India’s lightbulb moment: Not using this crisis for meaningful energy sector reform would be a waste

April 30, 2020 4:30 AM

The trend of low power demand, now furthered in the post-Covid economy, and increased RE generation, will continue to put a ceiling on the PLF of the thermal fleet.

It would now be easy to sidestep this problem and provide an unconditional bailout to the discoms yet again.It would now be easy to sidestep this problem and provide an unconditional bailout to the discoms yet again.

By Vibhav Nuwal, Himraj Dang & Mahua Acharya

The 9-minute lights-off on April 5 was an interesting event in many ways—the appeal of the PM’s call, the extent of public participation, and the expert management of the national electricity grid. Switching off, and then bringing back in just a few minutes, a massive 32,000 MW of power, is a great technical accomplishment.

This accomplishment, though, shouldn’t hide the fact that even pre-Covid, India’s power sector has been facing a mounting financial crisis. It would now be easy to sidestep this problem and provide an unconditional bailout to the discoms yet again. Still, this event could also be seen as a lightbulb moment, an opportunity to take a step back, to address key issues, and plan for a more sustainable future. What are these issues?

First, as India continues to integrate renewable energy (RE) in keeping with energy security and climate change goals, a market-based, automatic mechanism for integration of infirm renewable power into the grid is non-negotiable. The 9-minute event demonstrated the technical capacity for managing grid flexibility. But, one must also remember that this was a planned event—grids had time to slowly back down supply. With renewable power, this luxury isn’t available—weather patterns change and forecasting is never 100% accurate. The management of the event has reassured us that the grid is robust enough to integrate more RE. Which is timely, given the high growth forecasts for renewables.

If, we can design a market that competitively discovers costs and imposes penalties to renewable gencos across a nationwide grid, the “must-run” status of RE will be earned without regulatory support. The ability to manage power spikes associated with the 175GW of RE planned by 2022 can be augmented with the use of Li-ion battery storage. Approximately 25MW of such is needed per 1,000MW of capacity generated in each grid. The Central Electricity Authority has researched this extensively and concluded that with minimal backdowns, the surge of renewable power expected in the future can be fully dispatched.

Second, what to do with idle, old, and inefficient coal plants. The past decade has seen a steady decline in energy generation from fossil fuels—plant load factors for the 2019-20 period are at 56%, down from 78% a decade ago. Coincidently, many of these same plants were to install air pollution equipment, as part of the country’s commitment to COP21. The plan to retrofit 440 power units aggregating to 166.5GW with flue gas desulphurisation (FGD) systems by December 2022 is way behind schedule. As an example, only two out of 33 plants in the highly-polluted NCR have met their FGD targets, and this tardiness can no longer be permitted given our renewed concerns for public health.

The trend of low power demand, now furthered in the post-Covid economy, and increased RE generation, will continue to put a ceiling on the PLF of the thermal fleet. Utilities will continue to lose money through locked-in fixed payment contracts. Rather than having low performing, old, and polluting thermal plants across the board, some of these old units could be restructured and shut down, based on their generation costs, remaining plant life, and the economics of installing FGDs. This will increase the PLFs of larger, newer, more efficient thermal plants, including those of NTPC, and also help mitigate the country’s now permanent problems with air pollution.

Third, we have another chance for ‘Make in India,’ an opportunity to bring in fresh Covid-influenced industrial investment from Korea and Japan, which are diversifying away from China. But for this, India must lower industrial power tariffs to meet the competition. Industrial power in Vietnam is, for example, 40% cheaper than in India; this is the case across ASEAN. Lowering industrial tariffs obliges the unravelling of the cross-subsidy regime. The key issue is of agricultural tariffs, and a permanent solution is needed. The political consensus seems to be veering towards a DBT subsidy similar to PM-KISAN, and freeing up all tariffs thereafter, with no scope for unfunded subsidies. There is a precedent for from the successful marketisation of fuel oils.

Finally, making these long-delayed changes would also address the perennial and oldest issue of the financial health of the discoms. Discoms now owe over Rs 8.8 billion to generators. The current industrial lockdown has hit finances even harder with discoms left catering to low-paying households and loss-making agriculture.

The proposed Electricity Amendment Bill, 2020, is an ambitious step in the right direction—with bold moves to institute cost-reflective tariffs, remove subsidies, and strengthen the sanctity of contracts through greater enforcement and provision of payment security to generators. Each state can be asked to endorse the legislation with its variant, which could become a condition to accept the Centre’s band-aid assistance.

However, the proposed Bill could have gone further to introduce the radical reforms needed. In the current draft, many of the reforms proposed earlier—carriage and content separation, more effective RPOs, and default open access to RE—have either been dropped or watered down. Nevertheless, a bold reform move would be the complete abolition of cross-subsidy at a defined future date. The discoms should also be required to implement “DBT” for paying any subsidy on electricity (rather than this being borne by the discom, as is the case presently). Removing the cross-subsidy will create the urgency to solve the subsidy problem, and concurrently make power tariffs more competitive—something we need to attract factories relocating from China.

It is said that India reforms only when there is a crisis. We have a monster of a crisis now, and to not use this crisis for meaningful reform would be a waste of talent, leadership, and this rare lightbulb moment at every level.

Nuwal is director, REConnect Energy; Dang is consultant; and Acharya, Asia director, CPI

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