Great strides have been made in power generation and transmission capacity over the years. A calibrated approach to privatization across the value chain will help free up the sector to the introduction of best practices, improved efficiency and finally, profitability.
The power distribution sector's struggle to manage its debt has had ramifications across the economy. At a time when businesses are struggling in the face of the Covid-19 pandemic, is an important area for the government to address to ensure India can move towards expanding its industrial base.
Great strides have been made in power generation and transmission capacity over the years, with significant focus on renewable and grid capacity building. However, the power distribution companies (Discoms), involved in the last leg of the electricity chain, have been submerged under mounting debt obligations and working capital constraints for years, resulting in losses up to $15 billion.
The UDAY (Ujwal Discom Assurance Yojana), launched in 2015, set out a plan to address specific metrics through which improvements can be tracked. While in some areas there have been significant changes for the better, a calibrated approach to privatization across the value chain will help free up the sector to the introduction of best practices, improved efficiency and finally, profitability.
The Aggregate Technical & Commercial Losses (AT&C), defined as energy loss + commercial loss, a coThe Aggregate Technical & Commercial Losses (AT&C), defined as energy loss + commercial loss, a combination of technical loss, electricity theft and billing inefficiency plus payment defaults and collection inefficiency, was cut to only 20% by the end of 2018 against a target of 15%. Meanwhile, the differential between the Aggregate Cost of Service (ACS) and the Aggregate Revenue Realised (ARR), which was meant to reach zero, hovers around 0.33 INR/KWh, which stands at ca. 10-15% of renewable generation costs. The upgrading of old and installation of new metering infrastructure -both feeder and distribution transmission (DT) - are works in progress with over 70 per cent coverage across rural and urban areas combined, while smart metering remains around 7% of the 2022 target.
Feeder metering helps Discoms segments the electricity provided between end user groups like agricultural, industrial and households. Combined with DT metering which uses intra-grid sensors to record and relay past and current transformer activity, operational efficiency is improved such that it assists the financial health of the distributor. Gujarat, a state which has reaped the benefits of power reforms, ensured better load management which helped curtail, reducing its AT&C, while simultaneously providing around the clock, reliable power supply for all. As rural economic activity increasingly diversifies into the non-agricultural space, the need for developing robust feeder segregation will only grow over the years to come, and for this, the Discoms would have to invest more in infrastructure and digital power management.
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Smart metering is expected to give a fillip to the Discoms through an integrated, digitized system that prevents leakages through theft detection, ensures transparent billing, and monitors electricity flows to assist distributors in determining load demand response in real-time. Integration with household renewable energy units like rooftop solar panels means that the end user can have greater control over their electricity usage while the grid is continuously made aware of consumption patterns.
According to a recent report by CRISIL, the high upfront costs of smart metering has prohibited their large-scale adoption, and it is estimated that the cost outlay would be around $1 billion to achieve the government's target by 2021-22. Currently, only 3 million smart meters are deployed, in contrast with 270 million electromechnical meters, and while India is a net exporter of the product, Chinese meters undercut on price.
As a part of the Aatmanirbhar push, the government is keen to utilize and expand on the 60-70 million per year private and public sector smart meter production capacity to deliver 250-300 million over the next two years. Energy Efficiency Services India Ltd. (EESL) along with IntelliSmart Infrastructure Pvt. Ltd, a joint venture between it and the National Infrastructure Fund, will play active roles in this process and had used the recent lockdown period to ready themselves for an immediate rollout of 20 imported million smart meters. However, taking cognizance of the cybersecurity challenges posed by electronics fitted in China, import duties have been hiked and restrictions imposed. In this context, EESL's supplier, BT Haxing, got blacklisted as it did not qualify under the new standards set by the government, and EESL has begun a shift towards local manufacturing with suppliers like Larsen & Toubro, Genus Power Infrastructure and HPL Electric and Power Ltd.
Privatization of Discoms in Union Territories - regions governed from New Delhi - is set to be complete by January 2021, providing a template to Assam, Jharkhand, Uttar Pradesh, Madhya Pradesh, Haryana and Gujarat to follow. While integrated electricity providers have been involved in power production, transmission and distribution exist in some states and cities, monopolization has resulted in high power tariffs up to 8-8.5 INR/KWh when the cost of production sits anywhere between 2-5 INR/KWh.
The reforms should not add another layer of efficiency in the system through such behaviour if the manufacturing industries are to lower their costs, and genuine free market principles must govern. Competition will bring forth the best in technology as efficiency gains are sought after, opening the space for commercial use of batteries, for which the state is providing subsidies for manufacturing. Discoms have been late on payments to renewable energy producers, many of whom, consequently, have ended up struggling with cash flow for other projects. Incentivizing vertical integration through the utilities space is being encouraged, and although some public sector involvement will remain, robust private-public partnerships (PPP) will be the models to adopt.
Surya Kanegaonkar is a commodities professional with ten years of experience in research and trading for a hedge fund, utility and miner.