Indian power sector: Fixing the plane while flying it

December 22, 2020 5:15 AM

Transformation of power markets can’t be done by putting the existing system on pause while the stakeholders collectively rearrange its “parts”. It will need a convergence of single instruments.

Of the many things that affect the financial health of discoms, pricing power lies at the heart.Of the many things that affect the financial health of discoms, pricing power lies at the heart.

By Aanchal Kumar & Mahua Acharya

The metaphor “fixing the plane while flying it” is most often invoked when changes are being made to established processes or procedures. The phrase is a cliché of Silicon Valley, rooted in the idea of iterative software development. Its application in the Indian power sector isn’t as outlandish as you may think—here’s why.

Economically viable and sustainable power distribution companies are the central need for India’s clean energy transition, a transition that needs to be clean, affordable and reliable. But distribution utilities continue to be afflicted by challenges—financial ones being the gravest amongst them—and thus remain the weakest link in the value-chain of the power sector.

Discoms famously buy high and sell low, especially to subsidised categories such as agriculture and domestic. Each discom is further saddled with a series of issues applied to it over the years, all in an effort to help improve its condition. Only six months ago, a bailout of Rs 90,000 crore, later increased to Rs 1.2 lakh crore, was handed out to them to make good on unpaid dues. The UDAY scheme was introduced to relieve discoms of their debt by passing it over to the states. Although there are signs of progress, discom debt continues to be a problem. Yet, energy demand continues to grow, India’s renewables targets mean new power is slated to come into the system, possibly even replacing existing coal. Any reform will necessarily have to be done while simultaneously addressing energy needs.

Of the many things that affect the financial health of discoms, pricing power lies at the heart. Other reasons then pile up-inefficiencies in the planning of power procurement, under-billing, managing suboptimal assets and losses due to cross-subsidising consumers. The agricultural sector perhaps stands out the most prominently in this list. The sector accounts for almost 20% of the total consumption, and its tariffs are between Rs 0 and Rs 4/kW in most states. The average cost of supply is much higher, in the range of Rs 5-7/kW, and the shortfall is spread across other consumer slabs to even up.

In many states, agricultural metering is low or absent. Government schemes that separated them helped increase electrification, but the drain on the grid has remained unaddressed. Now would be a good time optimise this scheme and take it a step further: solarise them.

Solarising these feeders can save discoms an average Rs 2-3 per unit of supply to a segment that is earning them almost nothing. The additional solar-powered generation would be 30GW, and in climate change parlance of yesteryears, this could be a neat “wedge” in terms of greenhouse gas emissions removed.

Solarisation, being done on the unused tracts of land, and staying close to the grid, brings with it a reduction in transmission & distribution losses. In many cases, this could even allow the discoms to meet their solar targets under renewable purchase obligations.

Solarising feeders isn’t rocket science; but, while it brings with it significant cost savings, the question is how to simultaneously address other basic energy-access needs affecting rural electrification and livelihoods. The economics of solar are such today that not utilising this opportunity to solarise energy use wherever possible would be a waste.

What if other energy-consuming village needs were met under the same pre-purchase arguments? If the old 20M or so inefficient pump sets were to be replaced and their costs amortised, it would add a meagre 20 paise to the tariff. This method of incremental loading would save on all upfront subsidies. Home-lighting would have an incremental cost of mere 10 paise. Add clean cooking, and the incremental cost is 30 paise. Major infrastructure, such as rural street lighting, costs an additional 60-70 paise to the PPA. Each of these would save the exchequer substantially.

Amortisation serves two important functions: One (importantly), it shifts the burden of maintenance to the developer, now an integrated energy service company, and two, it allows the discom and the state to save on upfront subsidy.

If the top five agriculture-heavy states adopted this approach, with an aggregate of 100MW per state, the benefit to the discoms would be approximately Rs 6,000 crore over a 25-year period. The tariff ranges between Rs 3.5-4.2/kWh depending on the value streams (agricultural pumps, LED lighting, BESS).

With international commitments to decarbonisation, falling costs of renewables and storage, national commitments to increase the share of renewable electricity, digitisation of the grid, the growth of e-mobility and the need to provide modern energy services at affordable rates, there is a need to think differently about the way energy is delivered to people. In times like these, creative disruption through the convergence of sectors into single all-in-one instruments could be an option, while continuing to provide power to the people.

Transforming the power markets is not easy; you cannot put the system on “pause” while everyone collectively rearranges the parts. Things must move forward simultaneously in an orchestrated, deliberate manner to enable these changes to take place. The enabling of such a convergence through a clutch of single instruments is one of them.

Kumar is with Electric Mobility, Convergence Energy Services Limited, and Acharya is CEO&MD, Convergence Energy Services Limited, at Energy Efficiency Services Limited

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