Invoking Section 11: Public Welfare Vs Genco Hardship

Posted On - 28 October, 2023 • By - King Stubb & Kasiva

With the rise in temperatures and delayed monsoons, there has been an increase in the consumption of electricity this in turn led to an increased power demand, and immense pressure on governments to meet this need. According to data from the Grid Controller of India, the country witnessed an unprecedented peak shortage of 9.11 gigawatts (GW) in August 2023. Subsequently, demand increased to 234GW, resulting in a peak shortage exceeding 7GW[1].

These fluctuations in demand and supply were felt in Karnataka (hereinafter, State), which faced a significant power shortfall of approximately 1,500-2,000 MW. In October, it was observed that the generation of renewable energy significantly reduced. Heavy rains in the coal mines, the source of coal for the State’s thermal power plants, caused wet coal, leading to frequent breakdowns in power plants managed by Karnataka Power Corporation Limited (KPCL).

The state government introduced the ‘Gruha Jyoti Scheme’ aimed at providing free power to the state’s citizens. Under this scheme, every residential household in Karnataka was entitled to receive free electricity for up to 200 units. However, the consequence of this well-intentioned initiative was that consumers began to excessively utilise their allotted units. This increase in power consumption, coupled with the reasons mentioned above created an unexpected power shortage. To tackle the problem, the State negotiated power swaps and procured short-term tenders[2] and soon thereafter invoked Section 11 of the Electricity Act, 2003 (“Act”).

Section 11 of the Act states:

The Appropriate Government may specify that a generating company shall, in extraordinary circumstances operate and maintain any generating station by the directions of that Government.
The Appropriate Commission may offset the adverse financial impact of the directions referred to in sub-section (i) on any generating company in such a manner as it considers appropriate.

Section 11, framed for use in extraordinary circumstances such as threats to the state’s security or natural calamities, permits the government to direct power generators to prioritise the supply of electricity to specific sectors. While this directive is crucial for ensuring essential services receive power during crises, determining fair compensation for private generators has proven to be a serious issue.

The Challenges and Possible Solutions:

The Challenges

By invoking Section 11 citing public welfare reasons, the State Government has once again brought to the forefront the challenges associated with compensating private generators for their losses during power shortages, which often results in prolonged legal disputes.

The lack of clarity in the Act regarding the methodology for calculating compensation has led to disagreements between the government and private parties. In past instances, wherein Section 11 was invoked, the facts resulted in disputes over provisional tariffs, with the Karnataka Electricity Regulatory Commission eventually deciding on a compensation rate[3].

Furthermore, timely compensation remains a concern, especially given the historical delays in payments by state distribution companies to generators even under normal circumstances. The inherent commercial nature of these transactions differs from the government’s political mandate to provide subsidised power to the public. Balancing these interests is essential to ensuring both public welfare and the viability of private power generation entities.

While challenges lie ahead, what possible solutions can the state explore?

A similar situation was faced by Haryana, and the Haryana State Electricity Board (HSEB), implemented “need-based-energy management” (NBEM). NBEM categorizes consumers, including continuous process industries, those with independent feeders, irrigation tube wells, peak load requirements, commercial/domestic connections, and essential/emergency services. Further, an efficient delivery mechanism and streamlined distribution system are in place to ensure an effective power supply while simultaneously raising awareness regarding responsible electricity usage.
One possible solution to this dilemma is to strengthen the regulatory framework governing compensation under Section 11. The government could consider amending the Electricity Act to provide clearer guidelines on what constitutes “adverse financial impact” and how compensation should be calculated. This would help to reduce uncertainty and disputes between the government and private generators.
Another solution is to explore market-based mechanisms for procuring electricity during emergencies. For example, the government could use power exchanges or ancillary services markets to procure electricity from private generators at market-determined prices. This would allow generators to offer their capacity voluntarily and receive compensation that reflects the true cost of providing electricity during peak demand periods.
Finally, the government could also consider implementing measures to improve grid stability and reduce the need for sudden interventions under Section 11. For example, the government could encourage the banking of power, which would allow generators to store excess electricity during periods of low demand and then draw on it during periods of high demand. This would help to ensure a more consistent supply of electricity and reduce the need for the government to direct generators to prioritize certain sectors.

Although Section 11 serves an important purpose during energy crises, its implementation requires a more transparent and streamlined compensation process and efficient energy banking is a viable solution that should be considered.

[1] https://www.livemint.com/news/india/electricity-demand-shortage-hit-record-11693333595007.html

[2] https://www.hindustantimes.com/cities/bengaluru-news/karnataka-facing-acute-power-shortage-as-demand-surges-due-to-deficit-rainfall-101697020943501.html

[3] https://kerc.karnataka.gov.in/uploads/13791668507798.pdf

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