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Election Results in India: Power sector reforms-a new agenda for the new government

   May 24, 2019        372        Kameswara Rao

New Delhi: The incoming power minister is unlikely to be troubled by any of the burning issues that her predecessors will have routinely faced early in their tenure. We are in this position having successfully tackled our long-running ordeals with power shortages, depleting fuel stocks, rising energy prices, and millions of homes without power connections.

We grabbed the limelight too in tackling climate change with ambitious programs to scale up renewable energy and deploy conservation measures. The progress across many fronts has propelled India to become the world’s third largest power market.

The challenges that the government faces now are more fundamental. The current industry structure is growing obsolete and increasingly ill equipped to cater to the new demands. The power minister will have to work with the state governments to build consensus for a new reform agenda and a new industry structure.

The most critical reform measure is to increase participation in retail supply. The single supplier model has served its purpose of delivering affordable electricity connections to consumers, but has now trapped the sector into a state of persistent insolvency. The Distribution Companies (Discoms), which the state governments own, continue to bleed cash and have put at risk generators, suppliers and lenders with delayed payments.

Sadly, this comes despite a credible improvement in their operating performance and securing debt relief under the UDAY scheme. The past efforts to raise Discom tariffs to recover their actual costs has not worked, given the independent regulators’ proclivity to pass on most of the gains to consumers. It is unlikely to happen in future, as it is politically expedient for any incumbent government to deny utilities a reasonable return.

The only credible solution is for the government to exit from the business of supplying power to the retail consumers altogether and allow new suppliers and competition to step in. Already, many large industries, commercial establishments (like airports or hotels), and public sector organisations (such as railways and metro rails) buy from captive or third party suppliers at a lower rate than from the Discoms. The state government utilities can continue to own and operate the wires infrastructure, which is a profitable business by its monopoly nature and does not drain taxpayers’ money in periodic bailouts.

The second reform measure is to transition the planning process from long-term to a shorter timeframe. In the past, long-term agreements (of 15 to 25 years duration) for power purchase or fuel supply worked well when the industry was under-served and it made sense to ‘capture’ the capacity. This is less relevant now with power surplus and an increasingly diverse set of suppliers and consumers.

The growth in variable renewable energy, from large-scale renewable parks to rooftop installations, and the consequent challenge of inter-day swings in production, has made flexible generation more valuable than a long-term contract. However, we do not have a policy or the process to contract such capacity. The profile of consumption is changing too with greater urbanisation, use of electric appliances, conservation measures and new applications such as on-site storage and electric vehicles.

A long-term take-or-pay contract when not fully utilised, as is increasingly the case, is very expensive and the reason for power utilities’ reluctance to sign any more power purchase agreements (PPAs). This is not all: coal suppliers offer their best rates only under long-term fuel supply agreements (FSA) with generators having long-term PPAs. Even the ancillary service market that responds to minute-by-minute swings draws largely from long-term suppliers, not designed for such a purpose.

The incoming government has the benefit of a stable power industry to usher in the fundamental reforms needed. The two transitions viz., to move from a monopoly to competition in retail supply, and from a long-term to short-term contracting, are both necessary and economic. If the policy makers hesitate to take these tough steps now, the old burning issues will not take too long to come back to the government agenda.

[The Author is Leader–Energy, Utilities and Mining at PwC India. The views expressed are personal]

ET Energy World

 

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