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Free-ing Power

India needs to move towards real market pricing to build a future-ready electricity ecosystem
twitter-logoPB Jayakumar | Print Edition: June 14, 2020
Free-ing Power

Manoranjith came to Thoppumpady in Kochi a decade ago and started ironing clothes for a living. He toiled for years with coal-fired iron to save some money. Then, he took a small loan, rented a shop in a housing colony, bought five electric irons, and employed seven workers. Despite enough work, he ran into losses. Power bills were high and workers idled for hours due to long power cuts.

Things changed when an oil company executive introduced him to an LPG-powered iron. It cost only `7,000 per box with a five-kg LPG cylinder that lasted two-three months even if used for 8-10 hours daily. Now, he is making profits. This is a perfect example of how frugal innovations in energy use can change lives, says an energy expert.

After decades of starving for electricity, India is now aspiring to provide quality, cheap, uninterrupted power to all citizens. Though it has been able to liberalise the power sector to some extent over the last two decades, more reforms are needed, of which some are in the pipeline. The overarching bureaucracy still regulates the sector, after all, say industry stakeholders.

An unregulated energy market driven by supply-demand, technology-driven products to build efficient generation and transmission systems, futuristic hybrid power generation and storage, generation of more clean energy and modernising of old fossil fuel power plants are some of the solutions that energy producers and consumers are looking at for meeting India's long-term power needs.

Liberalised But Highly Regulated

The draft Electricity (Amendment) Bill, 2020, an attempt to repair the Indian power ecosystem in place since 2003, has provisions that can fundamentally change the sector. One of its major provisions is cost reflective tariff, which allows state regulators to determine tariffs that reflect costs, so that distribution companies (discoms) are viable. Further, tariffs will be determined by regulatory commissions without taking into account subsidy, which will be given directly to consumers. Apart from the Central Electricity Regulatory Commission, a Central Electricity Contract Enforcement Authority, headed by a retired high court judge, will be set up to honour contracts related to purchase, sale or transmission of power.

Load dispatch centres will ensure adequate payment security before scheduling dispatch of contracted electricity. Higher penalty, strengthening of appellate tribunal for disputes, a separate policy for renewables, minimum hydro-power purchase and penalty for not buying stipulated renewable power are some of the changes envisaged as part of the proposed reforms.

At present, 87 per cent of electricity is sold through long-term (normally 25 years) fixed power purchase agreements between discoms and generators. Many were entered into without much deliberation during the 2003 to 2010 'liberalisation' period. Over the years, cost of power generation has come down, but discoms and consumers are being forced to pay higher prices. "Enhancing liquidity of discoms and difficulty faced by generating companies in recovering dues are ongoing issues. As we saw during this lockdown, discoms, sitting on over `90,000 crore dues, struggled to get payments from consumers. So, payments to generators got delayed," says Bhaskar Rakshit, Lead Principal-Power, Kearney India. As a quick-fix, Finance Minister Nirmala Sitharaman's Covid-19 stimulus package provided discoms `90,000 crore low-cost loans from PFC/REC. It also announced privatisation of power distribution in Union Territories.

Experts say quick fixes are not the solution. "Electricity is a highly politicised sector. It is used by politicians for mobilising votes. Everybody knows that theft, illegal industrial connections, never-ending subsidies and weak bureaucracy are fundamental issues in the power sector," says an expert, who did not wish to be quoted.

Earlier attempts to give funds to discoms had failed. The current dues are in excess of the pre-UDAY (Ujwal Discom Assurance Yojana) days of 2015, an attempt to restructure and make discoms profitable, say experts. UDAY is now coming back in a new packaging - now called Atal Distribution System Improvement Yojana (ADITYA) - which will allow discoms to run in the public-private partnership mode and improve efficiency by switching to prepaid smart meters in three years. The power ministry claims UDAY reduced efficiency loss of discoms from 24 per cent to 18 per cent of revenue, and ADITYA will reduce it further to 12 per cent. "Many provisions are welcome steps to make India a secure energy market, but they need to be implemented properly," says Jyoti Kumar Agarwal, Director (Finance), JSW Energy.

Experts say the fundamental issue is that power is in the Concurrent List and powers of the Centre are confined to framing rules while states call the shots. That is why earlier attempts to amend the Electricity Act had met with little success. The current draft is the fourth one. "In mature markets, power demand-supply equation is determined by de-regulated market mechanisms. During the lockdown, one state could save over `40 crore by purchasing power at cheap spot rates," says Rajiv Srivastava, CEO and Managing Director of the Indian Energy Exchange (IEE).

Global experts say India needs to go a long way to reform the sector. The success of the proposed reforms and progress to an improved wholesale real-time market requires country-wide national grid as a backbone, says the International Energy Association (IEA).

A Futuristic Power Market

Srivastava of IEE says India needs to relax its rigid power procurement norms and give flexible options for all stakeholders. "Technology is going to play a major role. We need to create more hybrid renewable power, new storage solutions like lithium batteries and focus on grid stabilisation and a modern T&D network," he says.

A major fundamental change that is going to happen is increased digitisation across the energy value chain, says Sunil Mathur, CEO and Managing Director of Siemens India. "That is evident from enquiries we are getting from customers in the last two months. A lot of SMEs and large companies are interested in digital solutions that can reduce capex, headcount, and increase efficiencies," he says

Creation of a competitive market is vital to improve utilisation of capacity. Current challenges include surplus capacity, lower utilisation of coal and natural gas plants, increasing share of variable renewable energy and huge 'stressed assets' in coal and gas-based generation, though the country now has the institutional framework needed to attract investment, says the IEA.

Domestic renewable energy tariffs are two-third of domestic coal-sourced power tariffs and half that of power from new imported thermal power plants. "With a few policy tweaks, India could be back on track to meet its ambitious target of 450 gigawatts of renewables by 2030," says a recent study by the Institute for Energy Economics and Financial Analysis (IEEFA). Tim Buckly, IEEFA's Director of Energy Finance Studies and Kashish Shah, the co-author of the study, say India could attract $500-700 billion new investment in renewables by 2030 by urgently expanding transmission capacity, monetising solar mega parks and improved centre-state coordination on renewable energy development.

Augmenting balancing capacity (batteries, demand response management and more flexible thermal capacity) also needs immediate attention. Instead of trying to make Indian manufactured solar cells competitive by increasing the price of imported modules, the industry needs an assured offtake in domestic markets and export incentives, they say.

Bhaskar Rakshit says the lockdown was an eye-opener for power generators. "Plants with lower costs were much less impacted by loss of demand," he says. Another issue generators faced was availability of contract manpower to run the plants.

Modernising coal-fired power plants, which supply over 64 per cent of electricity, is also a must. Plant Load Factor (PLF), which determines the health of a power plant, is only 56.5 per cent in India. The government had mandated coal plants to implement Flue Gas Desulphurisation (FDG) before February 2022 to reduce emissions. Of nearly 440 units generating over 165 gigawatt, at least 60 with 48 GW are yet to comply for want of funds. "Quality FDG costs `40-70 lakh per MW. Funding, extending the time to implement it in the Covid-19 scenario and giving pass-through (to consumers) need attention," says Jyoti Kumar Agarwal of JSW.

Experts say India's future power demand scenario is bright. According to the IEA, India's energy demand is set to double by 2040, while electricity demand may triple. "During the lockdown, power demand fell over 25 per cent, but being an essential service, demand is likely to revert back to 4-4.5 per cent annual growth even in the post Covid-19 new normal," says Agarwal. India's per capita electricity consumption was 1,181 kWh in 2018/19 as against 4,500 kWh in China and the global average of over 3,000 kWh.

While the future of the power sector looks rosy, committed policy changes with a future outlook are required, say experts.

@pb_pbjayan

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