Powering One India

What are the striking developments have taken place in the power sector, recently?

• There has been the highest ever increase in generation capacity. This helped in bringing down the peak electricity deficit in the country to the lowest ever level of 2.4 percent.
• On 29th December, 2015, no congestion was observed in the electricity grid and a single price was discovered on the power exchange IEX. This is the first such instance after India achieved complete grid integration on 31st December 2013.
• The Indian Railways (IR) is attempting to shift to open access (OA) for power purchase. This is not only cost efficient, but also harbingers the possibility of making India one market in power.
• Central and State governments have come together to address problems related to the health of distribution companies, and the debt overhang problem via the Ujwal DISCOM Assurance Yojana (UDAY).
• Renewable energy targets have been revised from 32 GW to 175 GW by 2022 moving the country towards a sustainable development model. Grid parity for solar generation is on its way to becoming a reality.

What are the daunting challenges remain in power sector?

• Complexity of tariff schedules prevents economic actors from responding sufficiently to price signals.
• Average tariffs in some cases are set below the average cost of supplying electricity.
• High industrial tariffs and variable quality of electricity adversely affects ‘Make in India’.
• Price and non-price barriers come in the way of single-nationwide electricity prices through open access.
• Determination of progressive tariff schedules for domestic consumers.

Transparency and simplicity in retail electricity tariffs

In India, there are separate tariffs for various types of activities. The complexity in electricity tariffs may prevent consumers from fully responding to tariffs. Simplification of tariffs with, perhaps no more than 2-3 tariff categories, will improve transparency and may well yield consumption and collection efficiency, along with governance benefits.

Tariffs and Costs

Discoms have a key role in the power sector, acting as an interface between retail consumers and rest of the value chain. However, their debt overhang has traditionally been a bottleneck for the sector. Tariffs reflecting costs are a necessary condition for discoms to sustain themselves over the long-run. Several states are attempting to close this gap under the UDAY Scheme.

Policies in the power sector: impact on ‘Make In India’

High tariffs and erratic supply for industry have led to a slow but steady decline in the growth of industrial electricity purchases from utilities and a gradual transition towards captive generation. There is wide variation in industrial tariffs within India. To protect against uneven power supply, about 47 percent of firms report using a diesel generator.These trends could be exacerbated in the coming years, as the decline in oil prices and the cost of renewable energy alternatives may prompt a further shift to captive power.

The Open Access (OA) issue

The Open Access (OA) policy introduced under Electricity Act 2003, allows consumers with electricity load above 1 MW to procure electricity directly from electricity markets. At its core, OA provides an aggregation of the country-wide supply and demand on the same platform. Therefore, this constitutes a first step towards discovering a single market price for power around the country.

The initial response to OA was strongly positive. Some states, however, have imposed significant barriers to OA in the form of cross-subsidy surcharge and additional surcharge for purchasing electricity from the power exchanges (PX).

This problem was meant to be addressed by the National Tariff Policy (2006), which established a methodology for determining the cross-subsidy surcharge to be levied on OA consumers, with a goal of reducing it over a period of time. Nonetheless, cross-subsidy surcharges over the years have gone up.

Currently, power plant load factors are at their lowest ebb (about 60 percent), as generation capacity has increased while the financial ability of discoms to purchase electricity has diminished. The time is thus ripe to allow industry, which has a high demand for power, to absorb the excess generation capacity through OA, providing a stimulus to industrial production under ‘Make in India’.

What should be the best structure of tariffs while also ensuring that power supply costs are recovered?

The tariffs for the poorest can be reduced while covering costs and without unduly burdening richer consumers. A major advantage of this procedure is that cross-subsidisation occurs within the residential consumers itself– i.e. rich and consumers with high consumption intensity within the residential sectors subsidise prices for consumers with lower consumption. Given their relatively inelastic price elasticity, rich consumers will continue to maintain their consumption even after price increase. The net effect is that the residential revenue collection becomes cost neutral for the discom and generates more revenues as compared to the current situation.