Why power sector direly needs bold reforms, favourable regulatory environment

Updated: October 20, 2020 6:39 PM

The COVID-19 pandemic and the nationwide lockdown to contain its proliferation has, in turn, set off an unprecedented blow to the already moribund power sector.

power sector, reforms in power sector, discoms, distribution companiesThe plant load factor (PLF) of thermal plants are hovering around 50% today (September 2020), and the peak and energy shortages have been reduced to less than 1%.

Ashish Kapur

The energy sector in India is at the crossroads and is saddled with crisis for quite some time now — ranging from payment delays by the already cash-strapped Discoms, insolvency of larger generation capacities, exasperating regulatory and policy inconsistency, to lack of on-ground implementation. The COVID 19 pandemic and the nation-wide lockdown to contain its proliferation has, in turn, set off an unprecedented blow to the already moribund power sector. During the lockdown period between March and May 2020, electricity demand had drastically plummeted (20-22% in the first 10 days of the lockdown). With everything shut, the consumption of electricity by industrial and commercial establishments as well as the railways has seen a huge drop. Besides, as these consumers cross-subsidize domestic and agricultural consumers, the loss in revenue terms has been more pronounced.

While the Ministry of Power (MoP) has acknowledged that Discoms face a mammoth liquidity crunch, it has rolled out certain measures to ease out the issue. The MoP passed orders under Section 107 and 108 of the Electricity Act, 2003 to the Central Electricity Regulatory Commission (CERC) and the state regulators to waive off or reduce the late payment surcharge (LPS) under power purchase agreements (PPAs). The MoP also permitted a reduction of 50% in the letter of credit mechanism required to be kept by the Discoms when scheduling power. As of June 2020, distribution utility dues towards generators stood at a staggering Rs 1,20,000 crore.

However, another issue that has been innately plaguing the power sector is the voracious lobbying by the captive power producers. The lobby is very robust and they work only for their own vested interests with the end consumers literally side-lined. There is absolutely no connection between the sector and the end-users. While power generation capacities are decent, consumers still face shortages. This lobbying is having a widespread impact on making the sector inefficient, non-competitive, and far from user-friendly, aam aadmi. There is a dire need for the government to make changes in this sector to make it efficient, effective, and aam aadmi-friendly.

As a case in point, on 1st October 2019, the Union Government in an order passed “exempted Captive Power Plants (CPPs) from sharing an equal load of country’s green energy target. Thus, these plants which typically generate and supply power for a specific industry, will not have to bear any extra charges for energy purchase obligations (RPOs)”. The CPP set up till 2015-16 shall meet the RPO target “RPO should be at the level as mandated by the appropriate Commission for the year 2015-16”. Higher RPOs are mandatory only in the case of additional capacity in the future but will be limited to the very year of addition. This is a clear indication that the government has surrendered to industry pressure.

With the Government’s decision to fix a cap for CPPS, suffering discoms and States would have to augment their RPOS to reach the 2022 target of 175 GW production. RPOs are actually targeting to ensure the strict implementation of renewables in India’s aggregate energy mix. Of the 175 GW, 100 GW is solar, followed by 60 GW wind, 10 GW biomass, and 5 GW minor hydro-power projects. While the installed capacity is 370 GW+ in the country, the peak load on Grid is only 170-180 GW. This has resulted in gross under-utilisation of latest supercritical technology-based generating plants to the extent of 50 GW and is languishing as NPA with Banks/NCLT for resolution.

On the other hand, the captive power plants (unit size 100 MW +/-) mostly set up during 2000-2010 is based on conventional technology no longer in use and are inefficient and consume as much as 2-3 times the coal quantity compared to supercritical technology. These plants aggregating to around 80 GW are operating at their peak levels because of the huge cross-subsidy element in the power tariff for industrial/commercial consumers. If cross-subsidy is reduced to +/- 20% and agreed subsidy is paid by the DBT route, most of these industrial customers with captive power capacity will migrate to on-grid load and all these latest supercritical technology plants will become operational and viable.

Moreover, some of these producers also recommended the Government for two-to-three-year extensions of deadlines to install emissions-reducing equipment at some plants. This is coming at a time when the country is having a tough time battling rampant pollution. It is for the second time that the government has been pressurized to postpone emissions targets, mentioning costs, and technical issues. After extensive lobbying by the coal-fired power industry, the Government had already extended its original December 2017 deadline to December 2022. Many coal-fired plants still operational, shall miss the deadlines as no initiative has been taken to install FGD/NOx facilities.

For a long time now, the power sector has been facing the challenges of fiscal losses, theft, wastages, vested interests of generators, and pseudo-competition. The consumers hardly have any choice left as they primarily consume electricity through the grid. The sector, therefore, needs bold and strong business-conducive consumer-friendly reforms to wade through this, before the issue spirals out of proportion. Even though the ministry, on various occasions, has guaranteed reforms at different points in time, none have seen the light of the day, to date.

Privatization, freedom, more competitive market forces are absolutely indispensable for the sector’s sound health. While all other sectors like telecom, aviation, ports, etc., have outperformed, the same needs to happen with the power sector. In telecom, data has now taken over voice telephony, the power sector needs to replicate this success. Electricity reforms require critical socio-economic implication analysis. Consumers also need to understand and support or oppose such reforms in a judicious manner. Plus, there has always been a challenge regarding access to the affordable and quality electricity supply for the poor in the country. A fifth of India’s population still does not have reliable access to the power supply. It cannot be discounted that, electricity is a necessary instrument for economic progress and inclusive growth. Therefore, its sound performance is imperative.

Ashish Kapur is CEO at Invest Shoppe India Ltd. Views expressed are the author’s personal.

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