Power sector in India today presents a picture of plenty co-existing with nearly 25 crore people (half the size of the European Union) living without electricity. State power distribution companies (Discoms) are reluctant to enter into new power purchase agreements because they say the demand from high-end consumers is weak and they will be burdened with fixed charges payments on newly contracted electricity. The central government has introduced ‘UDAY’ to bailout state government-owned discoms. Dr. Pramod Deo, former Chairman of the CERC, discusses with Pankaj Joshi on some issues which impact the power sector and why execution now is more vital than legislation.
Price levels on the power exchanges:
I moved to the CERC in 2008. In 2009, at the time of the national elections, electricity trading prices on power exchanges had gone up to Rs.17/unit, which was due to highly speculative power market driven by the political climate of avoiding ‘load-shedding’ at any cost to catch votes. In 2010, with elections coming up in five states, we could envisage a repeat of this. Hence, making use of the legal provision which stipulates that in case of shortage a price cap can be introduced on traded power, CERC imposed a price cap of Rs.8.50-9/unit. This rate though high was dictated by NTPC’s gas based power generation cost. As these plants were then running on naphtha because of non-availability of gas we could not go below this figure. Otherwise, this capacity would not have been dispatched. This price cap regulation was unsuccessfully challenged by some state governments in respective high courts. Since then as more and more capacity was being added mainly by private sector we left the price discovery to the markets.
Today, exchange prices have collapsed to such an extent that its rise to Rs.2.75/unit becomes a headline news. There is of course an economic basis for this drop. We now have total installed capacity of nearly 310 GW and peak demand does not cross 150 GW. But the real reason is political: State Government do not want discoms to enter in to new power purchase agreements as it would lead to rise in procurement cost which gets reflected in tariff rise. Today 25,000 MW of capacity is without long term purchase agreements. Even at the time of Lok Sabha elections in 2014, exchange transactions took place only at Rs.2.50/unit. Discoms are looking to buy power on short term basis on exchanges.
Today, 9% of total power demand in India is traded power, with around 7% through bilateral agreements and 2% through the exchanges.
The open access dissection:
India has a unique open access model – hybrid of market access and regulation (buy power from anybody i.e. switch vendor) but compensate the existing vendor (discom) by paying cross-subsidy charge determined by the state electricity regulator. Open access is being resisted by discoms because they cannot afford to lose industrial consumers – potential open access seeking candidates. Today, industry and large commercial establishments subsidize agriculture to large extent and therefore implementation of open access at state level is lackadaisical. As most regulators set cross-subsidy surcharge and the additional surcharge very high, it makes no financial sense for these consumers to switch to open market procurement. Open access in effect is ‘permitted’ only in case of a high deficit situation on ground, like in South India currently. There, industries get to buy on the market simply because discoms are unable to supply.
How severe is this cross-subsidy business? Let us take the case of Maharashtra. Mahadiscom’s 53% revenue comes from only 79,000 large industrial and commercial consumers. The remaining 2.30 crore consumers which includes 38 lac agriculturists contribute only 47%. Agriculture consumers take 23% power and contribute only 13% revenue. Average cost of supply of power in the state is Rs.6.03/unit and for 1 MW and above category it is above Rs.8. For the agricultural segment though Maharashtra Electricity Regulatory Commission (MERC) has been raising tariffs over past 10 years the average tariff is only Rs.3.11/unit. After that the state government gives direct upfront subsidy to discom of Rs.3,500 crore. This effectively brings down real billing to agriculturist to Rs.1.20. Again, in a drought year, like 2015, collection from this segment will be poor resulting in unplanned deficit to the utility.
For Gujarat, where the average cost of supply is Rs.5.40, 67% revenue is from 1 MW and above category. Remaining 1.35 crore consumers which includes 11.9 lac agriculture users contribute only 33% revenue. Here also average tariff fixed for agriculture by the regulator is only Rs. 2.46/unit to contribute 13% to discoms revenue.
I have taken these two states for analysis because the discoms here have separated feeders for agriculture thereby minimizing any error on account of un-metered agriculture supply. But I learnt from their recent tariff petitions that even here cost and usage figures are not accurate because metering remains an issue.
Now the Indian Railways has been declared as ‘deemed licencee’. Once the railways stop buying power from the discoms in these states the cross subsidy burden on industrial/commercial consumers will further go up.
Open access issue is no doubt important from perspective of electricity market development, enabling consumer choice and fostering competition. But, if cross-subsidy to agriculture category is to be reduced, the state governments will have to pay almost double the subsidy given to distribution utilities from the state budgets. Hence, state governments do not want tariffs in general and agricultural tariffs in particular to be revised regularly.
In summary, the issue of agriculture cross subsidy, need & extent for revision in agriculture tariff trajectory, ensuring metered supply for all agriculture consumer connections and quantum of subsidy by government need to be deliberated extensively and political consensus on this to be reached in case open access is to be become a reality. These sectoral issues are key for the long- term sustainability of the power market operations and the open access cannot happen unless a clear roadmap for tariff rationalization and subsidy payment for agriculture sector is developed.
UDAY and the challenges facing the states:
A vital element of UDAY is prudent financial turnaround of the discoms. 75% of existing debt has been converted to state bonds subscribed by lender banks, effectively putting them in the decision-making loop. With no funding available for losses outside the trajectory fixed by the regulator, discoms will have to depend more and more on efficiency improvement and tariff rationalisation.
On tariffs, a recent ICRA study showed that in many states increases have been done only in a small way. In fact, in Punjab, overall tariff has dropped by 1%. Punjab coincidentally is going to the polls. Discoms are still state entities and a political angle in their functioning cannot be wished away. Tamil Nadu, with its huge past losses, has still not joined UDAY. Some or the other state will be going to the polls, and any concession made with that in mind, has to be then extended to all other UDAY signatory states.
Tariff is one matter, efficiency (metering and collection) is another. If tariffs rise but efficiency does not, the gap will remain as it is. With no funding for losses (outside trajectory), there will be financial pressure on discoms and this will perforce lead to load-shedding with all its ill effects. UDAY stipulates mandatory separation of agricultural feeders. So it is work in progress in most states. However, this feeder separation will not be effective unless automatic meter reading is also implemented.
The renewable energy angle:
Now we have very ambitious targets of 100 GW solar power and 60 GW wind energy. But we need to not overlook cost implications of procuring renewable energy by discoms. Even if solar rates keep going down it is well to remember that ‘capacity utilization factor’ (CUF) of solar plants in India is only 16-17%. Integration of green energy involves other costs such as backing down of conventional thermal power plants, part socialization of ‘Deviation Settlement Mechanism (DSM)’ of solar, wind and other ‘intermittent generation sources, resort to purchase of costly ‘peaking power’ or ancillary services, ‘storage options’, ……. All this adds to the procurement cost of renewable energy which finally gets reflected in the consumer tariff. Hence, switch to renewable energy is not a cost reduction factor in near future. Though it is a means to energy security and emission reductions.
To achieve the national goals, states have to be on board. Target of 40 GW of solar rooftop will benefit large subsidizing customers, the ones which discoms will not want to let go. So again there will be a conflict. Prescribing renewable purchase obligation (RPO) trajectory by the central government for all states has no legal sanction and consequently its enforcement will suffer. Since we are dealing with political economy of electricity sincere implementation of co-operative federalism can alone transform the electricity scenario.