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Cross subsidies, states’ opposition roadblocks in govt road map for delicensing power distribution

The Electricity (Amendment) Bill, 2021, which proposes delicensing power distribution to bring in competition and reduce losses in the sector is currently being reviewed by the Union Cabinet.

The sharing of the fixed cost of high-cost legacy PPAs and potential cherry picking of customers who pay high tariffs by private sector entrants have been raised by some states. (File Photo)

THE GOVERNMENT’S proposal to delicense power distribution is likely to face significant implementation hurdles due to issues around cross subsidies, allocation of network costs, and potential opposition from states, according to experts.

The Electricity (Amendment) Bill, 2021, which proposes delicensing power distribution to bring in competition and reduce losses in the sector is currently being reviewed by the Union Cabinet. The Bill, which was initially set to be introduced in the Monsoon session of Parliament, faced opposition from a number of states, including West Bengal and Kerala. “Issues such as allocation of costs of legacy PPAs (power purchase agreements), the methodology for cross subsidy and the allocation of network tariff costs will likely cause implementation challenges,” said Anish De, partner and national head-energy, natural resources and chemicals, KPMG in India.

The sharing of the fixed cost of high-cost legacy PPAs and potential cherry picking of customers who pay high tariffs by private sector entrants have been raised by some states. Industrial and commercial power consumers in India cross subsidise the power consumption of rural, residential, and agricultural consumers by paying significantly higher tariffs. States have highlighted that stripping away of such customers would lead to further financial instability for state utilities, which would have to provide services to agricultural and rural consumers.

The Central government has said the minimum coverage areas for any new entrant would include a mix of urban as well as rural areas and assured states that any excess cross subsidy collected by any discom would be sent to a cross subsidy pool, which would be utilised to subsidise consumption in areas with more rural and agricultural customers.

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“Privatisation of distribution companies could be a relatively easy route from an implementation perspective, though it faces political headwinds,” said De, noting that private sector companies inherently had incentives to improve efficiency.

Private sector distribution companies in urban areas such as Delhi, Mumbai, Kolkata and Ahmedabad have been successful in reducing technical and commercial losses. Private licensees that took over power distribution in Delhi brought down Aggregate Technical and Commercial (AT&C) losses from 55 per cent in 2002 to about 9 per cent in 2019.

AT&C Losses for state discoms, on the other hand, have only come down from 23.5 per cent in FY17 to 21.83 per cent in FY20. The gap between the Average Cost of Supply and the Average Revenue Realised (ARR) has fallen from Rs 0.33 per unit to Rs 0.28 per unit in the same period.

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UDAY, launched by the government in November 2015, had set the target of reducing AT&C losses to 15 per cent and bringing the ACS-ARR gap to zero by FY20. The introduction of a new Rs 3.03-lakh-crore incentive-based scheme for discoms effectively extends the timelines for achieving these targets till FY25.

“The introduction of competition could make it difficult for inefficient state utilities to survive unless they change governance. Well-run state utilities will compete on equal footing,” said Sambitosh Mohapatra, leader, energy utilities and resources, PwC India. An expert, however, said any state that did not want to allow competition for its state discom could easily delay entry by setting up regulatory barriers.

Meanwhile, Debasish Mishra, leader, energy, resources and industrials at Deloitte India, said: “Private discoms have been able to reduce AT&C losses to single-digit per cent by improving governance and making necessary investments in the network.” He added there were no references yet in India where a private sector utility had succeeded in an urban-plus-rural area.

First published on: 23-08-2021 at 04:12 IST
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