niti-aayog-and-rmi-release-a-report-on-power-distribution-sector

Context: NITI Aayog recently released a report that presents reform pathways that can transform the country’s power distribution sector, in a step towards improving policy making in this area.

The rationale behind deriving the report:

  • India has one of the largest and most complex power sectors in the world. 
  • Over the past few decades, the country has witnessed a remarkable evolution. 
  • Today, almost every citizen has access to grid electricity, power deficiency has decreased sharply, and the installed renewable energy capacity has reached a fourth of the total capacity.
  • Most power distribution companies (discoms) in India incur losses every year. 
  • Total losses are estimated to be as high as Rs 90,000 crore in FY 2021.
  • Due to these accumulated losses, discoms are unable to pay generators on time, make investments required to ensure high-quality power, or prepare for greater use of variable renewable energy.

Objective of the report:

  • The report presents a review of reform efforts in the Indian and global power distribution sector. 
  • It extracts the learnings and best practices from the wealth of policy experience that exists in the country. 
  • This report examines many important reforms, such as: 
    • The role of the private sector in distribution, power procurement, regulatory oversight, integration of renewable energy, and 
    • Upgradation of infrastructure. 
  • A healthy and efficient distribution sector is essential, whether for improving the ease of doing business, or for improving the ease of life.

About the report:

  • The report, titled Turning Around the Power Distribution Sector, is co-authored by NITI Aayog, RMI and RMI India.
  • The report is divided into chapters focusing on: 
    • Structural reforms, 
    • Regulatory reforms, 
    • Operational reforms, 
    • Managerial reforms, and 
    • Renewable energy integration. 
  • This report presents policymakers with a menu of reform options to put the distribution sector on the track of efficiency and profitability. 
  • NITI will partner with some of the states to take these reforms forward.
  • Challenges:
    • Due to these accumulated losses, discoms are unable to pay for generators on time as of March 2021 an amount of ₹ 67,917 crore was overdue. 
    • They are also unable to make the investments necessary for: 
      • Ensuring continuous high quality power, or 
      • Build the infrastructure required to facilitate the transition from fossil fuel to renewable (but intermittent) energy sources, such as solar or wind.
    • The probable reason for these losses is the tension between two different outlooks: 
      • Is electricity an essential public service whose provision at low rates is necessary for citizen welfare, or 
      • Is it a commodity to be bought and sold on the market like any other?
    • The Electricity Act (EA), 2003, brought about major changes in the power sector, including: 
      • Delicensing of generation, 
      • Open access in distribution, and 
      • Independent regulators at the state and central levels.
    • A series of schemes was launched, by central and state governments, to upgrade the distribution infrastructure and help the discoms improve their finances. 
      • Some of these initiatives include: 
        • Ujjwal DISCOM Assurance Yojana (UDAY), 
        • Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), and 
        • Integrated Power Development Scheme (IPDS). 
      • A revamped reform scheme, with an allocation of ₹ 3.05 lakh crore, was also announced in this year’s Budget. 
    • However, the schemes implemented so far have not been able to ensure a sustainable turnaround of the discoms. 
    • A turnaround, in terms of both finances and operations, remains urgent.

DISCOM restructuring:

  • The distribution sector has been largely vertically unbundled—the three different functions of generation, transmission, and distribution have now been separated. 
  • Most discoms are state-owned, and only about 10 percent of India’s population is served by private distribution licensees. 
    • For a state-owned utility to succeed, there should be a clear separation between utility and state. 
    • Good corporate governance practices, including the use of independent directors, can help ensure such separation.
  • Higher private participation in distribution holds out the possibility of greater efficiency. 
  • Franchisee models have been successfully implemented in Odisha and Bhiwandi in Maharashtra, where there have been rapid improvements in metering, billing, and collection.
  • Benefits of franchising:
    • In Delhi, after power distribution was taken over by three private licensees, the Aggregate Technical and Commercial (AT&C) losses have come down from about 55 percent in 2002 to about 9 percent in 2019.
  • The recent Budget announcement delicenses distribution and proposes to allow distribution companies non-discriminatory access to the distribution system. 
    • Delicensing distribution can introduce competition and enable retail choice for customers. 
    • This reform can be challenging to achieve and should be accompanied with careful market design.
  • A public-private partnership (PPP) model can be especially useful in loss-making areas, where commercial operation might not be feasible without support in the form of viability gap funding (VGF) by the government.

Reforms suggested by the report:

  • Regulatory Reforms:
    • The state governments should promote autonomy, competence, and transparency of the State Electricity Regulatory Commission (SERC). 
    • Tariffs should be regularly revised to ensure that they fairly reflect the actual fixed and variable costs. 
    • No new regulatory assetsi should be created. 
    • The existing regulatory assets should be cleared according to a defined schedule over the next three-to-five years through appropriate tariff changes.
    • One way to insulate regulatory functions from political pressures is to create regional electricity regulatory commissions with the participation of the central government.
    • For consumers, who receive subsidised electricity, direct benefit transfer (DBT) can help improve efficiency and reduce leakages.
  • Operational Reforms:
    • Many discoms need to improve their billing efficiency through better metering. 
    • They should fully utilise the revamped central government reform scheme to achieve 100 percent metering using prepaid or smart meters while being cognisant of cybersecurity threats. 
    • Thefts can be reduced through concerted action by the discoms and states. 
    • Prepaid metering can help reduce thefts and increase collection, as in the case of Manipur. 
    • Another frequent reason for low collection is default in payment by state government departments and municipal bodies.
    • Many states provide subsidised and sometimes free electricity for agriculture. This can lead to leakages and high losses for discoms.
      • Discoms can significantly decrease their power procurement costs by encouraging the use of solar pumps for agriculture.
    • Discoms have locked themselves into long-term, expensive power purchase agreements (PPAs). 
      • As long as the markets continue to provide low-cost power, discoms should not sign new expensive long-term thermal PPAs.
    • Discoms can also reduce the cost of power by procuring cheaper power from the exchanges whenever the price on the exchange is lower than the variable cost of the PPA.
    • Discoms should use time of day (ToD) tariffs to incentivise changes in demand patterns. 
      • Dynamic tariffs, enabled by advanced metering and a smart grid, can reduce the discoms’ power purchase costs and help manage peak loads.
  • Renewable energy integration reform:
    • Discoms need to prepare to accommodate an increasing amount of renewable energy (RE), from generators as well as prosumers.
    • In order to increase the firmness of RE power, reduce power procurement costs, and handle a variety of power sources, discoms may need to deploy large-scale energy storage. 
    • Storage can be provided by battery systems or pumped hydro-storage systems. 
    • Discoms need to develop better RE forecasting capabilities in order to reduce their deviation costs and reduce the need for real-time balancing.
    • Rooftop solar plants are attractive in many ways. 
      • They let consumers meet part of their load from renewable solar energy. 
      • Consumers can monetise their rooftops and sell the excess to discoms. 
      • However, it does pose some challenges to discoms. 
      • They may lose a high-paying consumer; 
      • It may not be economical for the discom to purchase power from the prosumer at the prescribed rate; and 
      • They may need to incur additional expenditure on infrastructure to accommodate the RE sold to them by the prosumer. 
    • Discoms should be fairly compensated for the additional expenses they may incur to integrate rooftop solar power generation. 
    • Further, tariffs for rooftop solar should be set so that all consumers and producers face fair price signals as relevant to their state. 
    • Off-grid solar plants should receive greater policy encouragement, as they can be cheaper and simpler than grid connected solar plants.
    • Mini-grids (an electricity distribution network involving decentralised small-scale generation from locally available renewable energy sources) can provide more predictable power in remote and sparsely populated areas.
      • They can also be used to provide greater resilience to critical infrastructure such as hospitals. 
      • A PPP model can be explored in such remote areas, with the government providing VGF in return for the concessionaire supplying power at a specified rate while meeting specified service quality targets.
      • The mini-grid could also be run by a panchayat, if the latter has developed sufficient capacity.
  • Managerial Reforms:
    • Effective reforms are typically a result of stable leadership and vision sustained over time. 
    • Reform journeys in Andhra Pradesh, Gujarat, and New Delhi, were led by elected officials who retained their position in power for at least a decade.
    • Easily accessible call centres, convenient bill payment facilities, and accurate billing can help reduce customer dissatisfaction and increase revenue.
    • Performance incentives can help align discom employees to the interests of the organisation. 
    • Zones or circles in discoms could be treated as profit centres, with employees being given commensurate autonomy as well as responsibilities.
    • The operation and management of the power distribution business are complex activities. 
    • They require expertise in a variety of fields: engineering, finance, billing and collection, HR, administration, etc. 
    • There is a need to augment training and capacity building in these fields.

Source:https://www.pib.gov.in/PressReleasePage.aspx?PRID=1741780