The power sector in India is at an inflection point. Three developments are triggering a shift across the power chain, generation and distribution in particular, and are in the process deepening existing faultlines, and exacerbating the distress.
The first is a change in the way the Centre approaches the distribution segment. Till recently, it had preferred to incentivise states, nudging them to address the issue that lies at the heart of the power sector’s woes — turning around the operational performance and financial position of power distribution companies (discoms). However, despite multiple attempts, not much has changed.
But over the past few months, the Centre appears to have changed tack. From enforcing the tripartite agreement to recover the dues owed to power producers like NTPC by discoms in Jharkhand, Tamil Nadu and Karnataka to now regulating coal supplies to states where power generating companies have been delaying payments, it no longer appears content to simply nudge states into acting. The stick is being wielded with increasing force, with even states politically aligned with the Centre not being spared.
Second, notwithstanding buoyant tax revenues this year, Covid has wreaked havoc on government finances. The general government debt stands at 90 per cent of GDP. Add to this demands for greater welfare spending, uncertainty over state government finances once the five year GST compensation period ends next year, and the limits to which states can continue to support discoms will increasingly be tested. To what extent accounting jugglery can be used once again to clean up discom debt is debatable. After all, even the liquidity facility arranged by the Centre to help discoms pay off their obligations will have to be paid back.
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Third, until now, consumers had little recourse to alternate sources of supply. Consequently, discoms, which are essentially geographical monopolies, were able to charge higher tariffs from commercial and industrial consumers to cross-subsidise agricultural and low-income households. But the situation appears to be changing.
Migration of high tariff paying consumers through open access and investments in captive power plants is gaining traction, driven in large part by the emergence of solar as an alternative at seemingly competitive tariffs. According to research by Prayas (Energy Group), with high tariff consumers beginning to move away, the share of cross-subsidy in discom tariff support (the other part being state subsidy) has declined from 29 per cent in 2017-18 to 23 per cent in 2018-19 — a decline of 6 percentage points in one year.
This reduced reliance of high tariff paying consumers on discoms will only exacerbate their already precarious financial position. Even more worrying from their perspective is that the pace at which this transition is occurring will only accelerate in the coming years. This is due to two factors.
On the supply side, at the global and the national level, there is a push towards cleaner fuel, solar in particular. As a consequence, funding is increasingly flowing towards cleaner options — the trouble with financing a coal mine in Australia compared to the ease with which funds can be raised to finance renewable projects makes it evident.
Flowing from this — though with debatable relevance given the current levels of per capita emissions — is the domestic policy thrust towards renewables. Solar, in particular, benefits from both explicit and implicit subsidies — land at concessional rate, exemption from interstate transmission charges, discounted wheeling charges, cross-subsidies for open access, SECI taking on counterparty risk, and others. It also enjoys “Must Run” status.
Thus, most fresh investments, especially private, are flowing into renewables. In fact, according to projections by the Central Electricity Authority, by the end of 2029-30, the installed solar capacity is likely to significantly surpass that of coal.
On the demand side, at current tariffs, solar is emerging as an attractive alternative for the high tariff paying commercial and industrial consumers (the average cost per unit for commercial and industrial consumers was around Rs 8.37 and Rs 7.41 respectively in 2019-20 as compared to solar tariffs of less than Rs 3 per unit). And as more renewable capacity comes online, and storage costs decline, the shift of most cross-subsidising consumers away from discoms seems almost inevitable. Though for most households, with low levels of per capita income, rooftop solar may not seem like a viable option now — the costs for setting up a 10-kilowatt rooftop panel works out to around Rs 4 lakh.
On their part, discoms are trying to salvage a losing situation. To stem the flow of high paying customers, some have begun levying an additional surcharge on whoever opts for open access to lower the cost differential. Others are shifting from net metering to gross metering — essentially charging consumers higher tariffs — above particular consumption levels.
But as the reliance of these high tariff paying customers on discoms reduces, the latter will have to rely on tariff subsidies from state governments to a greater extent than before. However, continuously subsidising discoms for their AT&C losses (operational inefficiencies), and for not supplying power at commensurate tariffs to low-income households and agricultural customers (for political considerations) will become fiscally untenable. Just the bill for subsidising agricultural consumers was around Rs 1.1 lakh crore a few years ago according to the government.
A business as usual scenario will no longer suffice. Short of outright privatisation, market pricing of tariffs, options seem limited. To provide some perspective — as of March 2020, the net worth of all public sector distribution utilities in the country put together was a negative Rs 61,757 crore (though it was positive in states like Gujarat and Maharashtra). In comparison, the combined net worth of the few private sector discoms that exist in the country was a positive Rs 24,965 crore.
This column first appeared in the print edition on November 5, 2021 under the title ‘Sun’s not shining on discoms’. Write to the author at firstname.lastname@example.org
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