Need for caution in delicensing distribution

March 10, 2021 5:15 AM

It would be better to focus on developing effective wholesale electricity markets, which, in turn, require well-functioning fuel markets

Any reform measure must not only solve today’s problems, but also ensure the sector is ready to face tomorrow’s challenges. These issues raise several concerns about the proposed changes.

By Daljit Singh
Following up on the announcement in the Budget, the Ministry of Power is proposing to delicense electricity distribution and allow multiple distribution companies (discoms) in each supply area, arguing that this will lead to greater competition in retail supply and allow consumers choice of supplier of electricity. Almost no one disputes the need for reforms in the power sector, particularly in distribution. Therefore, the government’s attention to this sector and its willingness to act are welcome. However, past experience suggests that piecemeal or isolated reforms are unlikely to succeed and, instead, a comprehensive approach is required. In addition, the power sector is undergoing rapid changes with a dramatic increase in renewable energy (RE) in the resource mix, and more distributed energy resources (DERs) such as roof-top solar.

Any reform measure must not only solve today’s problems, but also ensure the sector is ready to face tomorrow’s challenges. These issues raise several concerns about the proposed changes.

First, focusing on retail competition will have very little effect on the overall cost of electricity. Competition is expected to lead to greater efficiency and hence lower tariffs for electricity. However, 70-80% of the cost paid by consumers for electricity comes from the cost of power procurement which is determined by transactions at the wholesale level. Therefore, it would be better to focus on developing effective wholesale electricity markets, which, in turn, require well-functioning fuel markets. International experience shows that much of the economic gains from restructuring electricity sectors have come from wholesale markets, and that well-functioning wholesale markets are a prerequisite to well-functioning retail markets. The Central Electricity Regulatory Commission is developing wholesale markets; this work needs to be accelerated.

Second, the distribution network is a natural monopoly and each service territory should have only one network operator. Currently, discoms perform two functions: network operation (‘wires’ business), and energy supply. The proposed changes allow a competing discom to either set up its own network or use the network of an existing discom to supply electricity to its customers. Making ownership and responsibility of the distribution network non-exclusive will lead to unnecessary duplication of resources, which will increase the cost of electricity for consumers. The experience from the Mumbai experiment with multiple distribution licensees in the same area should be a sobering reminder of the perils of such an approach. There was endless litigation, planning and regulatory failures, and significantly higher tariffs for consumers.

Third, delicensing of distribution is likely to lead to neglect of distribution network operation, just when its importance for the sector is growing. The distribution network operator (DNO) performs several functions including network planning, augmentation of the network, and operation and maintenance of distribution equipment. These tasks may seem mundane but are crucial to ensuring good quality electricity service for consumers.

The role of the DNO will become even more important and challenging with increasing contribution from RE in the resource mix, a growing presence of DERs, new behind-the-meter technologies, and an increasing use of smart meters. Instead of one-way flow of power from the transmission grid through the distribution network to the consumers, there will be bidirectional flow because of DERs. Forecasting of generation from DERs will be more difficult because much of the installation will happen behind-the-meter, based not on the utility’s decisions but on consumers’ decisions. Because of bidirectional flow of power, active management of the distribution network will be required to respond to possible congestion in the distribution network and to ensure quality of power.

Managing purchase and sale of power between consumers on the distribution network (peer-to-peer transactions) will be another challenging task. In this new world, the DNO is expected to become the distribution system operator (DSO), requiring a far greater level of expertise within discoms.

Instead of adding to the financial stress being experienced by incumbent discoms, it would be better to support them in enhancing the skills of their workforce and being better prepared for future challenges. Furthermore, delicensing distribution and spreading these responsibilities across multiple companies will dilute accountability for distribution network and system operation and could lead to finger-pointing or even chaos. Therefore, discoms should have exclusive responsibility for the network in their respective service territories. Moreover, there are significant economies of scale in the work of DNOs and DSOs, and having exclusive service territories will help capture those economies.

Fourth, given that the work of DNOs/DSOs will require better technical and managerial capacity, a better alternative may be to pursue privatisation of discoms. The government has been promoting privatisation in distribution starting with the Union territories. Delicensing distribution will increase the risk for potential investors and is likely to reduce their interest in bidding. It is important that before any decision regarding privatisation, the state governments consult and negotiate in an open and transparent manner with all the stakeholders, particularly the unions, to address their apprehensions. The privatisation of distribution in Delhi may provide an example of how this can be done.

Given the diversity amongst states in India, as the government considers reforms in the power sector, it should follow an open, deliberative and wide consultative process to solicit inputs for any proposed reforms. It will help improve, and develop greater ownership of, the proposed reforms. While a consultative approach may seem frustratingly long and slow, it is essential for having a thriving power sector that can propel the Indian economy on to a high growth path.

The author is visiting scholar at the Centre for Social and Economic Progress, a Delhi-based not-for-profit think tank. Views are personal

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