to overload it. • After ABT, ground situation has not changed much as the grid constituents in general have preferred to allow the frequency to decline rather than to proactively shed load. • ABT may not address frequency problem where CGS contribution is low since impact of UI (Unscheduled Interchange) charges on utility finances is low.

11. Grid discipline - some suggestions • Frequency regulation needs to be monitored on real time basis • Through reliability rules and procedures and not merely by relying on monetary incentive/ disincentive framework. • The Area Control Error (ACE) principle could be one method to strengthen frequency control. • ACE specifies responsibility on each constituent to bring back the frequency to normative level, even if stated schedules are being adhered to. • ACE concepts could be incorporated within ABT to supplement the price signals in ABT once the system frequency drops below, say, 49 Hz. • However for this to be effective additional statutory powers to the regulator and the load dispatcher may be necessary.

12. Grid discipline - some suggestions • Utilities need to undertake extensive load research to evaluate the magnitude and characteristics of current load (both served and unserved), and future load addition. • Load research can not only increase accuracy of load forecast, but also assist in formulation of demand side management measures. • A significant systemic tool like Energy Management System (EMS), has features addressing short term unit commitment, economic load dispatch and settlements. • Makes it suitable for current needs as well as future requirements under arrangements like multi-buyer markets.

13. EMS - a tool to a tool for efficient dispatch

14. 1. Grid Discipline 2. Non Discriminatory Open Access 3. New Investment in Transmission

15. Some of the pre-requisites for open access are … • Improved reliability of T & D network. • Reliable information systems. • Technical adequacy of transmission lines. • Knowledge on available capacity (measure congestion). • Transparent energy accounting systems. • Balancing mechanisms

16. Open access – some issues • Transmission system development would become more complex. • CTU & STUs need to strengthen/improve existing networks to remove congestion & make a realistic plan for expansion. • The concern for stranded cost will increase. • Network operation/planning to take in to consideration of minimising stranded costs. • Transaction costs have to be minimised so that they do not off set the benefits of competition. • Regulatory control on transmission access and pricing would be critical

17. Open access – some issues • Accuracy of determination of total & available transmission • Capacity is one of the requirements for operating under open access. • Most utilities' current pricing schemes do not effectively address the costs of transmission constraints. Nor do they provide the proper signals concerning whether to remove constraints through supply side generation, transmission expansion or demand side measures. • When individual utilities schedule power flow over a single regional grid, unexpected overloads can arise and become barriers to competitive power trading.

18. 1. Grid Discipline 2. Non Discriminatory Open Access 3. New Investment in Transmission

19. The new structure is complex … Earlier Now • Transmission of electricity through intra-state transmission system • Planning and co-ordination • Ensure development of intra-state transmission lines. • To provide non-discriminatory open access to its transmission • To build, maintain and operate an efficient and economical inter-state or intra-state transmission system. • To comply with the directions of RLDC and SLDC as the case may be. STU Transmission service provider Licensee Transco System operator. • To ensure integrated operation of power system in the state • Responsible for optimum scheduling and dispatch • Keep account of quantity of electricity transmitted through state grid • Real time operation of grid controls and dispatch through secure and economic operation SLDC • Bulk supply trading of all existing • Contracts Bulk supplier/Trader Trading

20. Business separation will be important … • Separation of monopoly transmission businesses from competitive or potentially competitive activities. • Options range from full ownership separation to management separation. • Europe has a mix of these: • Ownership unbundling (UK, Finland, Spain, etc) • Legal unbundling (Austria, Belgium, Denmark, etc) • Management unbundling (France, Luxembourg) Source: Ian Pope Associates

21. In addition, monitoring regimes are required to ensure fairness • Separation and publication of accounts • Appointment of a “compliance officer” whose job is to ensure that network access rules are applied equally and fairly • Establishment of a separate corporate identity for the TSO • Ensuring that the TSO is not physically located in the same building as an affiliate operating in the competitive market Source: Ian Pope Associates

22. European experience …. Source: Ian Pope Associates

23. Encouraging investments – some suggestions • Adequate returns (risk adjusted) on the investments and attractive depreciation norms. • Ensure separation of business & introduce monitoring regime • Realistic transmission planning by CTU/STU based on scientific load research/load forecast & generation plan. • Regulatory certainty over a long period • Cost reflective retail tariffs • Establishment of effective/reliable communication network and energy data collation system • Settlement systems • Addressing the stranded cost issue

24. Thank you R Venkatraman, KPMG Consulting Email: vr@kpmg.com