Making competition drive a consumer-centric power system

Competition—aided by robust regulatory oversight—could nudge discoms to rationalise costs, reduce losses and provide quality electricity services to all consumers

Making competition drive a consumer-centric power system
The devil lies not just in the detail but also in an ongoing public dialogue.

By Shalu Agrawal & Arunabha Ghosh
How can competition become bedrock of the power sector? On these pages last week, one of us outlined the principles for a future-ready power system ( Interventions to strengthen the regulatory apparatus, rationalise subsidies and use of digital tools could reorient India’s power sector to meet the energy aspirations of consumers across income groups, support livelihoods and promote economic growth. As desirable as these may sound, achieving these would require bespoke policy design that promotes competition. If the Electricity Amendment Bill (EAB 2021) triggered such policy innovation, it could be transformative for the economy.

A salient feature of EAB 2021 is the proposal to de-licence the power distribution business. Barring Mumbai (and Adityapur in Jharkhand), across India the norm is for a single distribution licensee to be responsible for providing electricity services within its jurisdiction. Most of these are public utilities. Given this monopolistic distribution market structure, consumers have no choice but to accept the services of the incumbent distribution company (discom), regardless of quality of provision. Allowing more players in the distribution business would give electricity users a choice of supplier. Competitors would try to provide reliable and affordable services through cost reduction and operational efficiency to win or retain consumers. This is good in principle, but does it work in practice?

Several countries, including Argentina, Australia, South Korea, the US and most countries in Europe have deregulated power distribution. But unlike them, EAB 2021 does not propose a separation of the wires (network management) business from retail supply. As the Forum of Regulators has noted, this could result in a conflict of interest, with the incumbent controlling the wires and restricting access to new competitors. Retail competition in Mumbai has been a mixed experience, with persisting legal battles between discoms. Overall, the broader agenda for more competition must overcome three primary concerns raised by some states and other stakeholders.

New entrants cherry-picking high-paying consumers: The worry is this could lead to loss of cross-subsidy for state-owned discoms, making it costly for them to serve lower-income areas and agricultural consumers. EAB 2021 tries to address these concerns in two ways: Prescribing a minimum area of supply (a municipal council or revenue district) within which all suppliers have universal service obligation (USO); and creating a USO fund to capture surplus cross-subsidy or surcharges to fund deficits arising from any changeover of cross-subsidising consumers.

The challenge would be the lack of adequate data to determine actual cost of supply—and hence cross-subsidy—for different consumers. An alternative proposition could be to impose a standard cross-subsidy charge for all consumers, barring those who need to be subsidised. This approach is followed in the Philippines where the electricity bill comprises power tariff and universal charge (where applicable). It has also been successfully tested in India’s telecom sector.

Loss of large consumers leading to loss of load: Here the worry is incumbent discoms would be left with costly power purchase agreements (PPAs). This is why discoms have generally opposed open access for large consumers. EAB 2021 proposes to share existing PPAs among all suppliers serving an area to allay these concerns. Implementing this would need robust demand forecasting and attribution of energy flows. Market-based economic despatch, wherein all power procurement will be routed through a clearing house, would address the latter concern. However, energy metering and accounting at all levels would be fundamental.

Consumers exposed to volatile tariffs: Many consumers in Mumbai were unsatisfied with the switching over process due to limited information about tariff structures and a reactive approach to resolving critical questions of tariff setting. To protect consumers against tariff uncertainty, EAB 2021 could consider tariff ceilings for each consumer category. Within these ceilings (to be periodically reviewed by regulators), suppliers should have the flexibility to reduce input costs through efficient power procurement, thereby getting the advantage of a tariff ceiling.

Past attempts to usher in retail competition fizzled out due to concerns about their distributional consequences. The provisions in EAB 2021 are encouraging. Its success would hinge on getting some basics right. First and most importantly, a collective acceptance of electricity as a commodity that should be paid for, unlike its treatment as a (free) public good by many sections.

Secondly, detailed rules to govern sharing of cross-subsidy surplus and PPAs, recovery of regulatory assets, sharing the costs of consumers switching back and forth, and sharing the losses and responsibility for network management. Thirdly, regulators’ ability to ensure non-discriminatory access to the distribution network, monitor and enforce standards of performance, and maintain a level-playing field with nimble responses to emerging concerns. The FoR should develop model rules that could help state regulators guide the changes necessary for the transition. Lastly, a well-functioning wholesale market that helps retail suppliers to reduce costs through efficient procurement and despatch operations.

Competition—aided by robust regulatory oversight—could nudge discoms to rationalise costs, reduce losses and provide quality electricity services to all consumers. This would have significant positive spill-overs for the economy. Creating a conducive regulatory environment and setting the rules of the game early on would be crucial for ensuring the transition is consumer-centric. The devil lies not just in the detail but also in an ongoing public dialogue.

Agrawal is senior programme lead and Ghosh is CEO, Council on Energy, Environment and Water
@GhoshArunabha @CEEWIndia

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