For demand-side electricity reforms

The recent times have seen several States enhancing their electricity tariffs — the most recent case being in Delhi that came with the usual public outcry and protests. In times to come, with the rising costs of fossil fuels, northward trajectory of tariffs will become a periodic feature. Is there a way forward to hedge the economic downside of such revisions, particularly for consumers?

Financial subventions seem to be the most obvious answer — but can a sector plagued by mounting subsidies, that are threatening its sustainability, afford more? The answer is a resolute ‘no’; therefore, it is imperative to look at demand-side management (DSM) as a regulatory and policy tool that has been used successfully by several countries to mitigate the ill-effects of rising costs, while at the same time reducing the demand-supply divide.

ENERGY CONSERVATION

Carefully-crafted DSM frameworks have stimulated private sector investment. In the State of California alone, the annual investments in DSM projects are to the extent of $1 billion (Rs 5,500 crore). Undeniably, there needs to be a proper legal, regulatory and policy framework to stimulate the market.

The regulators in India have taken several important steps with almost 15 States, issuing regulations enabling the activity.

DSM is defined as a set of initiatives undertaken by the utility to bring about a desired change in consumer demand and/or demand profile, maintaining, or even enhancing, the service provided to the consumer in terms of quality, reliability and cost of service.

DSM usually results in reducing the energy use of consumers, without compromising its quality; and in overall conservation of electricity, its efficient utilisation (measured in terms of reduction of kilowatt hours (kWh) of electricity consumption) and connected load, that is, the reduction of KW of power demanded.

DSM works on the principle of evenly distributing electricity demand during the day to optimise the sourcing of power by the utility. Most utilities have a skewed demand curve during the day — rising to a peak level during 10 am-2 pm and then again during 6 pm- 10 pm and dropping substantially at other times.

Taking note of the fact that electricity cannot be stored, utilities have to procure power matching with peak demand. Thus, in off-peak hours, utilities have to bear the loss of demand reduction.

This provides them an opportunity to use DSM to reduce the peak-off-peak demand gap, leading to optimising of its resources and reducing the costs of power purchase. In most utilities, the difference between peak and off-peak demand stands between 30-50 per cent and any reduction there could lead to significant cost reduction, given that power procurement costs contribute to about 70-90 per cent of input costs.

SUBSIDY SAVINGS

In addition to cost savings, DSM could also help utilities rationalise the growing subsidy burden from household, agriculture, water pumping sectors where average realisation is lower than the cost of supply of electricity.

The cost differential is met by direct subvention from the governments or through cross-subsidies from commercial and industrial consumers. Thus, every additional unit of electricity saved in these sectors could result in reduction in cross-subsidy or subsidy requirement.

International experience suggests that governments need to evolve a comprehensive framework to stimulate DSM activities. The framework must address several regulatory, financial and information barriers that otherwise result in market failures.

To begin with, the framework needs to address the inherent conflict between DSM that inevitably results in reducing energy consumption, with the avowed objective of utilities maximising it.

This myopic view is the result of lack of information, institutional capacity, financial instruments and regulatory directive to the utilities.

Further, given that electricity sector is fully regulated, utilities are also hampered by making financial allocations required for development of DSM projects. In many countries, public sector entities have been mandated, after the frameworks have been established, to design, develop and implement demonstration projects to stimulate private sector investments.

POLICY FRAMEWORK

The enabling legal and policy framework for DSM has been laid down by the Energy Conservation Act, 2001, Electricity Act, 2003 and the National Electricity Policy. The Forum of Regulators (FOR) — a statutory body of all State Electricity Regulatory Commissions (SERCs) — has taken proactive steps in mainstreaming DSM from the regulatory side.

These efforts are in the direction of hedging the utility from the uncertain nature of DSM outcomes and the inherent conflict with the objective of achieving increase in sales. Many States have allowed legitimate expenses related to design and development of DSM projects as pass-through in tariff.

These expenses related to data collection, load profiling and research, evolving financial instruments to ease risks, setting up robust protocols for monitoring and verification, capacity building and training and creation of separate DSM cells in the utilities.

The FOR has proactively worked with other agencies to enhance understanding of SERCs towards the importance of DSM.

It has developed draft guidelines replete with regulatory, policy and financial instruments to overcome barriers. In the recent past, nine States have issued DSM regulations while six others are at an advanced stage of doing so. These guidelines enable the SERCs to give a target to the utilities for energy savings/cost savings by implementing DSM programmes.

Electricity usage has intricate linkages with human behaviour and, therefore, in addition to designing interventions based on technology, financial instruments, and so on, it is imperative that DSM programmes respond to behavioural change issues.

Financial incentives and disincentives have proved to be an effective instrument for this and in the Indian context, the telecom sector used the same to manage demand profile through preferential Time of the Day (ToD) tariff structure, where off-peak rates were almost 25 per cent of the peak call rates.

There are several other instruments that have been used internationally with success – however, the bottom line for all of them is the nature and quantum of incentives, that they partake with the consumers and other stakeholders.

Proactive public sector leadership in DSM project demonstration will go a long way in engaging the attention of the private sector.

(The author is Programme Officer, OzonAction Programme, UNEP, Bangkok. The views are personal.)

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