Exorcise familiar ghosts in electricity supply

Sometimes, as in the case of electricity, hacking through a tangle of pancaked, well-meaning policies seems like the only way. There are many challenges, including a split legislative mandate, between the Union and the states, for what should be an integrated, network industry. This leaves cities – even the largest growth drivers- completely divorced from any accountability for the provision of this lifeblood of any modern economy.   

BIG PUSH REFORM IN GENERATION NOW MORE THAN TWO DECADES OLD

Generation was cut loose- significantly- from the enmeshed regulatory thicket two decades ago. The market responded and today, 46% of utility capacity is privately owned. Installed generation capacity grew steadily at 6% per year till it hit the glass ceiling of “revealed demand” as measured by a proxy – the financial capacity of the distribution utilities- who account for more than 95% of the bulk purchase. 

DISTRIBUTION-RETAIL SUPPLY REMAINS BEDEVILED BY FAMILIAR GHOSTS

It is difficult to guess how much demand is suppressed by bankrupt retail supply. Going by the average of 3.4 hours per day of power outages for households either enforced by DISCOM budget constraints or a fault in the fragile distribution grids, there could be 15% of unserved “demand”. CEEW 2020 Three-fourths of customers reported being satisfied with the supply. But that still leaves the residual one fourth. We can speculate that these are the ones who would be willing to pay for more and better supply.

CONSUMER SUBSIDIES INFLATE DEMAND & INDUCE WASTE

We also have inflated demand in the residential segment where near-free urban life-line service is the norm. Total residential supply is 28% of supply but only 22% of revenue. Agricultural demand- 22% of supply but 20% of revenue- PFC 2019– is also inflated because electricity is supplied at far below the minimum of 50% of the average cost of supply, as prescribed in the national electricity policy 2016. 

Some of this financially unsustainable, customer-demand is managed by the DISCOM just switching off “financial loss-making” feeders. Two thirds of rural households and two-fifth of urban households report daily power cuts of over one hour. The unfortunates (usually the richer ones) on such feeders who can or do pay for the power they consume, then resort to “self-generation” via battery invertors or polluting oil-fired generators, to keep electricity flowing. The true (full cost) unserved demand is likely to be contextually varied. 

POOR QUALITY OF SUPPLY CONSTRAINS HIGH-VALUE DEMAND GROWTH

The demand for networked services like electricity or the internet, increases exponentially with higher levels of credibility in supply. Most people would not buy an electric vehicle unless they are assured of being able to recharge as and when they want. Nor would people – even the lucky ones who have much valued digital jobs and do not go to office – live in an area where electricity supply is erratic, as in the rural areas, even though rent is lower.

Add to the continuing “challenges” bucket that average line losses (the difference between energy supplied and the revenue collected) is also a high 22%. At least one half of it could be just under-billing or theft or both. Collection efficiency- the share of billed revenue collected- is much better at 93%. Those who pay their bills feel cheated by having to pay for the inefficiency of supply, as in high line losses.

Happily, things are improving. Even in low access states -Bihar, Madhya Pradesh, Jharkhand, Odisha, Uttar Pradesh and West Bengal, supply has increased from 12.5 hours in 2015 to 18.5 hours in 2020. 

POOR INCOME GROWTH ADDS TO THE BURDEN OF LIFE-LINE SUPPLY

Some of the inability to cater to demand is income-related. The share of low-income customers is far higher in the “low income” states. The population-weighted average per capita Net State Domestic Product of the poorest eight states (population share of 37%) is just Rs 66,213/- less than one-half the median for thirty states of Rs 139,588/- (2018-19). Not surprisingly, these states also have low fiscal capacity, with multiple competing demands like health outlays presently or clean drinking water. 

It is beyond the existing fiscal capacity of the Union government to subsidize electricity use by the poor in such states. Ergo “trickle down” appears the only answer. We wait for average incomes and government fiscal capacity to increase to be able to “afford” supply of subsidized electricity to the poor in a credible and sustained manner. They too need to adapt to the new digitally “connected” economy- think access to remote education, health or work, especially for women, only 28% of whom participate in the formal economy. Higher incomes increase both the private capacity of the poor to pay and the fiscal capacity of government to provide electricity subsidy, presently (0.25% of GDP).

This happy congruence in the electricity needs of the poor and state fiscal capacity is unlikely before 2030. By then a doubling of per capita income can potentially, reduce the incidence of poverty sufficiently, to provide grid quality 24X7 electricity to all, including a well-targeted “life-line” supply, not exceeding a sustainable 5% of the total residential load. 

DISTRIBUTED RE GENERATION AND FEED BACK TO GRID PROMISES FINANCIAL VIABILITY IN RURAL SUPPLY

There is however a salami slice which we can and should attempt much earlier in agriculture. Rapid extension of the KUSUM model of solar or hybrid renewable energy self-generation can, at the very least, become a source of income for “prosumer” farmers by feeding electricity back into the grid and shrink their electricity demand from the grid for pumping groundwater for irrigation. The urgency in rural areas is to avoid the generational dependency on subsidized electricity – along with subsidized fertilizer, canal irrigation and seeds, as fiscal support for low productivity agriculture.

USE RICHER CITIES AS THE LEVER TO PRIVATISE AND GREEN ELECTRICITY SUPPLY

In urban areas, electricity shortages and the poor quality of supply is a barrier to growth which also inhibits diversified “good” jobs other than in manufacturing. A strategy to reduce the level of air pollution caused by vehicular exhausts and back up fossil fuel generation via higher shares for “green” electricity, is another driver for change.

More generally, government should seriously consider a decade long, publicly notified strategy to pull back from direct ownership of fossil generation – presently 29% owned by states and 24% by the Union, as well as distribution assets -largely state government owned- by encouraging private entrepreneurs, including deep-pockets overseas investors, to step in. The monetized resources could create a permanent fund for subsidizing life-line retail services, finance a ramped up EESL Ltd energy-services model for 100% metering, strengthen the high capacity, inter-state and cross-border grid and provide incentives for distributed RE generation. 

ELECTRICITY REGULATORS ALSO NEED A BREAK

Electricity regulators, first legislated in 1998 and reincarnated under the 2003 Electricity Act have proved less than adequate in navigating the well-known, political economy constraints of dealing with a public-sector dominated industry. 

A review of the National Electricity Policy 2005 is underway. A draft – lacking in big picture, aggressive transformation, but big on micro, more-of-the-same initiatives- is being considered by an expert committee via public consultations. Their combined vision should cut though the messy logjam to a private sector dominated, financially resilient, socially responsive, “green” electricity business. Even electricity regulators would heave a sigh of relief. 

Adapted from the authors opinion piece in TOI Blogs May 21, 2021 https://timesofindia.indiatimes.com/blogs/opinion-india/cutting-through-the-cobwebs-electricity-development-in-india/

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