By Dr Sapan Thapar, Associate Professor, TERI School of Advanced Studies
Projected to be the fastest growing economy this fiscal, India would require enabling support from all factors of production to maintain its momentum towards Viksit Bharat-2047, including energy. Power sector has been among the numerous success stories of the country, with the total crossing 500 GW (half attributed to cleaner sources), over 2 trillion units being generated, meeting the energy needs of over 250 million consumers. An impressive addition in power generation capacity, led by solar and wind, bridged the supply deficit, enabling universal access of electricity at affordable terms.
However, a key challenge lies in the last leg of the energy value chain, which is the power distribution sector and its (perennially) weak financial health. Discoms, numbering over seventy, are saddled with $80 billion of debt of over and $7 billion of payment dues of the generating companies. Most of these utilities experience high level of aggregate technical and commercial (AT&C) loss due to technical mismanagement, under-recoveries and indifferent attitude towards consumers. Despite repeated reforms and multiple schemes, cost parity between the annual revenue realised (ARR) and the average cost of supply (ACoS) has not been attained, even after accounting for subsidies, indicating a loss on every unit sold; current value is in range of Rs 0.40 per kWh. We analysed these challenges and offer bold and pragmatic solutions towards ushering in One Nation-One Tariff.
A major component (70-80 per cent) in tariff build-up is the power purchase cost. However, it varies across discoms, due to vintage of technology, contracts and portfolio. Consider a solar/ coal plant selling power to multiple discoms but at different price points, culminating in non-uniform consumer tariffs across states and even discoms within same state. Another scenario can be discoms sourcing power from plants setup within their respective states (say pit-head coal plants, or solar/ wind/ hydro), giving them an undue advantage in terms of costs, only because of natural resource endowment.
The second issue is multiple tariffs slabs, over twenty, even within a discom. As per our estimates, over 1,500 different tariff slabs prevails in the country, and these are determined and approved every year. Primary reason is cross-subsidising certain consumer segments (households and agriculture) at the expense of commercial and industrial establishments, making them commercially unviable. It may be important to note that India is among very few countries levying higher tariffs on industries/ commercial establishments over other consumers. This has led to flight of these large consumers from grid purchase to third-party open access or captive mode plants, further eroding the revenues of discoms, creating a vicious cycle of cross-subsidies. This is a paradox, as states compete to attract private investment, energy being a key factor.
These challenges lead to wasteful utilisation of resources in determining and revising tariffs, with little incentives for discoms to improve their operations and limited options for consumers. A primary reason for the current imbroglio is the concurrency of electricity as a subject under the Indian Constitution, making it difficult to undertake pan-India reforms. We propose the following bold but pragmatic solution.
First is creation of a national agency (akin to National Load Despatch Centre) to procure power from multiple generating plants across the country and selling it through another pan-India entity (say NTPC) directly to the end-consumers at the same price point. Power Ministry’s MERIT (Merit Order Despatch of Electricity) portal can be utilised to derive the average marginal price on a country-wise basis. In addition, the existing expertise of State Electricity Regulatory Commission (SERC) in computing average power purchase cost, as part of renewable energy certificate- renewable purchase obligation (RPO) mechanism, shall prove to be helpful.
The role of discoms shall be network service providers, offering carriage facilities at predetermined rates. It’s costing can be arrived at by subtracting the power purchase cost from the overall discom expenses, to be averaged for the entire country. A functional example has been the bifurcation of PowerGrid into multiple entities- Grid India, which is responsible for maintaining grid stability, central transmission utility working as planner of inter-state transmission system (ISTS) and the PowerGrid operating as a transmission licensee on pure commercial principles.
Cost of power is not the only factor in terms of deciding the final tariff. There are three associated parameters involved. These are AT&C loss, renewable energy purchase and transmission charges (cum losses), all of which vary widely across states.
States incur charges based on renewable resource endowment, which itself varies hugely in terms of type of technologies (solar, hydro, wind) and project location. A single national value, in terms of cost of renewable energy procurement, can ensure meeting India’s renewable energy targets, without any biasing among states. Expertise of entities like the Solar Energy Corporation of India can be employed to source renewable energy under transparent bidding process.
To encourage efficiency in operations, performance of states/ discoms, in terms of decreasing AT&C loss and increasing revenue collection, can be rewarded under norms of the Finance Commission. The Fifteenth Finance Commission incentivised reforms by linking states’ borrowing with performance of their discoms. This can be extended under the proposed mechanism as well.
The overarching change would be in terms of rollout of the GST in the power distribution sector. States may not be inclined, perceiving loss of revenue similar to the unwillingness shown in the petroleum sector. However, most discoms are running in losses and not making any meaningful contribution to the state exchequer. On the contrary, they depend upon state governments to sustain their operations. Even in case of a positive balance sheet, they are required to socialise their profits (similar to loses) among the end-consumers.
Beyond this, states may seek compensation in lieu of the electricity duty, which is typically levied on industrial consumers and varies across states. Total annual duty collection across the country was estimated at Rs 400 billion, which in unit terms, comes at a meagre Rs 0.25 per kWh. Financial support extended by the central government to the state owned distribution utilities under multiple reform schemes (Accelerated Power Development and Reforms Programme, Ujwal discom Assurance Yojana, Revamped Distribution Sector Scheme) is far greater than earnings made by states from electricity duty. State governments can be asked to choose from either levying electricity cess, or, seeking financial support from the government. This way, they can be nudged towards GST.
A key challenge can be resistance of consumers enjoying subsidised power. The answer lies in coupling decentralised solar subsidy schemes like Pradhan Mantri Suryaghar Yojana and Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan, with ‘Give-it-up’ like approach. Similar campaign, initiated in the year 2015, in the liquefied petroleum gas segment, led to a large number of consumers voluntarily surrendering their cooking gas cylinder subsidies.
Interestingly, energy generated from solar rooftop plant would be sufficient to offset free power offered by discoms. A typical 3-kW solar rooftop system generates 400 kWh per month, almost double the existing free units offered to consumers under prevailing schemes. The financial value of solar power generated, over its 25-year lifetime, comes at 50 per cent higher than the total subsidy offered. Consumers availing subsidy under government schemes can be asked to give-up their discounted tariffs.
The proposed concept, as explained in the figure, involves determination of a common tariff number by summing up the average national cost attributed to the following:
- Power purchase
- Discom carriage charges
- AT&C loss
- Transmission charges and losses
- Renewable compliance
One Nation-One Tariff (Proposed Concept)
Legends:
- Gen: Generator; PPC: Power Procurement Cost; C1: Discom Carriage Charges
- OC: Other Charges for AT&C, RCO and Transmission; T1: Consumer Tariff
As an illustration, a commercial entity in State-A would pay the same tariff as a household in State-B. This shall obviate any tariff distinction across states/ discoms as well as consumer types. Subsidies to any consumer segment can be directly routed via the Direct Benefit Transfer mechanism. For consumers procuring power under open access, power exchange, or, captive facilities, standardised network utilisation charges can be levied by discoms.
Regarding the Constitutional provisions, learnings can be made from the recent notification on RPO/ renewable consumption obligation norms made under the Energy Conservation Act, 2001 and not the Electricity Act, 2003. Other examples include ‘One Nation-One Grid-One Frequency’ harmonising the power transmission sector, and the Central Electricity Regulatory Commission norms for renewable energy tariffs as well as RECs, widely adapted by the SERCs.
In this digital age driven by artificial intelligence, smart meters can be the key enablers. Most people in India are adept at using mobile apps involving commercial transactions (like cab booking, e-commerce). Smart meters can offer actionable insights to end-consumers based on the prevailing/ anticipated demand-supply trends, enabling demand side management. This can even enable time of day tariff, based on demand-supply patterns and generation schedule, which can be applicable for all consumers.
The suggested measures shall usher in ‘One Nation-One Tariff’ in the country, a kind of renaissance in the power sector, benefitting stakeholders across the value chain. Cost of power supply shall get homogenised reducing the cost of doing business for industrial and commercial entities; need and quantum of bail-out packages for discoms as well as consumer subsidies shall lessen, reducing financial load on the exchequer; administrative work of SERCs and discoms towards determining tariffs shall ease; consumers would be able to manage their supply-demand using smart energy systems.
Amidst a steadily increasing electrification of the Indian economy, the suggested pathways shall enable a swift and sustainable transition of the power sector.
