The UK is almost back to vertically-integrated utilities. But this doesn’t mean power reforms won’t take off in India; privatise discoms, with govt-pvt JVs in which govt handholds the pvt player till losses are wiped out
There is yet another factor which inhibits further reforms in the Indian power sector: ‘Power’ falls in the Concurrent List.
By Somit Dasgupta
The power sector in the UK has almost come a full circle. After living with vertically integrated utilities till 1989, they unbundled, created markets both at generation and retail end, and today, they are back to a situation where 70% of the power generated is sold outside the wholesale market, directly by the generators to their utilities. It has been quite a journey since the enactment of the Electricity Act, 1989, which paved the way for the appointment of a regulator, called OFFER (now called OFGEM), and thereafter, leading to unbundling, both vertical and horizontal. Twelve distribution utilities were set up (called RECs) along with three generation companies (called National Power, Powergen and Nuclear Electricity) and also a national wires company (called NGC). All of them were privatised barring Nuclear Electricity.
Retail competition was introduced in 1990 for the large consumers (having a load in excess of 1 MW), and by 1998, it was extended to all consumers. A wholesale market was set up, and all generators were mandated to submit their bids in the wholesale market. The next major step was to fragment the generators, National Power and Powergen, further because the regulator felt that they were colluding. Not content with this, the wholesale market was replaced by NETA in 2001. This was primarily a tie-up between gencos and their consumers with long-term power purchase agreements.
This was not all. The Energy Act, 2012, was enacted, which envisaged further changes. The notable features included the introduction of a carbon floor-price based on the EU’s energy trading system, bringing in long-term contracts for renewable generation, creation of capacity markets and mandating electricity suppliers to bring out less complicated tariff schedules.
The purpose of this piece is not to pass judgement on whether the restructuring helped anyone, and if yes, then whom. In fact, there is a vast amount of literature giving contrary views on the usefulness of this massive churning. On one issue, however, there was consistent finding amongst all researchers, which was that very few consumers actually changed their supplier. Moreover, it was the same set of consumers who were changing, and many were not sure if they are actually changing for the better, since the tariff schedules were too complex to decipher. However, the sheer pace of reforms needs to be appreciated and highlighted.
In India, we have not really moved forward after the enactment of the Electricity Act, 2003. The Act itself is a very cautious and timid exercise compared to what has been done in the UK. Through the Act, we have merely unbundled and ring-fenced our utilities so that there is transparency in the accounts; this itself took us several years. There has been no attempt to create a wholesale market or a full-fledged retail market where the consumer chooses the supplier. Large consumers, having loads in excess of 1 MW, however, have the option of open-access where they can opt to receive supply from some other entity, instead of his incumbent utility. The road to open access though has been bumpy, and discoms have opposed it tooth and nail.
Of late, there has been some thinking on introducing wholesale markets in India, and the CERC floated a discussion paper in December 2018. Whether this can be achieved is debatable since this amounts to retrofitting, and retrofitting in an existing architecture has its limitations. The moot point is whether we should attempt creating a wholesale market or for that matter a full-fledged retail market in India, especially after the experience of the UK. As mentioned before, the UK is almost back to the era of vertically integrated utilities, and consumers barely switch their retailer. Besides what was possible in the UK may not be possible in India. The UK did not have a regime of cross-subsidies (where the commercial and industrial sectors subsidise agriculture and low-end domestic consumers) and also did not have high commercial loss levels. Moreover, in the UK, all consumers were metered, unlike India.
There is yet another factor which inhibits further reforms in the Indian power sector: ‘Power’ falls in the Concurrent List. The Centre and states rarely see eye-to-eye on several issues concerning the sector, especially on matters relating to distribution. Consequently, any major change does not get accepted. The subject of ‘content and carriage’ is one such example, though its implementation would have been a herculean task, if not impossible, given our high commercial losses, a regime of cross-subsidies and lack of consumer metering.
So, are we condemned to a situation where the distribution sector will continue to bleed and make the whole sector unviable, thereby, affecting the banking sector through NPAs? The answer is no. We need to privatise our distribution sector by creating joint ventures with the government, and, of course, the government will have to undertake initial hand-holding till such time commercial losses are wiped out. This is the model which was followed in the case of Delhi and has proven successful. Commercial losses have come down from 50% to single-digit figures within a span of 10 to 12 years. Once we reach that stage, we can think of creating a full-fledged retail market where a consumer can choose her supplier. As of now, let us follow a path which is consistent with our ground realities. The Indian consumer is only interested in good quality power supply at a reasonable price. We only need to take policy measures so that the incumbent utilities can provide this, since, this will be the least costly path.
The author is Former member, CEA Views are personal