The Indian power sector has seen dramatic institutional changes in the past two decades. First, in the early 90s, the government promoted the private sector by providing lucrative incentives for Independent Power Producers (IPPs). However, this attempt to bring in the private sector failed, and by 2003 only 5.3 GW of IPP projects were fully commissioned , and the overall capacity addition in the country slowed down in the mid-to-late 1990s. In the mid-1990s, the World Bank, which had previously engaged with the central utilities and had responded lukewarmly to the IPP policy , decided to focus on bringing about changes to the Indian power sector by offering financial support to states that would implement its policies for restructuring their electricity sectors. The main changes were to institute a regulatory commission and split the electricity boards into generation, transmission, and distribution units. In the late 90s, the Central government consolidated these state reforms through the Electricity Regulatory Commission Act in 1998 and the Electricity Act in 2003.
The Electricity Act 2003 required all state electricity boards to unbundle and privatize, while introducing at the same time wholesale competition, trading and bilateral contracts with regulation. By forcing the unbundling of vertically integrated companies, the Act intended to separate generation from transmission and distribution, with the hope that generation would be subject to market competition. The Act envisioned a new, market-driven framework where electricity would be just another commodity that can be generated, sold, and traded in the market as determined by supply and demand.
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