Time for radical power sector reforms

Lowering tariff for industries, better integration of renewables, and closure of inefficient thermal plants must be undertaken

The Covid pandemic, along with the ensuing lockdown, is an unprecedented health and economic crisis. This is true for the electricity sector, even though “lights are on” in every household.

Consider the metrics — on April 30, 2020, power demand across the country was 2.9 billion units. On the same day last year, it was 3.9 billion units. This reduction in demand is entirely from the relatively higher paying commercial and industrial sectors. Even at a conservative ₹5 per kWh, this amounts to a revenue loss of ₹500 crore per day for Discoms.

Discoms are left with servicing sectors that are subsidised (poor households and agriculture), while the sector from which the subsidy is recovered has disappeared. This situation will drastically exacerbate the already precarious state of Discom finances. It will also have a ripple effect on the finances of power generators.

The crisis will further compound the many problems that the power sector had been facing even before Covid. Chief amongst them are financial sustainability and payment reliability. It would be easy to kick the can down the road in light of the current crisis, but there is a real opportunity to take a step back to address these problems, especially at a time when energy demand is low and likely to remain that way for at least a few months, if not much longer.

Subsidy issue

First, with regard to ‘Make in India’, there’s an opportunity to bring in fresh Covid-influenced industrial investment from Korea and Japan, which are diversifying away from China. Notwithstanding other regulatory issues, industrial tariff has to become competitive to begin with: electricity prices for the Indian industry are one of the highest in the world. Thailand incentivises its manufacturing industry to work through the night by offering vastly discounted power.

We know fuel oil prices have been totally decontrolled in India, and the refineries have even been upgraded to pay for low sulphur fuel, so a tariff change for fossil fuels is eminently possible, even politically. India’s cross-subsidy scheme has uneven impacts on the competitiveness of sectors; to specifically target manufacturing, industrial power tariffs need to be competitively priced. For this to happen, agricultural tariffs have to be dealt with squarely. The political consensus seems to be veering towards a DBT subsidy similar to PM-KISAN, and freeing up all tariffs thereafter, with no scope for unfunded subsidies.

Renewable power

Second, as India continues to integrate renewable energy into the grid, a market-based automatic mechanism for the integration of infirm renewable power into the grid is needed. All countries struggle with this, as does India. The nine-minute lights-off event on April 4 demonstrated the technical capacity for managing grid flexibility, at least in one direction. But one must also remember that this was a planned event — grids had time to slowly back down supply in preparation and reduce damage from a sudden shock.

With renewable power, this luxury isn’t available — weather patterns change and forecasting will never be 100 per cent accurate. The management of the nine-minute event has reassured us that the Indian grid is robust; which means it is also robust enough to integrate more renewable energy — and this is timely given growth forecasts for renewables.

If we can design a market that competitively discovers costs and imposes penalties on dispatching renewable power across a nationwide grid, the “must-run” status of renewable energy will be earned without a regulatory push. Further capacity to manage power spikes associated with 175GW of renewable energy can be built with a push for battery storage availability in each grid — estimated at 2.5 per cent for every MW of renewable energy installed. The Central Electricity Authority has researched this issue extensively and concluded that with minimal back downs, the surge of renewable power expected in the future can be fully dispatched.

Coal plants

Third, what to do with idle, old, and inefficient coal plants. With a reduction in power demand across the country, output from coal and lignite plants has been adjusted downwards. This is a good time to recognise that the last 10 years have seen a steady decline in energy generation from fossil fuels — plant load factor for 2019-20 stood at 56 per cent, down from 78 per cent a decade ago.

Coincidently, many of these plants were to install flue gas de-sulphurisation (FGD) systems, but the commitment to retrofit 440 units amounting to 166.5GW by December 2022 is way behind schedule. As an example, only two out of 33 plants in the polluted NCR have met their FGD targets, and this tardiness can no longer be permitted given our renewed concerns for public health.

Unless a replacement programme is devised, utilities will continue to lose money through locked-in fixed payment contracts. Rather than have low-performing, old, and polluting thermal plants across the board, some of these old units could be incentivised to shut down, based on generation costs, remaining plant life, and the economics of installing pollution-control equipment.

If the cost of FGD installation at existing efficiencies are higher than the cost of incoming new renewables, now would be a good time to rethink further life of these plants. This will increase the PLFs of larger, newer, more efficient plants, including those of NTPC, and also help mitigate the country’s now permanent problems with air pollution.

Financial health

And, finally, all this requires that the perennial and oldest issue of the financial health of the Discoms gets solved, not just providing a lifeline. The government recently announced a ₹90,000-crore “loan” to Discoms so that the dues to generators can be cleared. While clearing dues to generators is a welcome step, mere riders attached to such loans are not enough. Unless this opportunity is used to create real reform, it will be just another colossally expensive step that simply shifts problems onto other entities. It will also be a short-term measure, and dues will start to build up again almost immediately.

The proposed Electricity Amendment Bill, 2020, is an ambitious step in the right direction — with moves to institute cost-reflective tariffs, remove subsidies, and strengthen the sanctity of contracts through greater enforcement and provision of payment security to generators. Each State can be asked to endorse the legislation with its variant, which could become a condition to accept the centre’s band-aid assistance in this time of crisis.

However, the proposed Bill could have gone further to introduce the radical reforms that are needed — mostly in the distribution sector. In the current draft, many of the reforms proposed earlier — carriage and content separation, more effective Renewable Purchase Obligations, and default open access to renewable energy — have either been dropped or watered down. A bold reform move would be the complete abolition of cross-subsidy at a defined future date, full substitution of agricultural power to cheaper sources such as solar, installation of smart meters, and a requirement to fulfil payment guarantee considerations that are more reliable than the current 6-9 month letters of credit on offer.

It is said that India reforms only when there is a crisis. We have a monster of a crisis now, and to not use this crisis for meaningful reform would be a waste of an opportunity.

Acharya is Asia Director, Climate Policy Initiative; Dang is a consultant; and Nuwal is with REConnect Energy

Published on May 17, 2020

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