Electricity is at the core of a digitized India. The digital world was brought home to the average citizen via liberalization of telecom in 1995.
A near universal shift from low access in fixed telephony to near universal mobile connectivity for 1 trillion adults, including net connectivity for two thirds, illustrates the impressive results achieved by the “quad” of (1) viable utilities, (2) an effective autonomous regulator (TRAI), (3) supportive spectrum allocations by the government (Department of Telecommunications) and (4) allowing publicly owned telecom companies to sink or swim on their own – not surprisingly they have sunk.
Why electricity reform lags telecom
Which brings us to the question of why electricity has not achieved what telecom could. The regulatory structure for telecom and power is dissimilar. Telecom is a Union government mandate. In electricity the Union only has only a mandate over inter-state supply. State governments manage their own affairs.
Should the asymmetry in mandate explain the difference in outcomes? Are state governments inherently less effective than the Union government?
One hesitates to subscribe to this theory. Consider that the mandate to mine coal is entirely with the Union. But Coal India remains a poorly managed Union government entity as are the numerous publicly owned banks which would have gone belly up had they not been hastily merged with better managed banks, to hide their distress.
The tyranny of fractured mandates
Nevertheless, fractured mandates do increase frictional losses. Consider, that much of the financial distress at the end of the pipe is because Union regulation (Central Electricity Regulatory Commission) has safeguarded the profits of Union owned generators to the detriment of the state government owned distribution utilities.
Another example of such “shedding” of transition costs by the Union is the proposed amendment to the Electricity Act 2003 which requires distribution utilities to compulsorily consume renewable energy (RE) and hydro power in quantities defined by the National Electricity Policy. Why has it become necessary to thrust RE and hydro down state government gullets?
The answer lies in rapid expansion of RE capacity under the governments Paris Commitment of 175 GW of RE by 2022; the decreasing but still higher commercial cost of renewable energy plus an intermittency filler energy source versus fossil fuel generation till cheaper battery storage comes along and elongation of gestation periods for hydro projects.
Prayas-Energy Group- a not-for-profit based in Pune since 1990 which practices evidence based advocacy PRAYAS ANALYSIS 2020 estimates, using Central Electricity Authority data, that the time overrun on thirty five hydro projects is 7.7 years thereby adding Rs 50 million per MW to the normative cost of hydro power as compared to the commercial cost of solar at Rs 35 -40 million per MW and Rs 60 to 70 million per MW for wind power.
Rapid expansion in RE is taking place at a time when aggregate demand is low, and the availability of fossil fueled generation is at a peak. Post the extended Covid shock induced recession, the “availability” charge of idle fossil fuel generation capacity will become even more burdensome.
This cost is borne by the distribution utilities with whom the generators – both publicly owned and private – have signed “take or pay” agreements. Unless the cost of the “stranded fossil assets” is socialized with all stakeholders, including banks taking a haircut, the precarious financial situation of state utilities will only become worse.
Electricity reforms more talk than light
Power utility reform started two decades ago in 1998 with three primary objectives – overcome crippling aggregate power shortages caused by low generation capacity and uneven local access because of poor transmission connectivity; make utilities self-financing, commercially healthy, corporate entities and deliver a better, safe and secure customer experience to users of electricity.
There have been substantive gains. First bulk supply capacity constraints have been overcome. The problem now is how to reverse the foreseeable but ignored, negative consequences of giant generators lying unused (30 GW) because their cost of supply is not affordable within the regulated retail tariff.
Second, distribution tariffs remain a hopeless spaghetti of “pork” and privilege. In Delhi, the concept of “lifeline” electricity supply is so abused that even middle-class young users are able to pay nothing by staying below the free 200-kilowatthour monthly limit whilst upper end residential, commercial and industrial consumers are “gouged”. What has transformed the quality of supply in Delhi has been privatization of its distribution utilities in 2002.It also helps that it is the richest state in India.
More generally, across India, billing and collection remain very inefficient with high leakages. Agriculture uses electricity at nominal rates or for free whilst industry is heavily taxed making the latter non-competitive and the former an energy guzzler.
Access for rural households has improved under the Modi government but institutional arrangements to encourage efficiency and deter theft remain uneven. Not much has changed in the poor finances of the distribution utilities since 2003 when the Electricity Act became operational.
GOI proposes amendments to the regulatory architecture chiselled for maximum effect with the minimum disruptions
The proposed amendments implicitly acknowledge that poor regulation is to blame because state regulators are complicit in populist programs of their state governments – code for not getting tough on farmers and residential users who pay much less than even the variable cost (fuel cost) of delivered electricity.
The Ministry of Power has cleverly used the principle of cooperative federalism, as in the GST council, whilst proposing changes to how regulators are selected.
A common selection committee for all Union and state level regulators is proposed, headed by a Supreme Court Judge, recommended by the Chief Justice of India, in which two out of the five members would be Chief Secretaries of states nominated on a rolling, alphabetical basis for one year, whilst the other two would be secretaries from the Union government. This balance between state and Union representatives is expected to make the deliberations even handed.
But tariff distortions exist even in states ruled by the BJP. The political economy of electricity is complex. Insulating regulators, at the selection stage from political patronage, can only partly solve the problem.
The amendments recognize this and go further by requiring regulators to determine tariff only on technical parameters. This means tariffs could increase by 15% on average and much more for specific classes of customers, who currently enjoy subsidized tariff.
State government are to directly compensate the losers per their subsidy policy. This is a big bang never before reform which will require finessed implementation to avoid substantial disruptions. But it has been necessary since decades.
We seem to be moving closer to the successful telecom model of the “quad” – firm regulation, viable utilities, supportive government policies and an enlarging pool of private electricity utilities.
Also available at TOI blogs June 5, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/sculpting-new-age-power-utilities/