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Will the 4 ‘R’ approach give power sector a plug?

Richa Mishra | Updated on February 19, 2021

Reach, reinforce, reform and renewable is the mantra that underpins the new holistic approach

Prime Minister Narendra Modi said on Thursday that his government’s approach for the power and renewable energy sector has been holistic and guided by four mantras — reach, reinforce, reform, and renewable energy. “For reach, last mile connectivity is needed. This reach needs to be reinforced by installation capacity, for that reform is needed. Along with all this, renewable energy is the demand of the time,” said the Prime Minister when addressing a webinar on effective implementation of the Union Budget provisions in the power and renewable energy sector.

With this he set the pace for quick implementation of the Budget proposals, while also ensuring that the message goes loud and clear to all stakeholder that the success of any reform process in the power sector is dependent on how the States respond.

In her latest Budget, Finance Minister Nirmala Sitharaman said: “The distribution companies across the country are monopolies, either government or private. There is a need to provide choice to consumers by promoting competition. A framework will be put in place to give consumers alternatives to choose from among more than one distribution company.

“The viability of distribution companies is a serious concern. A revamped reforms-based result-linked power distribution sector scheme will be launched with an outlay of ₹3,05,984 crore over five years. The scheme will provide assistance to Discoms for infrastructure creation including pre-paid smart metering and feeder separation, upgradation of systems, etc., tied to financial improvements,” she said.

The first reaction to this proposal was — yet again, another scheme. Hasn’t the government learnt any lesson from the UDAY (Ujjwal Discom Assurance Yojana) scheme, which was to be the financial turnaround and revival package for electricity distribution companies with the intent of finding a permanent solution to the financial mess that the power distribution entities were?

Yes, it has, according TV Somanathan, Expenditure Secretary, Ministry of Finance, who explains that unlike UDAY this is a performance linked financial package.

One would say that an outcome and reform linked financial package for Discoms’ infrastructure upgradation is a forward-looking plan spanning over five years and certainly an improvement over the existing UDAY scheme, which was universal.

The Accelerated Power Development Programme, launched in 2000, was the first “reform linked” bailout package for State electricity boards tied to reforms. Several such ‘reform-linked’ packages have been announced since. UDAY was launched in 2015.

The ₹3-lakh-crore revamped power Discom scheme is Centrally sponsored and different from UDAY. It will be in the form of a grant, but not the entire ₹3-lakh crore. “Some parts will be borne by States and the rest by the Centre,” Somanathan said, acknowledging that based on the UDAY outcomes the scheme has been recalibrated. Therefore, the latest offering is a result-based reform scheme. It is not unconditional flow of money. If a State is not doing anything, it will not get money, as simple as that. It also requires each State to prepare an action plan which needs to be approved by the Power Ministry.

Once cleared, some amount of money will be given as advance, but everything else will be based on performance. Basically there is no free lunch in this offering by the Centre.

The industry termed it as a ‘welcome move’ as the distribution segment has been the weakest link in the electrical system and no measure was working on it till now. But what gives the government confidence that this will be a success? Wouldn’t privatisation of Discoms be a better option?

This is certainly an improvement over the existing UDAY scheme, which is primarily focussed on financial restructuring of Discoms by offering a debt waiver early but with no incentive for Discoms to deliver on the reform milestones. However, the recent announcement in the Union Budget, as well as the Atamnirbhar Bharat package in FY21, are at least in principle talking about operational improvement conditionalities in the same breath as liquidity injection, said an industry player.

Support measures

Besides the financial assistance to clear Discoms’ dues, to make them truly viable and to see significant operational and structural improvements, the schemes should be supported by legislative or administrative action to address several key issues that are vital to their revival — such as pushing tariff reforms, Direct Benefit Transfer of power subsidy, smart metering, encouraging open access and providing choice to consumers by promoting competition in the distribution sector.

In fact, in his address, the Prime Minister also touched upon the efforts being taken to improve ‘ease of doing business’ in the sector. He asserted that with reforms in the regulatory and process framework, the outlook towards the power sector has improved significantly.

“The government treats power as a separate sector, not as part of the industry sector. This innate importance of power is the reason for the government’s intense focus on making power available to everyone. The government is also working to remove problems in the distribution sector. For this, a policy and regulatory framework for Discoms is in the offing. Consumer should be able to choose his supplier as per performance like any other retail commodity,” he said, adding “work is on to free the distribution sector of entry barriers and licensing for distribution and supply. Efforts are under way for prepaid smart meter, feeder separation and system upgradation.”

However, as the saying goes, devil lies in the detail.

Everyone is waiting for details of this package, and how it supplements other Central and State schemes; discussions are under way in the Ministry at the highest level on this.

But, be it UDAY or the attempts prior to that, little has materialised by way of reforms over the past two decades on the Discom front. However, this time, besides the distribution segment, the government proposes to de-licence the supply side, providing consumers the option to choose their supplier. Competition in supply would improve the sector without disrupting the incumbent Discoms. According to Ashok Kumar Khurana, Director General, Association of Power Producers (APP), this could prove to be a game changer in the sector.

If the government is determined to push reform, some kind of liability has to be fixed, which it is now trying. It is easier said than done one would say, as many times politics overtakes economics. But, then, where there is a will there is way.

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Published on February 19, 2021
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