The Electricity Act, 2003 (“the Act) was notified by the Government of India and brought into effect on June 10, 2003. The Act opens up an entirely new paradigm and has the potential of making the nation cross the Rubicon – from an era of vertically integrated monoliths seeped in in-efficiencies and a drag on state finances, to an era of a fully competitive sector with competition at every level to ensure ever increasing efficiencies and cost reduction that contributes to the state finances rather than burden it.
The Act sets out the framework to enable the sector to mature into a dynamic industry that will attract entrepreneurs yet at the same time allow the consumer the freedom of choice – to choose his vendor and determine the source of power that he would like to consume.
Two extremely significant concepts introduced by the Act are Captive Generation and Trading – and these two concepts have the potential of completely revolutionizing the sector. For the first time in the history of free India, a piece of legislation has unleashed the potential of galvanizing private capital at a level never witnessed in any sector. The huge private investments made in sectors like oil and gas and telecom are likely to be dwarfed by the scale of private investments that can potentially be unleashed with the catalytic forces of the Act.

CAPTIVE GENERATION

The Act defines a captive generation plant as one set up by any “person” to generate electricity primarily for his own use and includes a plant “set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association”
Hidden in the above sentence is an expression that is on the face of it, innocuous, but that single expression is potentially the most explosive facet that can and is likely to, transform the sector as we know it.
The expression “person” has been defined to “include any company or body corporate or association or body of individuals, whether incorporated or not, or artificial juridical person.”

The only reaction that one can have on reading the above definition is extremely positive, plus also a huge compliment to the legislature that has, in its “wisdom” felt it imperative to allow the private sector the complete freedom and flexibility to “structure” their investments, including in a collective manner, if necessary. The magic lies in this one single expression that opens up a whole world of structuring opportunities.
The consequences are obvious and immediate! Open access to the transmission grid upon payment only of a wheeling charge and no surcharge whatsoever. Philosophically, this has transcended industry and released it from the scourge and malaise of the “S” word – yes that’s right – no more “Subsidy”. Industry can finally, truly be competitive without having to carry the so called “social objectives burden” – a concept that has become so twisted and mangled over the last 50 years!

TRADING

Trading in electricity opens up “a whole new world”. The arena that was until recently the preserve only of the establishment is now potentially open to the private entrepreneur. Trading will piggy back on the new era of open access that has been made mandatory by the Act and will be introduced over a period of time by the Regulators across states.
Once again, the innocuous expressions used in the Act disguise the momentous changes that it will unleash in the sector. Trading can potentially re-surge the huge generation capacity that is currently lying idle for want of buyers of power or because it was too expensive to run these plants in the past regulatory environment.

WAY FORWARD

Financial Institutions and project lenders that have so far been used to project financing power generation projects on pre-determined and fixed off take agreements at predictable prices; will have to grapple with the new paradigm. The future scenario does not contemplate long term off take agreements. Payment securities and mechanisms can no longer rely on “escrow” arrangements or “sovereign” or “third party” guarantees. For once, the sector will have to pay for itself – and for once, it has the potential to do so.

Do you have a role to play in the changing scenario? Do you have the initiative to take on the risks and challenges and reap the commensurate rewards? If the above scenario excites you, then maybe IPPAI can shepherd you through your project. IPPAI can help you conceptualize the project and maneuver you through the legal, regulatory and structuring minefield

Buyers Sellers Club – Objective

IPPAI has put together a module comprising of diverse consulting (business, legal and regulatory) services that can help you through the process of putting together a generation and/or trading project. IPPAI has also put together a team of experts with significant knowledge of electricity sector and corporate structuring that can deliver advice of the highest caliber and quality. To deliver the legal content and inputs, IPPAI has engaged the services of an outstanding firm of lawyers (“Legal Experts”) to act together with it in delivering these services. The principal of the legal firm has significant experience in the power sector and has a deep and unique understanding of the market dynamics, regulatory issues and market structure of the electricity sector in India and has over the years gained and developed critical strengths relative to the Indian electricity market and environment and has therefore, established a formidable reputation for himself as a leading legal expert in the electricity sector.
The consulting expertise that IPPAI brings to the table will cover the following areas:

1. Project Conceptualization – evaluating the dynamics of the project, the players involved, the diverse stakeholders and their specific individual motivations and expectations from the project and helping you put together the “concept”;

2. Business and Regulatory – viability of a project is predicated upon it passing the touchstone of the business and regulatory framework. IPPAI can help you through the “thinking process” and in doing so, it brings to the table immense value in terms of business, regulatory and legal expertise and skills

3. Structuring – as is evident from the above discussions, the “magic” lies in innovative structuring, especially the legal structuring, of the project. IPPAI and the legal Experts carry immense expertise and experience, including international precedents where relevant, to help you put together an appropriate legal structure that will pass the legal and regulatory tests under the Act;

4. Regulatory – to make the project happen, certain regulatory action may be required – licenses, consents, approvals, directions and/or other regulatory action. IPPAI and the Legal Experts will prepare, file and prosecute the appropriate regulatory actions;