Type: op-ed snap

Context

A recent report of Niti Aayog has assessed the losses of discoms to be about Rs 90,000 crore in 2020-21.

Central government schemes for discoms

• In 2001, the Accelerated Power Development Scheme was initiated.
• This was followed by various other schemes with some differences between them.
•  The government had launched the UDAY scheme in 2015.
• UDAY did not involve any monetary assistance to the states, but only promised to help the states in reducing the cost of power through coal linkage rationalization, etc.
• Recently, the government launched a new scheme with a total outlay of around Rs 3.03 lakh crore.
• It seeks to improve the distribution infrastructure of the distribution companies (discoms) with the primary intention of improving their financial health.
• The objective of the scheme is to bring down commercial losses in the range of 12-15 percent and also reduce the difference between the average cost of supply (ACS) and average revenue realized (ARR) to zero by 2024-25.
• The problem with all these schemes (including UDAY) is that they have not been delivered and the financial position of the discoms has only worsened.

Why did schemes fail to improve the financial health of discoms?

• Reduction of loss is a managerial issue: Reduction of commercial losses is not really about improving infrastructure, it is more of a managerial issue.
• The average loss (inclusive of technical and commercial) is about 22 percent today.
• But several discoms have losses in excess of 40 percent.
• It is possible to bring down losses from 40 percent to about 15 percent without any significant investments in infrastructure.
• Investments, however, would be required to bring down losses further to a single-digit level.
• The governance issues of the scheme is a complex issue.
• The two most popular parameters which are monitored are the loss levels and the difference between the ACS and ARR.
• There are inherent problems with these parameters since they keep fluctuating and it is very difficult to fathom their trend on a quarter-wise basis, rendering the release of funds to be tricky and cumbersome.
• In the scheme now announced by the government, about 26 parameters will be taken into consideration and assigned a score.
• For some of the parameters, it may be difficult to assign a score across discoms which may lead to some amount of subjectivity.

Way forward: Alternate approach

• Provide transitional financial support: An alternate approach that could be considered by the Centre (in lieu of such assistance schemes) is providing only transitional financial support to all discoms, which are privatized under the private-public partnership mode. 
•  A transitional support of Rs 3,450 crore spread over five years proved to be exceedingly beneficial in the case of discoms in Delhi.
• Promote privatization: Since in an earlier policy statement the government had mentioned that privatization of discoms is to be promoted, it would make sense to consider this transitional support as a catalyst.

Conclusion

Adopting this approach will ensure that the central government moves away from the micro-management of discoms, which inevitably happens if the release of funds is linked to reform-linked parameters on a quarter-wise basis.

Context

The spread and speed of the destruction caused by climate change in recent weeks present our new Minister of Petroleum and Natural Gas with a policy dilemma. The article offers five policy suggestions to deal with the dilemma.

Energy dilemma facing India

• The events of the past month all over the world have caught even the most alarmist of climate scientists by surprise.
• These events brought into sharp relief the reality that there was no option of denying the consequential implications of the use of fossil fuels.
• However, the dilemma India faces lies in the fact that the Indian economy is heavily dependent on fossil fuels and there is no end in sight to this dependence.
• Further, India imports approximately 85 percent of its crude oil requirements and is exposed to the volatility of the international oil market.

Five policy changes needed

1) Reduce emphasis on domestic exploration

• Not easy to locate and difficult to develop: A review of the public sector’s exploration and production (EP) track record suggests that whilst India may well be sitting on substantial hydrocarbon reserves, these reserves are not easy to locate and, even when located, difficult to develop and produce on a commercial basis.
• The government has often compounded this economic challenge by placing administrative limits on marketing by companies and their pricing freedom.
• High risk and structural softness in the market: The fundamental point is that EP in India is a high-risk activity, and this risk is even greater today because of the longer-term structural softness of the petroleum market.
• The resources earmarked for exploration can be deployed more productively elsewhere.

2) Increase productivity of producing fields

• The ONGC needs to allocate increasing resources to improving the productivity of its producing fields.
• Low oil recovery rate: The average oil recovery rate in India was around 28 percent that is, for every 100 molecules discovered, only 28 were monetized.
• This number did not compare well with the global average of around 45 percent for fields of comparable geology.
• Use technology: The application of enhanced oil recovery (EOR) technology offers a relatively low-risk avenue for increasing domestic production.

3) Increase strategic reserves

• We hold currently strategic reserves equivalent to 12 days of imports.
• The government has approved plans to increase this buffer to 25 days.
• By comparison, China, the EU, South Korea, and Japan hold between 70-100 days of reserves.
• A significant portion of our oil imports came from the Middle East, predominantly Saudi Arabia, Iraq, and Iran.
• This region faces deep political and social fault lines and there is no knowing when our supply lines might get ruptured.
• We would, therefore, be well-advised to build contingency safeguards.

4) Restructure and reorganize public sector petroleum companies

• Consolidate upstream assets: In the first instance, the upstream assets should be consolidated under ONGC (the upstream assets of BPCL, IOC, HPCL, and GAIL should pass onto ONGC) and GAIL should be unbundled into a public utility gas pipeline company
• Diversify: Thereafter, these companies should be encouraged to look beyond hydrocarbons to build an “energy” enterprise.
• The restructuring will help cut back the “avoidable” costs of intra public sector competition.
• It will also reduce the inefficiencies of “sub-scale” operations.
• It will provide a focused platform for balancing the shorter-term need to provide secure and affordable hydrocarbons with the medium and longer-term imperative of developing clean energy.

5) Avoid siloed thinking

• The petroleum minister should not see his responsibility through the siloed prism of oil and natural gas.
• He should broaden the aperture and become the progenitor of the energy transition.

Conclusion

The dilemma referred to in the opening sentence will be easier to resolve our priorities are set within the framework of clean energy.

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.