Policy Wise: India’s Power Sector

Context

• Concerns of states on some provisions of the new Electricity Bill are justified. But the legislation proposes welcome correctives to longstanding problems of the power sector.

Important provisions of the bill

• Payment security: The Bill provides that electricity will not be scheduled or despatched if adequate payment security is not provided by the discom.   The central government may prescribe rules regarding payment security.
• Contract enforcement: The Bill empowers the CERC and SERCs to adjudicate disputes related to the performance of contracts.  These refer to contracts related to the sale, purchase, or transmission of electricity.  Further, the Commissions will have powers of a Civil Court.
• Renewable purchase obligation: The Act empowers SERCs to specify renewable purchase obligations (RPO) for discoms.  RPO refers to the mandate to procure a certain percentage of electricity from renewable sources.  The Bill adds that RPO should not be below a minimum percentage prescribed by the central government.  Failure to meet RPO will be punishable with a penalty between 25 paise and 50 paise per kilowatt of the shortfall.
• Selection committee for SERCs: Under the Act, the Chairperson of the Central Electricity Authority or the Chairperson of the CERC is one of the members of the selection committee to recommend appointments to the SERCs.  Under the Bill, instead of this person, the central government will nominate a member to the selection committee.  The nominee should not be below the rank of Additional Secretary to the central government.
• Composition of Commissions and APTEL: The Bill increases the number of members (including the chairperson) in SERCs from three to four.  Further, at least one member in both the CERC and SERCs must be from law background.  Under the Act, Appellate Tribunal for Electricity (APTEL) consists of a chairperson and three other members.  The Bill instead provides that the APTEL will have three or more members, as may be prescribed by the central government.

State apprehensions of the bill

• Multi state license: The clause pertaining to applicants seeking a distribution licence in more than one state. It states that the Central Electricity Regulatory Commission (CERC), and not the SERC, will grant the licence. This is problematic because a SERC is likely to be more aware of the field-level conditions in a state than its central counterpart.
• Centre can bypass state: The Bill has a provision empowering the Centre to give directions directly to the SERCs. Till now, the CERC received instructions from the Centre and the SERCs were under the state. The new Bill enables the Centre to bypass state governments. It’s not surprising that this is a matter of concern for the states.
• Direct appointment by centre: The Bill states that the SERC chairperson will now be a nominee of the central government and will be an additional secretary-level official. This gives the impression that the Centre is trying to control the appointments to the SERCs.

Why the bill is important?

• Compensation clause: The Bill states that if power purchase agreement PPAs are renegotiated, the affected party has to be compensated within 90 days from the date of submission of the petition.
• Uniformity in tariffs revision: New tariffs have to be made applicable from the beginning of the financial year. New tariffs often come into force in the middle of the financial year (due to delays in the issuing of orders by SERCs). This means that discoms do not earn their full revenues leading to cash flow problems.
• Easy tariff petition processing now: The Bill has proposed a reduction in the time for processing tariff petitions from 120 days to 90 days.
• Suo moto jurisdiction: Regulatory commissions have been given suo motu jurisdiction if tariff petitions are not filed within 30 days of the stipulated time. This too is a step in the right direction.
• More teeth to load dispatcher: the Bill proposes to give more teeth to the national load dispatcher. We need to strengthen the load dispatcher for the smooth functioning of the grid, especially with a huge renewable capacity where intermittency of generation is a major issue in the offing.

Conclusion

• The rollout of the proposed amendments through a consensus-based approach would go a long way in overhauling the weakest link in the nation’s power supply chain.

Mains question

Q. Electricity Bill 2022 is a remedy worse than the disease afflicting India’s power sector. Critically analyse.

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Context

• The Prime Minister has called for “Energy Atmanirbharta” by 2040.

What is Atmanirbharta?

• Atmanirbharta translates literally to self-reliance.

What is the main purpose of Atmanirbhar Bharat?

• The aim is to make the country and its citizens independent and self-reliant in all senses. Five pillars of Aatma Nirbhar Bharat are – Economy, Infrastructure, System, Vibrant Demography and Demand.

How to achieve energy self-reliance?

• Definitional clarity: Atmanirbharta translates literally to self-reliance. Many interpret it to mean self-sufficiency. That should not be our goal. Energy self-sufficiency is infeasible and uneconomic. A better statement of intent would be “strategic autonomy”.
• Affordable access to fuel: Our policy must continue to emphasise affordable and secure access to oil and gas. Part of this objective could be met by intensifying domestic exploration.
• Prioritise access to the building blocks of green energy: The sine qua non for realising this forecast will be cost-competitive access to minerals/components (copper, cobalt, lithium, semiconductor chips etc) required to build EVs, solar panels, wind turbines and batteries.
• Infrastructure development: We must expand our strategic petroleum reserves to cover at least 30 days of consumption and upgrade the transmission grid and battery storage systems to scale up renewables and smoothen its supplies. We will need to develop innovative financing mechanisms to fund green infrastructure. It should be emphasised that all such investments will get impaired if state discoms are financially insolvent.
• Green incentives: The government’s production-linked incentive scheme (PLI) offers benefits for investment in green energy.
• Demand conservation and efficiency: Energy usage norms must be standardised and tightened. Legislation should be contemplated to ensure compliance.
• Energy diplomacy: Our diplomats should add the arrows of energy diplomacy to their quiver. This is because of our dependence on the international energy supply chains. Success in navigating the cross-currents of economic and geopolitical uncertainties will rest greatly on skilful diplomacy.
• Holistic governance: The current siloed structures of energy governance are suboptimal. A root and branch administrative overall is required. Institutions should be created to facilitate integrated energy planning and implementation.

Case study for value addition

• Costa Rica lasted 300 consecutive days on renewable energy alone. Costa Rica set the record in 2017 for most consecutive days with renewable energy. The previous record for this feat was in 2015 when Costa Rica lasted 299 consecutive days on pure, clean energy.

Challenges ahead

• Anti-nuclear public sentiment: The Fukushima-Daiichi accident resulted in growing concern over the safety of nuclear plants in India .The construction of a nuclear plant in Kudankulam, Tamil Nadu, brought the issue directly into the public domain in 2012.
• Management autonomy: Power sector is dominated by public sector companies or PSUs (owned by the central and state government). Some parts of the energy sector have made very little progress in attracting private investment since 2007.
• Pricing: is the key to ensure the commercial viability of business entities and to attract investment into each fuel sector.
• Rigid tariff setting mechanism: Theoretically,  prices should be supervised and adjusted in a timely manner and adequately by independent regulators to reflect changing costs. However, in India, regulators including CERC and SERCs operate in a very rigid way due to political considerations. This jeopardises the operational profitability of companies.

Conclusion

• We need leadership that can reconcile temporal differences and balance the short-term pressures of elections with the longer-term imperatives of sustainability in energy security which calls for bold and pragmatic decision making by the leadership.

Mains question

Q. How India can achieve “Energy Atmanirbharta” by 2040 an ambitious target stated by prime minister? What are the challenges in achieving this goal?.

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Context

Across several states, the fiscal situation is becoming increasingly challenging. Yet, the common thread that runs through these deficits — state ownership and control — remains unaddressed.

State ownership: structural cause of India’s deficit

• Coal India’s inability to raise production to meet growing demand contributed to the recent power crisis.
• The state-owned power distribution companies have failed to bring down losses despite many schemes and packages.
• The state control of these critical aspects of India’s power chain is central to a higher current account deficit and growing fiscal risks at the state level.

Coal output fails to meet the demand

• From 2013-14, the Indian economy has grown by around 50 per cent (in real terms).
• But Coal India, which accounts for around 80 per cent of India’s total coal production, was able to raise its output by just 34 per cent over the same period.
• Increased reliance on imported coal: India’s coal imports (thermal and cooking) rose to a staggering 230.3 million tonnes in 2020-21, up 37 per cent from 168.5 million tonnes in 2013-14.
• Coal imports for thermal power alone have more than doubled in the first quarter, compared to the same period last year.
• To put this in perspective — the value of coal imports in just the first three months of this year is likely to be around half of what was imported in all of last year.
• Increase in current account deficit: This growing reliance on coal imports (along with crude and gold) is at the root of the country’s widening current account deficit.
• An inability to ramp up production, to forecast demand accurately, as every episode of coal shortage over the years has exposed, is the hallmark of the coal sector that is still largely the preserve of a public sector monopoly.

Problem of DISCOMS

• No improvement in financial and operational issues: Despite repeated attempts to turn around their financial and operational positions, on key metrics, the divide between the public and private sector discoms is deepening.
• In 2019-20, public sector discoms lost Rs 0.72 per unit of power sold, while private discoms made Rs 0.20 per unit.
• High AT&C losses: Similarly, in 2019-20, the AT&C losses (due to operational inefficiencies) for state discoms were pegged at 21.7 per cent, while for the private sector, losses were at 8 per cent.
• With deteriorating finances, the net worth of all public sector discoms put together stands at a negative Rs 61,757 crore, while for the private sector, it is a positive Rs 24,965 crore.
• There have been several attempts to rescue state discoms.
• In the early 2000s, the scheme for repayment of SEB dues amounted to Rs 41,473 crore.
• In 2012, the financial restructuring plan added up to Rs 1.19 lakh crore.
• In 2015, UDAY involved a transfer of Rs 2.01 lakh crore to state government balance sheets.
• Notwithstanding various schemes to turn around their finances, the total debt of all discoms put together stood at Rs 5.14 lakh crore at the end of 2019-20.
• Of this, Rs 4.87 lakh crore is owed by state discoms.
• Impact on entire power chain: A deterioration in the financial position of discoms means that their dues to power generating companies start mounting, which in turn delay payments to coal miners, affecting the financial stability of the entire power chain.

Declining cross-subsidisation

• As tariffs charged by discoms are much higher than the cost of alternatives, a sizeable part of non-agricultural sales of discoms (industrial and commercial consumers) have already shifted towards captive and solar.
•  And with the ministry of power recently reducing the threshold for green energy open access, more and more consumers will increasingly opt out.
• This would mean that discom losses will rise as cross subsidisation from commercial and industrial consumers will decline, increasing their dependence on state subsidies.
• In 2019-20, the total state subsidy claimed and released was around Rs 1.1 lakh crore or 17 per cent of total discom revenue.
• This will only increase down the line, making future bailouts even more fiscally challenging.

Conclusion

Tackling these deficits requires addressing the issue of government control over critical aspects of India’s energy sector. Without shifting to market-determined prices — reforms are ultimately about price — little headway is likely to be made.

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Context

The power crisis has taken us by surprise. The question in everyone’s mind is: where did we go wrong? And who slipped up?

Responsibilities in supply chain

• Under the Electricity Act, it is the responsibility of the Distribution Licensee/Company (Discom) to provide reliable quality and round-the-clock electricity to all consumers to meet full demand.
• To do so, they enter into contracts with a number of generating companies in order to ensure adequate supply.
• These Discoms work under the oversight of the State Electricity Regulatory Commissions.

Suggestions

1] Dealing with the challenge of demand prediction

• Qualitative transformation in demand: With higher incomes and the consequent increase in the use of air-conditioners and other electrical appliances, the nature of electricity demand is undergoing a qualitative transformation with rising daily and seasonal peaks, and spikes on very hot or cold days.
• While demand prediction is inherently uncertain, the questions to ask are whether Discoms have been making and updating their demand growth projections and scenarios over the medium term with adequate supply arrangements in a robust manner.
• This needs to become central to the regulatory process.
• Ensuring reliable supply to meet unanticipated peaks, as have occurred now, requires making supply arrangements with reserve margins that are adequate.
• The Regulatory Commissions need to provide for such expensive peaking power arrangements in the tariffs they approve.
• It is also time to move towards separate peaking power procurement contracts in addition to the present system of long-term thermal power contracts.

2] Demand-based time of day rates of electricity

• A transition to demand-based time of day rates of electricity for generators as well as consumers would help.
• These should be brought in by the Regulatory Commissions.
• Flattening of demand curve: Peak demand moderation and flattening of the demand curve through a change in consumer behaviour is feasible with smart meters.
• But this would take place only with a strong price signal, a large differential in peak and off-peak rates.

3] Subsidies and politics

• Free supply of electricity to farmers and households up to a specified level is not a problem as long as State governments pay for it as provided in the Act, and the Regulatory Commissions do not at the same time act from a political point of view and shy away from determining cost-reflective tariffs.
• While the problem of delayed payments by Discoms is getting highlighted and needs to be resolved with a sense of urgency, the coal supply problem is not due to this.
• Coal India needs to create capacities to rapidly ramp up production; and the Railways need to carry larger quantities of coal when demand surges, as has happened now.
• Imported coal and gas generated electricity: There is idle but expensive generating capacity available — about 15-20 GW of gas-based power plants which can run on imported liquefied natural gas, and 6 GW-8 GW of thermal plants which can run on imported coal.
• Consumers who are willing to pay more could be kept free of power cuts with purchase and supply of more expensive electricity generated from imported coal and gas.
• To improve reliability, Discoms, with the approval of the Regulatory Commissions, need to go in for bids for storage.

Conclusion

A lesson is that demand growth projections and supply arrangements need to become central to the regulatory process.

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Context

The power sector in India is going through a crisis. Peak shortages in some states have reached double digits.

Chronology of the crisis

• First, with summer approaching before time, power demand has shot up to record levels.
• The second reason for the rise in power demand is that the economy is recovering, and demand from the industrial sector is going up.
• All things put together, power demand crossed 207 GW on April 29, which is about 14 per cent higher than what it was a year ago.
• Experts feel that the peak demand may even touch 215 GW in the coming months.

Coal shortage crisis

• On average, coal stocks available are only good enough for about eight days’ generation against a norm of 24 days.
• In some plants, the stocks available are just about enough to run the plant for a day or two more.
• Part of the problem of poor coal stock is also rumoured to be on account of the non-payment of dues of coal companies.
• But this is not the major cause of the shortage.

Reasons for coal shortage and fall in generation

• The fall in coal stock in power stations is because of two main reasons.
• 1] Rise in international price of coal: The first is that due to a rise in the international price of coal on account of the Ukraine crisis, all plants that were importing coal have either stopped generating completely or are generating at much lower levels.
• We have a sizeable generating capacity based on imported coal, estimated at about 16 GW to 17 GW.
• All these plants after stopping imports are now looking for domestic coal, creating pressure on domestic coal.
• 2] Non-availability of rakes with Indian railways for transporting coal: Though about 22 MT of coal may be available in power stations, if one includes the stocks available with mining companies, the figure is well over 70 MT.
• So, it is all a question of transporting the coal to the power stations.
• 3] Fall in generation from gas-based plants: To make matters worse, generation from gas-based plants has also fallen due to high gas prices in the world market.
• 4] Impact on hydro generation: Reservoirs, too, are drying up due to intense heat which will adversely affect hydro generation.

Transportation problem faced by Indian railways

• The railways have about 2,500 rakes which can be used for coal transportation.
• With a turn-around time of about four-and-a-half days which goes up to nine days for coastal regions, the railways can provide only about 525 rakes on any single day. 
• Of this, about 100 rakes are used for transporting imported coal and therefore, only about 425 rakes are available on a daily basis for transporting domestic coal.
• But only 380 rakes were being provided in the first half of April this year, though efforts are on to increase this to about 415 rakes.
• The railways prefer to transport coal over short distances in order to save on the turn-around time.
• There is also the issue of availability of tracks since they are being used on a back-to-back basis.
• Thus production has to be enhanced so that the replenishment rate is higher than consumption.
• Unless we do that, the total stock of coal in the country will deplete further and it will no longer be a mere transportation problem as it is now, but a general lack of supply of coal.

Conclusion

This is the right time to enhance coal production and build adequate stocks because once the monsoon sets in, production will fall.

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Context

The announcement of enhanced targets for climate action by India, particularly for achieving net-zero emissions by 2070, has highlighted the importance of long-term planning for decarbonising the economy.

Why do we need a decarbonizing strategy

• The Government of India has responded to rapid reductions in the cost of renewable energy (RE) based power, with dramatic enhancements in the targets for RE.
• With this approach, India has done well and is on a path to fulfilling its Paris Agreement commitments for 2030.
• However, the road ahead will be challenging, and therefore, a coordinated strategy for decarbonising the economy efficiently and effectively will be required.

Strategy for decarbonising the economy

• Factoring in the changes: By 2070, there will be many changes in technology, environmental conditions, and the economy.
• The planning horizon of about 50 years will need to be broken up into shorter periods so that new knowledge about emerging technologies can be incorporated into plans.
• Monitoring of the progress: Plans will need to be monitored so that the course can be corrected to respond to any unforeseen problems.
• Five years, as the UK has used, seems like a reasonable “Goldilocks ideal.”
• An autonomous and technically credible agency, like the Climate Change Committee (CCC) in the UK, should be set up.

Decarbonising the power sector

• Biggest source of GHG: The power sector is the biggest source of GHG emissions and also the easiest one to decarbonise.
• Reducing emission intensity is a good overarching objective; increased use of RE or non-fossil-fuel generation is a means to that end.
• The four 2030 targets: Non-fossil fuel generating capacity to be 500 GW, RE capacity to be 50 per cent of all generation capacity, reduction in emission intensity by 45 per cent, and avoidance of GHG emissions by 1 billion tonnes — are inter-related.

Suggestions to decarbonise the power sector

• Set emission intensity targets: Setting permissible emission intensity in terms of grammes of carbon dioxide equivalent per kWh of electricity sold, would be a good option for targets in the power sector.
• Single emission-related objective: In order to decarbonise the power sector, it would be best to have a single emissions-related objective so that an optimal strategy can be developed to achieve the objective at the lowest cost.
• Avoid separate targets: Currently there is a profusion of separate targets for almost every resource used to generate electricity.
• For example, there are separate renewable purchase obligations (RPOs) for solar, non-solar RE, and hydropower.
• Such an approach reduces the flexibility of distribution companies to select resources to meet their loads, resulting in a non-optimal resource mix, and a higher cost of electricity.
• Reconsider RPO: RPOs are usually imposed to support nascent technologies, and because RE is now competitive on costs with conventional generation, the need for RPOs should be reconsidered.
• The use of emission intensity targets is a better approach.

Consider the question “Why power sector holds the key to decarbonising the Indian economy? Suggest the strategy India should follow to decarbonise the power sector.”

Conclusion

The use of five-year interim targets for permissible emission intensity and the establishment of an autonomous and credible agency to advise the government on targets and policies and to monitor progress will greatly facilitate an effective, economic, and smooth transition to decarbonisation of the power sector first, and the Indian economy later by 2070.

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Context

The power sector in India is at an inflection point. Three developments are triggering a shift across the power chain, generation and distribution in particular, and are in the process deepening existing faultlines, and exacerbating the distress.

Three changes driving the shift in power sector

1) Central government’s approach towards distribution segment

• Till recently, the Centre had preferred to incentivise states, nudging them to address the issue that lies at the heart of the power sector’s woes — turning around the operational performance and financial position.
• However, despite multiple attempts, not much has changed.
• But over the past few months, the Centre appears to have changed tack.
• The Centre no longer appears content to simply nudge states into acting.
• This change in stance is evident from enforcing the tripartite agreement to recover the dues owed to power producers like NTPC by discoms in Jharkhand, Tamil Nadu and Karnataka to now regulating coal supplies to states where power generating companies have been delaying payments.

2) Covid impact on government finances and ability to support discoms

• Notwithstanding buoyant tax revenues this year, Covid has wreaked havoc on government finances.
• The general government debt stands at 90 per cent of GDP.
• Add to this demands for greater welfare spending, uncertainty over state government finances once the five year GST compensation period ends next year, and the limits to which states can continue to support discoms will increasingly be tested.
• To what extent accounting jugglery can be used once again to clean up discom debt is debatable.
• After all, even the liquidity facility arranged by the Centre to help discoms pay off their obligations will have to be paid back.

3) Loss of monopoly and shift towards renwable

• Until now, consumers had little recourse to alternate sources of supply.
• Consequently, discoms, which are essentially geographical monopolies, were able to charge higher tariffs from commercial and industrial consumers to cross-subsidise agricultural and low-income households.
• But the situation appears to be changing.
• Migration of high tariff paying consumers through open access and investments in captive power plants is gaining traction, driven in large part by the emergence of solar as an alternative at seemingly competitive tariffs.
• This reduced reliance of high tariff paying consumers on discoms will only exacerbate their already precarious financial position.
• The pace at which this transition is occurring will only accelerate in the coming years.
• On the supply side, at the global and the national level, there is a push towards cleaner fuel, solar in particular.
• Flowing from this — though with debatable relevance given the current levels of per capita emissions — is the domestic policy thrust towards renewables.
• Solar, in particular, benefits from both explicit and implicit subsidies — land at concessional rate, exemption from interstate transmission charges, discounted wheeling charges, cross-subsidies for open access, SECI taking on counterparty risk, and others.
• It also enjoys “Must Run” status.
• On the demand side, at current tariffs, solar is emerging as an attractive alternative for the high tariff paying commercial and industrial consumers.
• On their part, discoms are trying to salvage a losing situation.
• To stem the flow of high paying customers, some have begun levying an additional surcharge on whoever opts for open access to lower the cost differential.
• Others are shifting from net metering to gross metering — essentially charging consumers higher tariffs — above particular consumption levels.

Conclusion

Continuously subsidising discoms for their AT&C losses (operational inefficiencies), and for not supplying power at commensurate tariffs to low-income households and agricultural customers (for political considerations) will become fiscally untenable.

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Context

The blame cannot be placed on the doors of any one entity or ministry for the shortage of coal.

Ministries linked with coal shortage issue

• The Ministry of Coal and Coal India must certainly accept that they slipped up somewhere — whether in managing the production process, planning supplies or leaving vacant crucial leadership positions.
• The Ministry of Power/NTPC should also accept responsibility as they allowed coal inventories to fall below the recommended minimum in an effort to better manage their working capital.
• But they can claim they had no other option because the state government electricity distribution companies do not pay their dues on time or fully.
• The discoms will point a finger at their political bosses, who compel them to sell electricity to residential and agricultural sector consumers at subsidised tariffs.

Structural issues

• There is no one public body at the central or state government level with executive oversight, responsibility and accountability for the entirety of the coal value chain.
• This is a lacuna that afflicts the entire energy sector.
• It will need to be filled to not only prevent a recurrence of another coal crisis but also for the country to realise its “green” ambition.
• The word “energy” is not part of the political or administrative lexicon.
• At least not formally. As a result, there is no energy strategy with the imprimatur of executive authority.
• The NITI Aayog may well challenge this statement.
• For they have produced an energy strategy.

Suggestions

• Energy act: The government should pass an Act (possibly) captioned “The Energy Responsibility and Security Act.”
• This Act should elevate the significance of energy by granting it constitutional sanctity; it should embed in law, India’s responsibility to provide citizens access to secure, affordable and clean energy.
• The law should lay out measurable metrics for monitoring the progress towards the achievement of energy independence, energy security, energy efficiency and “green” energy.
• Ministry of energy: Towards the fulfillment of this mandate, the government should redesign the existing architecture of decision-making for energy.
• Preference would be for the creation of an omnibus Ministry of Energy to oversee the currently siloed verticals of the ministries of petroleum, coal, renewables and power.
• The department would have a narrower remit than the other energy departments but by virtue of its location within the PMO, it would, de facto, be the most powerful executive body with ultimate responsibility for navigating the “green transition”.

Benefits

• It is important to stress the positive impact the above redesign will have on investor sentiment.
• Several corporates have signaled their intent to invest mega bucks in clean energy.
• Reliance has committed $10 billion, Adani $ 70 billion over 10 years; Tata Power, ReNew Power and Acme Solar have also placed their stakes in the ground.

Conclusion

Energy sector will be immensely benefited if the current fragmented and opaque regulatory, fiscal and commercial systems and processes were replaced by a transparent and single-point executive decision-making body for energy.

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Context

India has a long way to go in providing electricity security to its people since its per capita electricity consumption is still only a third of the global average.

Ensuring energy security and role of coal

• Energy security warrants the uninterrupted supply of energy at affordable prices.
•  Thanks to the Electricity Act of 2003, the installed coal-fired thermal power plant (TPP) generation capacity in India more than doubled from 94 GW to 192 GW between March 2011 and 2017.
• This sharp increase in the installed capacity has enabled the government to increase per capita electricity consumption by 37% while reducing peak demand deficit from 9.8% (2010-11) to 1.6% (2016-17). 
• TPPs contributed 71% of the 1,382 billion units (BU) of electricity generated by utilities in India during FY 2020-21 though they accounted for only 55% of the total installed generation capacity of 382 GW (as of March 2021).
• Coal, therefore, plays a vital role in India’s ongoing efforts to achieve Sustainable Development Goal 7, which is “to ensure access to affordable, reliable, sustainable and modern energy for all”.

Renewable energy utilisation issue and implications for consumers

• While variable renewable energy (VRE) sources (primarily, wind and solar) account for 24.7% of the total installed generation capacity, as of March 2021, they contributed 10.7% of the electricity generated by utilities during FY 2020-21.
• However, the ramp-up of VRE generation capacity without commensurate growth in electricity demand has resulted in lower utilisation of TPPs whose fixed costs must be paid by the distribution companies (DISCOMs) and passed through to the final consumer.
• The current level of VRE in the national power grid is increasing the cost of power procurement for DISCOMs, leading to tariff increases for electricity consumers. 
• Therefore, India must implement a plan to increase energy efficiency and reduce the emissions of carbon dioxide (CO2) and airborne pollutants from TPPs without making power unaffordable to industries that need low-cost 24×7 power to compete in the global market.

Way forward: time-bound transition plan

• Phasing out: The plan should involve the progressive retirement of TPPs(unit size 210 MW and below) based on key performance parameters such as efficiency, specific coal consumption, technological obsolescence, and age.
• Increasing utilisation: The resulting shortfall in baseload electricity generation can be made up by increasing the utilisation of existing High-Efficiency-Low-Emission (HELE) TPPs that are currently under-utilised to accommodate VRE and commissioning the 47 government-owned TPPs.
• In addition, the Nuclear Power Corporation of India Limited (NPCIL) is also constructing 11 nuclear power plants with a total generation capacity of 8,700 MW that will supply 24×7 power without any CO2 emissions.
• The combined thermal (220 GW) and nuclear (15 GW) capacity of 235 GW can meet the baseload requirement (80% of peak demand) during the evening peak in FY 2029-30 without expensive battery storage.
• The optimal utilisation of existing and under-construction HELE TPPs with faster-ramping capabilities and lower technical minimums also facilitates VRE integration.
• Since HELE TPPs minimise emissions of particulate matter (PM), SO2, and NO2, the transition plan offers operational, economic, and environmental benefits including avoidance of sustenance Capex and FGD costs in the 211 obsolete TPPs to be retired besides savings in specific coal consumption and water requirement leading to reductions in electricity tariffs and PM pollution.

Conclusion

The implementation of transition plan will enable India to safeguard its energy security and ensure efficient grid operations with lower water consumption, PM pollution, and CO2 emissions.

Context

As part of the Union Budget address for 2020-21, the Finance Minister, Nirmala Sitharaman, said that the shutting down of old coal power plants, which are major contributors to emissions, will aid the achievement of India’s Nationally Determined Contributions.

Advantages of shutting down old coal power plants

• The availability of under-utilized newer and presumably more efficient coal-based capacity means that shutting down older inefficient plants would lead to improved efficiencies, reduced coal usage, and hence, cost savings.
• It would be uneconomical for old plants to install pollution control equipment required to meet the emission standards announced by the Environment Ministry, and hence it would be better to retire them.

Why the decision needs finer scrutiny?

• Some old plants are cost-effective: There are also several old plants, which generate at lower costs, such as plants at Rihand, Singrauli, and Vidhyanchal (Madhya Pradesh).
• Locational advantage: This may be due to locational advantage rather than efficiency, as older plants are likely to be located closer to the coal source, reducing coal transport costs.
• Not cost-effective: Savings in generation cost from shutting down plants older than 25 years would be less than ₹5,000 crore annually, which is just 2% of the total power generation cost.
• Not effective in reducing coal consumption: Savings in coal consumption by replacing generation from plants older than 25 years with newer coal plants are also likely to be only in the 1%-2% range.
• Economical even after installing pollution control equipment: There are some old plants that may continue to be economically viable even if they install pollution control equipment as their current fixed costs are very low.

Important roles played by old thermal power plants

• A significant part of power supply: Plants older than 25 years makeup around 20% of the total installed thermal capacity in the country and play a significant role in the country’s power supply.
• Supporting renewable: To support the growing intermittent renewable generation in the sector, there is an increasing need for capacity that can provide flexibility, balancing, and ancillary services.
• Old thermal capacity, with lower fixed costs, is a prime candidate to play this role until other technologies (such as storage) can replace them at scale.
• Political economy risk: There is also a political economy risk, as aggressive early retirement of coal-based capacity, without detailed analyses, could result in real or perceived electricity shortage in some States, leading to calls for investments in coal-based base-load capacity by State-owned entities.

Way forward

• Nuanced analysis needed: Instead of using age as the only criteria, a more disaggregated and nuanced analysis needs to be used.
• Constraint related to renewable and increasing demand: We also need to take into account aspects such as intermittency of renewables, growing demand, and the need to meet emission norms, to make retirement-related decisions.

Conclusion

It may be prudent to let old capacity fade away in due course while focusing on such detailed analysis and weeding out the needless capacity in the pipeline, to derive long-term economic and environmental benefits.

The article highlights the need for frequent financial aids to the discoms by the Centre and discusses the factors responsible for this.

Frequent rescue packages for discoms

• Recently, there was a sharp decline in the dues owed by power distribution companies, discoms, to power generating companies.
• Discoms have paid off their dues in part by drawing down a liquidity facility arranged by the Centre last year.
• This rescue package was arranged to prevent the entire power sector chain from suffering because of the discoms’ inability to meet their obligations. 
• In the initial years after the introduction of UDAY some states did, in fact, witness an improvement in their financial and operational indicators.
• But it wasn’t sustained, There has been a sharp deterioration in several parameters.

Low performance of Discoms

1) On the basis of AT&C losses

• A key metric to measure the performance of discoms is AT&C losses.
• The UDAY scheme had envisaged bringing down these losses to 15 per cent by 2019.
• However, as per data on the UDAY dashboard, the AT&C losses currently stand at 21.7 per cent at the all-India level.
• In the case of the low-income north and central-eastern states — Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh — the losses are considerably higher.

2) On the basis of cost and revenue per unit

• On another metric — the gap between discoms’ costs and revenues — the difference, supposed to have been eliminated by now, stands at Rs 0.49 per unit in the absence of regular and commensurate tariff hikes.
• For the high-income southern states of Tamil Nadu, Andhra Pradesh, and Telangana, this gap between costs and revenues is significantly higher.

What are the factors responsible for inefficiencies?

1) Electrification push without cost restructuring

• The government’s push for ensuring electrification of all have contributed to greater inefficiency.
•  To support higher levels of electrification, cost structures need to be reworked, and the distribution network would need to be augmented — in the absence of all this, losses are bound to rise.

2) Economic fallout of the pandemic

• With demand from industrial and commercial users falling, revenue from this stream, which is used to cross-subsidise other consumers, has declined, exacerbating the stress on discom finances.
• A turnaround in the economy will provide some relief, but will not form the basis of a sustained improvement in finances.

3) Lack of consumer data and metering

•  Even six years after UDAY was launched, various levels in the distribution chain — the feeder, the distribution transformer (DT) and the consumer — have not been fully metered.
• As a result, it is difficult to ascertain the level in the chain where losses are occurring.
• Other than discoms in metros like Delhi and Mumbai, there is also limited data on which consumer is attached to which DT.
• This lack of data makes it difficult to isolate and identify loss-making areas and take corrective action.

4) No tariff hike

• The continuing absence of political consensus at the state level to raise tariffs or to bring down AT&C losses signal a lack of resolve to tackle the issues plaguing the sector.

Way forward

• One of the solution centres around a national power distribution company.
• Another option is to deduct discom dues, owed to both public and private power generating companies, from state balances with the RBI forcing states to take the necessary steps to fix discom finances.
• The Centre has linked additional state borrowings to the completion of distribution reforms to incentivise states to act.

Consider the question “Despite several efforts by the Centre to improve the efficiency, discoms continue to perform dismally requiring frequent financial aids. What are the factors responsible for this? Suggest the way forward.” 

Conclusion

Short of radical measures — privatisation remains a chimera — it is difficult to see how a sustainable turnaround in the financial and operational position of discoms can be engineered. As the amounts involved rise, minor tinkering isn’t likely to produce the desired results.

Back2Basics: AT&C losses

• Distribution loss consists of two parts:
• a. Technical loss
• b. Commercial loss.
• It is also called AT&C loss.
• AT&C loss is nothing but the sum total of technical and commercial losses and shortage due to non-realization of billed amount.
• AT&C Loss = (Energy input – Energy billed) * 100 / Energy input.

The article analyses the factors responsible for financial difficulties faced by the DisComs and suggests the ways to deal with the issues.

Important role of the DisComs

• Distribution Companies (DisComs) are the utilities that typically buy power from generators and retail these to consumers.
• For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs.
• The days of scarcity of power are over.
• The physical supply situation has mostly improved.
• But the financial picture has not brightened much.

Analysing the data on liabilities of the DisComs

•  ₹90,000 crore (later upgraded to  ₹1,25,000 crore) was earmarked for DisComs in ₹20-lakh crore package announced in the wake of Covid-19’s economic shock.
• The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were ₹2,27,000 crore, and this is well before COVID-19.
• It also showed similar Other Current Liabilities.
• DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan.

But why do DisComs not pay on time?

• Ideally, DisComs should not incur losses as they enjoy a regulated rate of return.
• While AT&C losses can explain part of any gap. Major reasons are as discussed below:

1) Regulatory issue and cash-flow gap due to it

• The first problem starts at the regulatory level where even if DisComs performed as targeted, across India, they would face a considerable cash flow gap.
• This cash flow gap was ₹60,000-plus crore in FY18-19 compared to their then annual cost structure of ₹7.23-lakh crore.

2) Payabeles issue: Due from consumers, state and regulatory gap

•  These dues are of three types.
• First, regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets,which are to be recovered through future tariff hikes.
• Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.
• Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.
• State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.

3) Challenge of renewable energy

• The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage.
• And as battery technologies mature, their dependence on DisComs may wane entirely.
• Even without batteries, regulations permitting, they may want to find third party suppliers under competitive models.

Impact of Covid pandemic

• COVID-19 has completely shattered incoming cash flows to utilities.
•  The revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments.
• Reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower offtake.

Way forward

• We will probably need a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt.
• We need a complete overhaul of the regulation of electricity companies and their deliverables.
• We need to apply common sense metrics of lifeline electricity supply instead of the political doleout of free electricity even for those who may not deserve such support.
• For the rest, regulators must allow cost-covering tariffs.

Consider the question “Examine the factor responsible for making the DisComs financial unviable? Sugget the pathways to deal with the issues faced by the DisComs”

Conclusion

The financial problems of DisComs have been brewing for many yearsHowever, if business as usual was not even good enough before COVID-19, it will not be workable for the current national needs of quality, affordable, and sustainable power.