Department of Electrical Engineering

Restructuring of Power Systems

Unit-I
Restructuring of Power Industry
1. Introduction to Power System Restructuring
Power system restructuring refers to the transformation of an electricity market from a monopoly-based
structure to a competitive market-based structure. This involves unbundling vertically integrated utilities
and introducing competition to improve efficiency, reduce costs, and enhance service reliability.
Key Objectives of Restructuring
1. Encouraging Competition – Breaking monopolies to enable multiple electricity suppliers.
2. Improving Efficiency – Promoting cost-effective electricity generation and distribution.
3. Attracting Private Investment – Opening the market to private investors.
4. Reducing Government – Shifting the responsibility of power generation to private players.
5. Enhancing Service Quality – Providing reliable and uninterrupted power supply.
6. Encouraging Renewable Energy Adoption – Market-based incentives for green energy sources.

2. Traditional vs. Restructured Power Systems

Historically, power utilities operated under a vertically integrated structure, where a single entity managed
generation, transmission, and distribution.
Characteristics of Traditional Monopoly Power Systems
• Government-Owned Entities – Most power utilities were controlled by state governments.
• High Losses & Inefficiency – Lack of competition led to operational inefficiencies.
• Regulated Tariffs – Electricity prices were set by the government, often leading to financial losses.
• Limited Private Participation – Private sector involvement was minimal.

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Characteristics of Restructured Power Systems
• Unbundling of Generation, Transmission, and Distribution – Separate entities handle each
function.
• Competitive Electricity Market – Multiple power producers compete to sell electricity.
• Open Access to Transmission Networks – Independent Power Producers (IPPs) can transmit power
over existing networks.
• Market-Based Pricing – Electricity prices determined by supply and demand.
• Independent Regulation – Regulatory bodies oversee market operations and pricing.

3. Phases of Power Sector Restructuring in India

The restructuring of India’s power sector happened in multiple stages:
A. Pre-Reform Era (Before 1991)
• The Indian power sector was state-controlled, with State Electricity Boards (SEBs) responsible for
generation, transmission, and distribution.
• SEBs faced financial losses due to politically determined tariffs and high transmission losses.
• Power shortages and blackouts were common due to inefficiencies.
B. Post-1991 Reforms – The Beginning of Restructuring
• As part of economic liberalization, the private sector was allowed to participate in power
generation.
• The Independent Power Producer (IPP) policy was introduced to attract investment.
• The Electricity Regulatory Commissions Act, 1998, established CERC (Central Electricity
Regulatory Commission) and SERCs (State Electricity Regulatory Commissions) to regulate the
sector.
C. Electricity Act, 2003 – The Major Turning Point
The Electricity Act, 2003, was the most significant reform in India’s power sector. Its key features include:
• Unbundling of SEBs – Generation, Transmission, and Distribution were separated.
• Open Access – Large consumers could purchase electricity directly from generators.
• Competitive Power Markets – Encouraged private investment and market-based pricing.
• Power Exchanges – Allowed electricity trading via Indian Energy Exchange (IEX) and Power
Exchange India Limited (PXIL).
• Renewable Energy Promotion – Introduced mechanisms like Renewable Energy Certificates
(RECs) to incentivize green energy.
D. Market-Based Mechanisms Introduced After 2003
• Short-Term Power Market – Consumers could purchase electricity on an hourly basis.
• Day-Ahead Market (DAM) – Buyers and sellers could trade electricity for the next day.
• Real-Time Market (RTM) – Real-time electricity trading to balance demand and supply.

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4. Components of a Restructured Power System in India
A. Generation Companies (GENCOs)
• Role: Produce electricity from thermal, hydro, nuclear, and renewable sources.
• Examples in India:
o Public Sector: NTPC Ltd., NHPC Ltd.
o Private Sector: Tata Power, Adani Power, JSW Energy.
B. Transmission Companies (TRANSCOs)
• Role: Transport electricity from power plants to distribution companies.
• Examples:
o Central Transmission Utility (CTU): Power Grid Corporation of India (PGCIL).
o State Transmission Utilities (STUs): State-owned transmission companies.
C. Distribution Companies (DISCOMs)
• Role: Supply electricity to end consumers.
• Examples:
o Public DISCOMs: Uttar Pradesh Power Corporation Ltd. (UPPCL), Maharashtra State
Electricity Distribution Company Ltd. (MSEDCL).
o Private DISCOMs: TaBurden ta Power Delhi Distribution Ltd., BSES Rajdhani Power Ltd.
D. Power Exchanges
• Role: Facilitate electricity trading in a competitive market.
• Examples:
o Indian Energy Exchange (IEX)
o Power Exchange India Limited (PXIL)
E. Regulatory Authorities
• Role: Set tariffs, monitor competition, and ensure fair trade.
• Examples:
o Central Electricity Regulatory Commission (CERC)
o State Electricity Regulatory Commissions (SERCs)

5. Benefits of Power Sector Restructuring in India

1. Improved Efficiency – Market-based pricing incentivized efficiency in power generation.
2. Better Reliability – Reduced power shortages and improved grid stability.
3. Increased Investment – Private players invested in new power plants and transmission networks.
4. Renewable Energy Growth – Competitive tariffs helped expand solar and wind energy.
5. Consumer Choice – Open access allowed large consumers to buy electricity from preferred suppliers.

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6. Challenges in Power Sector Restructuring

1. Financial Issues of DISCOMs
• Distribution companies still suffer from high Aggregate Technical & Commercial (AT&C) losses.
• Tariffs are politically controlled, leading to financial distress.
2. Transmission Congestion
• Limited transmission capacity restricts the flow of power between regions.
3. Regulatory Challenges
• Policy uncertainty affects private sector investment.
• Delays in tariff approvals hinder market efficiency.
4. Renewable Energy Integration
• Intermittency of solar and wind power creates grid stability issues.
• Need for energy storage and flexible generation options.

7. Case Study: Delhi Power Sector Reform

• Before 2002, Delhi Vidyut Board (DVB) suffered from high losses (50% AT&C losses) and
unreliable supply.
• In 2002, the government privatized the distribution sector, handing it over to:
o BSES Rajdhani Power Ltd.
o BSES Yamuna Power Ltd.
o Tata Power Delhi Distribution Ltd. (TPDDL)
• Results:
o Losses reduced from 50% to below 10% in some areas.
o Service reliability improved significantly.
o Delhi became a model for other state power reforms.

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Fundamentals of Economics (With Context to the Power Sector)
1. Introduction to Economics
Economics is the study of how individuals, businesses, and governments allocate limited resources to
meet unlimited needs and wants. The power sector is a crucial part of any economy as it provides the
electricity required for industries, households, and services.
Why Study Economics in the Power Sector?
The power sector differs from other industries due to:
1. Essential Nature of Electricity – Unlike other goods, electricity cannot be stored in large amounts,
requiring real-time balancing of supply and demand.
2. High Capital Investment – Setting up power plants and transmission networks requires huge initial
investments.
3. Government Regulation – Due to its strategic importance, governments regulate tariffs and market
competition.
4. Environmental Concerns – Electricity generation impacts the environment (coal emissions,
hydropower displacement, nuclear waste).
5. Market Transformations – Many countries, including India, have shifted from monopoly-based
electricity markets to competitive markets, making economic principles vital.
Branches of Economics Relevant to the Power Sector
1. Microeconomics – Deals with individual firms and consumers in the electricity market.
o Example: How do power generators decide electricity prices?
o Example: How do industries respond to rising electricity tariffs?
2. Macroeconomics – Deals with overall economic growth, inflation, and government policies affecting
the power sector.
o Example: How does electricity availability impact GDP growth?
o Example: How does energy policy influence national employment and investment?

2. Fundamental Economic Concepts in the Power Sector

A. Scarcity and Resource Allocation
• Scarcity means resources are limited compared to demand. In the power sector, scarce resources
include:
o Fossil fuels (coal, gas, oil)
o Land (for power plants, transmission infrastructure)
o Capital (investment in power generation, grids)
o Skilled manpower (engineers, technicians)
• Since demand for electricity is rising, economic principles help in allocating resources efficiently to
ensure affordability and sustainability.
B. Demand and Supply in the Electricity Market
1. Demand for Electricity
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Demand refers to the amount of electricity consumers want to buy at a given price.
Factors Affecting Electricity Demand:
1. Population Growth – More people mean higher residential electricity use.
2. Urbanization & Industrialization – Expanding cities and industries increase demand.
3. Technology Adoption – Use of electric vehicles (EVs) and air conditioning raises power consumption.
4. Weather Conditions – Demand spikes in extreme heat or cold.
5. Electricity Prices – Higher prices can lead to reduced usage by industries.
2. Supply of Electricity
Supply refers to the amount of electricity power producers are willing to generate at a given price.
Factors Affecting Electricity Supply:
1. Fuel Availability – Shortages of coal, gas, or uranium can limit generation.
2. Transmission Infrastructure – If grids are weak, power supply cannot reach consumers efficiently.
3. Government Policies – Incentives for renewables or taxation on fossil fuels impact supply.
4. Market Competition – Competitive pricing encourages higher production.
5. Technological Advancements – Smart grids, energy storage, and efficient turbines increase supply
capacity.
C. Market Equilibrium in the Power Sector
Market equilibrium occurs when electricity demand equals electricity supply at a specific price.
• If demand exceeds supply → Prices rise, leading to increased investment in power generation.
• If supply exceeds demand → Prices fall, discouraging excess production.
Example (India):
• During summer, peak demand increases, and if supply is low, electricity prices rise on power
exchanges like IEX.

3. Market Structures in the Electricity Sector

Electricity markets have evolved from government-controlled monopolies to competitive markets in many
countries.
A. Monopoly (Before Restructuring)
• A single entity (government or private company) controlled power generation, transmission, and
distribution.
• Problems: Inefficiencies, high costs, lack of innovation.
• Example (India, before 2003): State Electricity Boards (SEBs) controlled power supply with no
competition.
B. Perfect Competition (Not Feasible for Power Markets)
• Many buyers and sellers, free market pricing.
• Not applicable to electricity due to transmission grid constraints and the need for reliability.
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C. Oligopoly (Current Market Structure in India)
• A few dominant players control the electricity sector.
• Example: NTPC, Tata Power, Adani Power, JSW Energy dominate power generation.
D. Monopolistic Competition (Electricity Trading)
• Multiple power generators compete on price and reliability.
• Example: Indian Energy Exchange (IEX) and Power Exchange India Ltd. (PXIL) allow different
power suppliers to trade electricity competitively.

4. Electricity Pricing Mechanisms

A. Types of Costs in Power Generation
1. Fixed Costs (FC) – Do not change with production levels.
o Example: Power plant construction costs, land acquisition.
2. Variable Costs (VC) – Change with the amount of electricity produced.
o Example: Fuel costs, maintenance expenses.
3. Marginal Cost (MC) – The cost of producing one additional unit of electricity.
o Important for pricing in competitive electricity markets.
B. Pricing Models in the Electricity Sector
1. Regulated Tariff Pricing (Before Market Reforms)
o Government fixed electricity prices, leading to inefficiencies.
o Example: Before 2003, DISCOMs (Distribution Companies) had fixed tariffs.
2. Market-Based Pricing (Post-Reforms)
o Prices determined through competitive bidding on power exchanges.
o Example: Indian Energy Exchange (IEX) determines real-time electricity prices.
3. Time-of-Use (ToU) Pricing
o Higher rates during peak demand hours (6 PM – 10 PM).
o Lower rates during off-peak hours (midnight to early morning).
4. Locational Marginal Pricing (LMP)
o Electricity price depends on location and transmission congestion.
o Example: Electricity in Mumbai is costlier than in Bihar due to demand-supply mismatch.

Economic Policies, Government Interventions, and Case Studies in the Power Sector

5. Economic Policies Affecting the Power Sector

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The electricity industry is heavily influenced by government policies due to its critical role in economic
growth and public welfare. Economic policies in the power sector focus on:
• Ensuring affordable electricity for all.
• Encouraging competition and efficiency.
• Reducing environmental impact by promoting renewables.
• Balancing supply and demand through regulatory mechanisms.
A. Government Interventions in the Power Sector
Governments intervene in the electricity sector to correct market failures, ensure reliability, and protect
consumers.
1. Subsidies
• Definition: A financial benefit provided by the government to reduce electricity costs for consumers
or promote specific technologies.
• Types of Subsidies:
1. Consumer Subsidies:
▪ Reduced electricity tariffs for rural consumers and farmers.
▪ Example: India’s government provides free/subsidized power for agriculture in states
like Punjab and Tamil Nadu.
2. Producer Subsidies:
▪ Incentives to power generators to reduce generation costs.
▪ Example: Viability Gap Funding (VGF) for renewable energy projects in India.
2. Cross-Subsidization in the Power Sector
• Urban/industrial consumers pay higher tariffs, and the revenue is used to subsidize electricity for
rural and agricultural consumers.
• Challenges:
o Industries face high electricity costs, reducing competitiveness.
o DISCOMs (Distribution Companies) suffer financial losses.
3. Taxation Policies on Electricity
• Governments tax fossil fuel-based power generation to discourage pollution.
• Example: India imposes a carbon tax on coal production (₹400 per metric ton) under the Clean
Energy Cess.
• Renewable energy enjoys tax exemptions and lower GST rates.
4. Renewable Energy Incentives
• To promote green energy, the government provides:
o Renewable Energy Certificates (RECs): DISCOMs must buy RECs to meet Renewable
Purchase Obligations (RPOs).
o Feed-in Tariffs (FiTs): Guaranteed purchase prices for renewable power.

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o Production-Linked Incentives (PLI) Scheme: Encourages domestic manufacturing of solar
panels.
5. Electricity Market Reforms in India
• Before 1991: Government-controlled State Electricity Boards (SEBs) had monopolies.
• Post-2003 (Electricity Act, 2003): Allowed private players, competition, and open access in power
markets.
• Power Exchanges (IEX, PXIL): Created a competitive market-driven pricing system.
• Introduction of Real-Time Markets (RTM): Buyers and sellers can trade electricity in 15-minute
blocks.

6. Role of Regulatory Bodies in the Power Sector

A. Central Electricity Regulatory Commission (CERC)
• Regulates inter-state transmission and electricity tariffs.
• Sets wholesale electricity pricing mechanisms.
B. State Electricity Regulatory Commissions (SERCs)
• Regulate electricity tariffs within individual states.
• Approve power purchase agreements for DISCOMs.
C. Power System Operation Corporation (POSOCO)
• Manages the national grid for stability and efficiency.
• Operates five Regional Load Dispatch Centers (RLDCs) and National Load Dispatch Center
(NLDC).
D. Bureau of Energy Efficiency (BEE)
• Implements energy efficiency programs and promotes energy conservation.
• Manages the Perform, Achieve, and Trade (PAT) scheme, which allows industries to trade energy
savings.

7. Case Studies on Pricing and Market Reforms in India

Case Study 1: Impact of Open Access on Industrial Electricity Prices
Background:
• Before restructuring, industrial consumers had no choice but to buy electricity from DISCOMs at high
tariffs.
• The Electricity Act, 2003, introduced Open Access, allowing industries to buy electricity from
cheaper sources.
Outcomes:
• Large industrial consumers shifted to cheaper sources (power exchanges, direct PPAs).
• Example: Many industries in Maharashtra and Gujarat now procure power from IEX instead of
state DISCOMs.
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• Challenge: DISCOMs lost high-paying consumers, worsening their financial condition.

Case Study 2: Delhi Power Sector Privatization

Background:
• In the 1990s, the Delhi Vidyut Board (DVB) had AT&C (Aggregate Technical & Commercial)
losses of nearly 50%.
• Poor infrastructure and power theft made the system financially unsustainable.
Reforms (2002):
• Delhi government privatized distribution, awarding licenses to:
o BSES Rajdhani Power Ltd.
o BSES Yamuna Power Ltd.
o Tata Power Delhi Distribution Ltd. (TPDDL)
Outcomes (2002–2020):
• AT&C losses reduced to 8–10%.
• Power reliability improved significantly.
• Criticism: Tariff increases in early years led to consumer dissatisfaction.

Case Study 3: Solar Power Pricing in India

Background:
• India aims for 500 GW of renewable energy capacity by 2030.
• Solar power prices were initially high due to expensive imported solar panels.
Policy Interventions:
• Government launched Production-Linked Incentives (PLI) for domestic solar panel
manufacturing.
• Reverse auction bidding mechanism reduced solar tariff from ₹10/kWh (2010) to ₹2.40/kWh (2023).
Outcomes:
• India became the 5th largest solar energy producer globally.
• Solar power is now cheaper than coal-based power in many states.

8. Challenges in Implementing Market-Based Economics in the Power Sector

Despite reforms, several challenges persist:
A. Financial Stress of DISCOMs
• Many state DISCOMs sell electricity below cost due to political pressures.
• Example: Rajasthan and Tamil Nadu DISCOMs have huge debts due to tariff subsidies.

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• The UDAY (Ujwal DISCOM Assurance Yojana) scheme was launched to improve financial health,
but progress has been slow.
B. Transmission Congestion & Infrastructure Bottlenecks
• Limited transmission infrastructure prevents power flow from surplus to deficit regions.
• Example: Power surplus in Gujarat cannot reach South India due to congestion.
C. Renewable Energy Integration Challenges
• Solar and wind energy are intermittent, requiring battery storage solutions.
• Grid modernization is needed to handle variable renewable supply.
D. Regulatory Inconsistencies Across States
• Different states have different open access charges, discouraging private investment.
• Example: Maharashtra has higher open access charges than Gujarat, making power costlier.

9. Conclusion
Economic principles play a fundamental role in shaping India’s power sector. While market-based reforms
have increased efficiency and competition, challenges like DISCOM financial stress, infrastructure
constraints, and renewable energy variability must be addressed.

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