As Reliance, Adani foray into green energy, it's time for govt power companies to wake up
The energy revolution poses a challenge to all conventional power companies, but particularly to the less nimble and more inertia-ridden state-owned utilities and distribution companies, often politically compromised entities burdened by poor balance sheets.
- May 10, 2023,
- Updated May 10, 2023 5:47 PM IST
At the COP26 summit in November 2021, Prime Minister Narendra Modi presented what he called “five nectar elements, Panchamrit”, each one a decarbonisation pledge. He ended with a flourish, promising that India would hit net zero by 2070. It was a watershed moment, prompting ministries, public sector enterprises, private companies and conglomerates to chalk out emission reduction targets and decarbonisation roadmaps.
Modi’s Panchamrit in Glasgow, Scotland, promised non-fossil fuel energy capacity of 500 GW by 2030. He said renewable energy would provide 50 per cent of the country’s energy requirements by the same time. From the prime minister's statements, it was evident that the power sector, India’s largest greenhouse gas emitting sector accounting for 34 per cent of total emissions, would have to decarbonise quickly.
Less than a year later, 40 per cent of installed electricity capacity, it was announced, were coming from “non-fossil fuel sources”, or from wind, solar and hydroelectricity power – a number achieved eight years ahead of India’s COP-21 commitments. Together, these made India the world's third largest producer of renewable energy.
Despite the volatility in the energy sector caused by the Ukraine war and Covid-19, power demand is now steadily rising, while the cost of renewable energy has fallen dramatically in a short period. Backed by a production-linked incentive for green hydrogen and a 25-year waiver of interstate transmission fees for renewable energy plants, alongside a push for domestic manufacturing of solar photovoltaic modules, India's renewable energy revolution has taken off to a roaring start.
This energy revolution poses a challenge to all conventional power companies, but particularly to the less nimble and more inertia-ridden state-owned utilities and distribution companies, often politically compromised entities burdened by poor balance sheets.
Historically, across most of India’s state power utilities, tariffs have been linked by social considerations to consumers’ capacity to pay, a cross-subsidy in which leading industrial consumers pay considerably higher prices than domestic or agricultural consumers, who may also pay tariffs that are lower than the cost of electricity supply.
But solar and wind power now cost less to generate than any other electricity source. Rooftop solar systems and the inclination of large corporates to purchase renewables directly from private generators (as demonstrated by Microsoft’s deal with ReNew) bring further losses to discoms as large purchasers leave, along with the bottomline-boosting cross-subsidies. Additionally, uncertainty in demand forecasting and other core business issues make the renewables revolution a major bend in the road for state-owned conventional power companies and discoms. The power distribution sector’s persistent losses, almost Rs 90,000 crore for FY 2021, prompted a Rs 3,00,000-crore power discom reform scheme, but while tariff reform attempts over a decade have called for a winding down of the cross subsidies, industry’s march towards renewables has struck the gavel on the matter.
Aggregate losses for state distribution utilities increased from Rs 30,203 crore in 2019-20 to Rs 50,281 crore in 2020-21—an increase of 66.48 per cent.
The tariff subsidy billed by distribution utilities rose from Rs 1,20,828 crore in 2019-20 to Rs 1,32,416 crore in 2020-21, from 16.52 per cent of total revenue in 2019-20 to 18.53 per cent in 2020-21. Accumulated losses of distribution utilities as on March 31, 2021 was Rs 5,16,336 crore.
Against this backdrop of a struggling state power distribution sector, not only will the heavy lifting in meeting the 500 GW renewable energy target for 2030 be undertaken by major private sector players, but public power utilities, particularly state discoms, have also only just boarded the green transition bus, if at all.
All public companies would be well-served by sharing their carbon offset and decarbonising plans, but one imagined that the power sector’s PSUs would expeditiously pivot to renewables. That is still to happen.
Big private players, including Reliance, Adani, Arcelor Mittal and JSW, are hogging much of the announced investments in renewables, a kind of niche billionaire boom in what will be a life-altering transition for India’s billion-plus citizens.
Presently, about a third of power generation is owned by state governments, a quarter by the central government. State institutions enjoy complete control over regulating transmission, distribution, tariffs and retail. All of this is about to change.
For the state power utilities, the writing is on the wall of the energy revolution: They will require deep reforms, a reimagination of their role and their space in the new energy economy.
They will no doubt find that integrating all rooftop solar consumers is an additional cost, apart from being a hit on revenue, even as they continue incurring costs of conventional energy power purchase agreements. Detailed and evolving time-of-use tariffs will be required to help stanch the losses. In fact, these utilities’ future consumers will no longer be passive users—many will be owners of renewable energy resources. This new class of ‘prosumers’ will include industrial users with their own captive renewables generation facilities, stakeholders in storage systems and local rooftop solar users, among others.
Without preparedness for this new customer base and without exploring untapped revenue streams, such as electric vehicles or energy storage, discoms will find it difficult to reap the benefits of the renewable energy mission amid growing stress on their finances. State power utilities must undertake extensive institutional redesign as policy itself transforms, from the current coal-focused policy to new regulatory frameworks.
Also, as a sophisticated financial power market emerges in the near future with trading in futures, swaps and options, state utilities will require policy and regulatory support to participate and thrive.
Short-term goals of shoring up revenue must not mar long-term investments in infrastructure, structural redesign and planning for inter-state and inter-regional power transmission required to leverage new renewable energy capacity.
A 2021 Niti Aayog document on the power distribution sector said power distribution continues to be the weakest link in the supply chain of the power sector, adding that for any state-owned utility to succeed, there should be a clear separation between utility and state. This implies applying widely accepted corporate governance practices and independent directors.
From better billing efficiency through smart meters, prepaid meters and better metering, to offering performance incentives for and re-skilling of power PSU employees, the low hanging fruit are ripe for the picking. More complex, and equally essential, will be the inevitable exit from long-term, expensive power purchase agreements.
Some of these will be disruptive reforms, as difficult to execute as to imagine. And to prepare the groundwork for such a turnaround, the public power sector will have to first acknowledge the opportunities that come with a clean energy portfolio. Views are personal. The author is Managing Director and head of Asia- FSG
At the COP26 summit in November 2021, Prime Minister Narendra Modi presented what he called “five nectar elements, Panchamrit”, each one a decarbonisation pledge. He ended with a flourish, promising that India would hit net zero by 2070. It was a watershed moment, prompting ministries, public sector enterprises, private companies and conglomerates to chalk out emission reduction targets and decarbonisation roadmaps.
Modi’s Panchamrit in Glasgow, Scotland, promised non-fossil fuel energy capacity of 500 GW by 2030. He said renewable energy would provide 50 per cent of the country’s energy requirements by the same time. From the prime minister's statements, it was evident that the power sector, India’s largest greenhouse gas emitting sector accounting for 34 per cent of total emissions, would have to decarbonise quickly.
Less than a year later, 40 per cent of installed electricity capacity, it was announced, were coming from “non-fossil fuel sources”, or from wind, solar and hydroelectricity power – a number achieved eight years ahead of India’s COP-21 commitments. Together, these made India the world's third largest producer of renewable energy.
Despite the volatility in the energy sector caused by the Ukraine war and Covid-19, power demand is now steadily rising, while the cost of renewable energy has fallen dramatically in a short period. Backed by a production-linked incentive for green hydrogen and a 25-year waiver of interstate transmission fees for renewable energy plants, alongside a push for domestic manufacturing of solar photovoltaic modules, India's renewable energy revolution has taken off to a roaring start.
This energy revolution poses a challenge to all conventional power companies, but particularly to the less nimble and more inertia-ridden state-owned utilities and distribution companies, often politically compromised entities burdened by poor balance sheets.
Historically, across most of India’s state power utilities, tariffs have been linked by social considerations to consumers’ capacity to pay, a cross-subsidy in which leading industrial consumers pay considerably higher prices than domestic or agricultural consumers, who may also pay tariffs that are lower than the cost of electricity supply.
But solar and wind power now cost less to generate than any other electricity source. Rooftop solar systems and the inclination of large corporates to purchase renewables directly from private generators (as demonstrated by Microsoft’s deal with ReNew) bring further losses to discoms as large purchasers leave, along with the bottomline-boosting cross-subsidies. Additionally, uncertainty in demand forecasting and other core business issues make the renewables revolution a major bend in the road for state-owned conventional power companies and discoms. The power distribution sector’s persistent losses, almost Rs 90,000 crore for FY 2021, prompted a Rs 3,00,000-crore power discom reform scheme, but while tariff reform attempts over a decade have called for a winding down of the cross subsidies, industry’s march towards renewables has struck the gavel on the matter.
Aggregate losses for state distribution utilities increased from Rs 30,203 crore in 2019-20 to Rs 50,281 crore in 2020-21—an increase of 66.48 per cent.
The tariff subsidy billed by distribution utilities rose from Rs 1,20,828 crore in 2019-20 to Rs 1,32,416 crore in 2020-21, from 16.52 per cent of total revenue in 2019-20 to 18.53 per cent in 2020-21. Accumulated losses of distribution utilities as on March 31, 2021 was Rs 5,16,336 crore.
Against this backdrop of a struggling state power distribution sector, not only will the heavy lifting in meeting the 500 GW renewable energy target for 2030 be undertaken by major private sector players, but public power utilities, particularly state discoms, have also only just boarded the green transition bus, if at all.
All public companies would be well-served by sharing their carbon offset and decarbonising plans, but one imagined that the power sector’s PSUs would expeditiously pivot to renewables. That is still to happen.
Big private players, including Reliance, Adani, Arcelor Mittal and JSW, are hogging much of the announced investments in renewables, a kind of niche billionaire boom in what will be a life-altering transition for India’s billion-plus citizens.
Presently, about a third of power generation is owned by state governments, a quarter by the central government. State institutions enjoy complete control over regulating transmission, distribution, tariffs and retail. All of this is about to change.
For the state power utilities, the writing is on the wall of the energy revolution: They will require deep reforms, a reimagination of their role and their space in the new energy economy.
They will no doubt find that integrating all rooftop solar consumers is an additional cost, apart from being a hit on revenue, even as they continue incurring costs of conventional energy power purchase agreements. Detailed and evolving time-of-use tariffs will be required to help stanch the losses. In fact, these utilities’ future consumers will no longer be passive users—many will be owners of renewable energy resources. This new class of ‘prosumers’ will include industrial users with their own captive renewables generation facilities, stakeholders in storage systems and local rooftop solar users, among others.
Without preparedness for this new customer base and without exploring untapped revenue streams, such as electric vehicles or energy storage, discoms will find it difficult to reap the benefits of the renewable energy mission amid growing stress on their finances. State power utilities must undertake extensive institutional redesign as policy itself transforms, from the current coal-focused policy to new regulatory frameworks.
Also, as a sophisticated financial power market emerges in the near future with trading in futures, swaps and options, state utilities will require policy and regulatory support to participate and thrive.
Short-term goals of shoring up revenue must not mar long-term investments in infrastructure, structural redesign and planning for inter-state and inter-regional power transmission required to leverage new renewable energy capacity.
A 2021 Niti Aayog document on the power distribution sector said power distribution continues to be the weakest link in the supply chain of the power sector, adding that for any state-owned utility to succeed, there should be a clear separation between utility and state. This implies applying widely accepted corporate governance practices and independent directors.
From better billing efficiency through smart meters, prepaid meters and better metering, to offering performance incentives for and re-skilling of power PSU employees, the low hanging fruit are ripe for the picking. More complex, and equally essential, will be the inevitable exit from long-term, expensive power purchase agreements.
Some of these will be disruptive reforms, as difficult to execute as to imagine. And to prepare the groundwork for such a turnaround, the public power sector will have to first acknowledge the opportunities that come with a clean energy portfolio. Views are personal. The author is Managing Director and head of Asia- FSG