Necessity Of Electricity Distribution Companies

Necessity Of Electricity Distribution Companies

Necessity Of Electricity Distribution Companies


The framework for the disbandment of the State Electricity Boards and the division of generating, transmission, and distribution into distinct businesses was provided by the Electricity Act of 2003. While transmission and distribution remained licenced and regulated operations, electricity generation was delicensed. The legislation’s main goals were to encourage competition, safeguard consumer interests, and ensure everyone had access to power.

Electricity Act of 2003

Act Objectives:

  • Consolidation of laws: The Act unifies the rules governing the production, transmission, distribution, trade, and consumption of electricity.
  • Industry development: The Act attempts to establish policies that would support the growth of India’s electrical sector.
  • Promotion of competition: The Act aims to advance competition in the electrical industry.
  • Consumer protection: The Act places a strong emphasis on defending consumers’ rights and supplying electricity to all areas.
  • Tariff Rationalization: The Act intends to provide open rules addressing subsidies and the rationalisation of power rates.
  • Efficiency and environmental considerations: The Act promotes the adoption of efficient and environmentally benign practices within the electricity sector.
  • Regulatory bodies: The Act provides for the establishment of a Central Electricity Authority, Regulatory Commissions, and an Appellate Tribunal.


  • Delicensing power generation: The Act delicensed all forms of electricity production, except for nuclear and sizable hydroelectric projects.
  • Suppliers and distributors are required to produce 10% of the power they distribute from renewable and unconventional sources.
  • Techno-Economic clearance: The Act does away with the Central Electricity Authority’s necessity for techno-economic clearance for the majority of power facilities, except for significant hydroelectric projects.
  • Direct sale of electricity: Power generators may sell power directly to licensees or customers with the approval of the state regulatory commission.
  • Surcharge provision: The Act permits regulatory authorities to apply a surcharge to make up for State Electricity Boards’ loss of cross-subsidy revenue.


  • Distribution in rural regions was no longer permitted under the Act.
  • Urban distribution: A licencing system is put in place for distribution.
  • Implementation errors: Only 16 states have specified what rural regions are, thus roughly one-third of the nation is still waiting for rural distribution changes to be put into place.

Private Sector Participation

  • The Act promotes private sector involvement in the production and distribution of electricity.
  • Electricity can be sold directly to customers by Independent Power Producers (IPPs), encouraging competition and enhancing IPP creditworthiness.

Regulatory commissioners:

  • To regulate the operation of the electricity industry, the Act creates regulatory commissioners at the federal and state levels.
  • The commissions handle consumer protection, dispute resolution, and tariff regulation.

Points to Ponder:

  • 2003 Electricity Act: By dividing generating, transmission, and distribution into distinct companies and fostering competition, consumer protection, and widespread access to electricity, the Act set the groundwork for the reorganisation of the Indian electrical sector.
  • Private funding of generation: The Act encouraged more private funding for the development of additional generating capacity. Lower pricing for electricity was obtained through long-term power purchase agreements (PPAs) following competitive procurement.
  • Growth of renewable energy: The Act, which was predominantly supported by private investment, enabled rapid growth in the renewable energy sector. India has one of the lowest costs in the world for solar power supply.
  • Compared to the UK model: Some proponents of India’s electrical sector reform proposed using a fully competitive, deregulated market model. This strategy was deemed inappropriate for India due to disparities in cost structures and the possibility of significant price shocks.
  • Cross-subsidy and open access: The Act established the idea of open access, giving consumers with loads of 1 MW or more the option of selecting their power supplier. To make sure that higher-end consumers subsidise lower-end households, cross-subsidy levies were implemented. Open access adoption is hampered by the Act’s mandate to remove cross-subsidies, which has not been fully implemented.
  • Difficulties with Discoms: Discoms, who are in charge of providing power to consumers, encounter difficulties while trying to determine cost-reflective prices and timely state government subsidies. Solutions like privatisation are needed in some governments to address bad governance and rent-seeking.
  • The importance of Discoms: Discoms are important because they forecast demand, enter into long-term agreements, and guarantee a steady supply of electricity. They play a crucial role in encouraging investment in generating capacity and accelerating the energy transition.