The distribution business plays a pivotal role in the power supply chain and serves as the cornerstone for the financial sustainability of the power sector. However, over time, while there has been significant growth in generation and transmission capacity and investment, the distribution business has evolved into a cost centre, exerting a detrimental impact on the economy due to its precarious financial state. Several factors contribute to the poor financial health of distribution companies (discoms), including governance deficiencies, high aggregate technical and commercial (AT&C) losses, regulatory inertia leading to delayed tariff orders, unregulated coal prices, escalating railway freight costs, delayed subsidy disbursements, increased government intervention, and stagnating energy demand. Nevertheless, I view discoms as an integral part of the solution in our pursuit of a cleaner environment, rather than being a part of the problem.
The first
generation of reforms in the power sector, ushered in by the Electricity Act of
2003, brought about significant changes. It deregulated power generation and
separated transmission from generation activities. However, the unbundling
& restructuring of distribution was postponed for a later phase.
Initial reforms aimed to distance both state and central governments
from technical and financial matters by establishing independent regulatory
commissions at both levels.
Furthermore,
the deregulation of power generation, particularly through the Regulated Tariff
Mechanism (RTM) and the provision of a high Return on Equity (RoE), resulted in
an excessive surplus of power generation capacity. This surplus arose from
overly optimistic demand projections by the authorities, leading to the
creation of stranded generation capacity. The situation worsened due to the
inclusion of low-income consumers in the "power for all" initiatives
and the implementation of more stringent Renewable Purchase Obligation (RPO)
targets for states, which mandate the purchase of renewable energy on a
priority basis, even when it surpasses actual demand growth. These factors have
increased the accessibility and availability of power but have come at the
expense of affordability. Consequently, this has had detrimental effects on the
financial health of distribution companies, which has now become a pressing
issue for the entire power sector. Earlier, flexible load of the grid was
served by stable base load and peak load plants. This all is now changing
rapidly now due to more and more decentralised renewables having variability
& intermittency and spread over geographical areas are getting integrated
with the grid and thereby making the need of flexibility in the grid , a real
necessity and grid balancing an expensive and complex operation.
Renewable energy sources such as wind and solar are inherently location-specific and often situated at considerable distances from major load centres. This geographical dispersion necessitates substantial investments in the development, expansion, and upgrading of high-cost transmission networks, as well as the implementation of advanced network management techniques or the utilization of Virtual Transmission through Energy Storage Systems (ESS). Besides , there's a growing trend towards decentralized distributed renewable energy integration, especially through rooftop solar photovoltaic (PV) systems, whether through gross, net billing & net metering, and the adoption of EVs as a load and distributed source, both.
The evolution of a "Green
Grid" can be understood from several key perspectives. First and foremost,
the grid must have the capacity to seamlessly integrate a substantial volume of
renewable and environmentally friendly energy sources. Simultaneously, it
should prioritize safety, reliability, heightened system efficiency, and
increased utilization of grid assets. These essential aspects come with
associated costs. For instance, the greater intermittency and variability of
renewable energy sources necessitate enhancements in grid system operations.
This includes improvements in forecasting, scheduling, and dispatch frameworks,
the strategic curtailment of renewable energy, and the operationalization of
ancillary services such as voltage support, frequency support, and the
provision of upward and downward reserves, all with rapid response
capabilities.
These ancillary services characterized by their ability to ramp up or down quickly, can be furnished by sources like gas, hydroelectric power with storage capabilities, and batteries. Energy storage systems (ESS) can be integrated either directly with wind and solar plants or strategically positioned at optimal locations within the generation, transmission, and distribution segments of the grid. Their integration serves to further enhance grid security, reliability, and stability, offering one or more critical functions such as energy shifting, fast frequency response, spinning reserve support, frequency regulation support, and ramp rate control support.
The central point to emphasize here
is that the integration of renewable energy into the grid comes with associated
costs. These costs are initially borne by distribution companies (discoms), and
they are later recovered from consumers. Consumer affordability is a crucial
consideration in this context and depends on factors such as disposable income
and per capita income, which vary from state to state. Consequently, it's
impractical to enforce the same standards and timelines as those in developed
nations on lower-income states. Ultimately, the per capita income of a state
will determine its ability to absorb the costs associated with clean energy.
Addressing these multifaceted considerations is essential before large-scale
grid integration of renewables can effectively take place.
The recently introduced Renewable Purchase Obligation (RPO) framework presents
us with the challenge of achieving a significantly higher share of renewable
energy (RE) by 2030. The new target is set at 43%, including hydroelectric
power, compared to the current level of approximately 20%, which includes hydro
sources. Presently, the RE capacity, including hydro, stands at around 174 GW,
accounting for 42% of the total capacity of 418 GW. However, this capacity
translates to only about 20% of the energy generated, which amounts to
approximately 316 billion units (BU) out of a total of 1,624 BU generated in
the 2022-2023 period. The lower Capacity Utilization Factor (CUF) of existing
solar and wind power plants, at roughly 22% and 40% respectively, means that
achieving the RPO target of 43% energy from RE sources will require a capacity
share of at least 65% to 70% from these sources. This necessitates frontloading
an excess capacity approach.
However, this approach may result in us being locked into relatively inefficient technology for the entirety of its life cycle, as we frontload RE capacity additions. This, in turn, could increase the overall cost of transition, reduce affordability, and have adverse effects on the financial viability of distribution companies (discoms). A one-size-fits-all approach to RPO may not succeed, especially as an unfunded mandate.
Furthermore,
this approach appears contradictory to our stance at COP26 within the UNFCCC on
climate change. At COP26, we emphasized the principle of "equity and
common but differentiated responsibilities and respective capabilities"
and committed to reaching 50% capacity from non-fossil fuel sources in our
Nationally Determined Contributions (NDC). However, domestically, we seem to be
moving differently, affecting our national
interests in terms of growth and development.
The recent
amendment to the Right of Consumer Rules in 2023 has introduced the concept of
Time of Day (ToD) tariffs, slated to take effect from April 1, 2025. However,
this amendment has inadvertently set distinct surcharge and discount in tariff for
domestic and Commercial and Industrial (C&I) consumers during the peak hours
and solar hours respectively. This distinction overlooks the fact that such
differentiation may unduly favour C&I consumers, given that their demand is
elastic and predominantly daytime-oriented,
while it could potentially burden domestic consumers, who typically have
inflexible or in-elastic demand patterns characterized by the use of lighting,
fans, and cooling during the evening and night. It's worth noting
that regardless of these, the revenue from tariffs have to be subsequently trued up after
finalizing accounts.It is also essential to recognize that C&I
consumers serve as the cross-subsidizing category, rather than being the
recipients of subsidies.
Interestingly,
on September 1, 2023, when the grid recorded its highest demand at 239.9 GW at
12:22 hours, regions such as the Northern Region (NR), Western Region (WR), and
Southern Region (SR) experienced peak demand that coincided with solar hours.
Conversely, regions like the Eastern Region (ER) and North Eastern Region (NER)
saw their peak demand occurring in the evening. Moreover, within these regions,
states with significant domestic consumer loads, such as Uttar Pradesh in the
Northern Region, experienced their peak demand during the late evening, not
aligning with either the national peak or regional peaks.
It's
important to emphasize that the successful implementation of ToD tariffs
necessitates 100% smart metering. However, the current penetration of smart
meters remains at less than 10%, presenting a substantial challenge in fully
realizing the potential of ToD tariff structures.
Furthermore,
a recent meeting of the Forum of Regulators (FOR) on the Resource Adequacy
framework underscored a critical concern. It revealed that the current dispatchable
capacity available in the country might fall short of meeting the escalating
peak and energy demand of the economy in the next 3-4 years. This situation
poses a substantial energy security threat, given that the current path of
renewable energy integration without storage may not be sufficient to cater to
the projected demand and energy requirements.
Turning our
attention to the Discoms, which serve as the primary vehicle for propelling our
journey towards a green grid, it's important to acknowledge that they are
currently the weakest link in the power supply chain. This weakness poses a
significant challenge to attracting investments for India's renewable energy
sector, which seeks investments totalling $225-250 billion to achieve a generation
capacity of 500 GW by 2030.
Discoms must
undergo a transformation and embrace the "3 Ds": De-centralization or
the incorporation of distributed and flexible energy resources; Digitalization
involving the bi-directional flow of information and power through smart
meters, SCADA systems, real-time monitoring and control, artificial
intelligence, machine learning, and block-chain technology; and
De-carbonization through increased integration of renewable energy sources.
To achieve this
transformation, a re-evaluation of our policies and the strengthening of our
institutions are imperative, as the current policy and legislative framework do
not adequately address these new aspects. Therefore, we urgently require the
next generation of power sector reforms to facilitate higher-level integration
of renewable energy, ensuring the provision of reliable, high-quality, and
affordable power for sustainable economic growth. These reforms must address
both technical and financial challenges comprehensively.
In India,
the distribution business predominantly consists of state-owned natural
monopolies, which need to be unbundled into carrier and content entities. This
unbundling is crucial because most other network-based industries in the
country have evolved in a similar manner and have successfully attracted
private investment, such as in the telecom, broadcasting, highways, and gas
sectors. Attracting private investment in the distribution sector should be a
priority to prevent overwhelming financial burdens on the states, which may
lack the fiscal capacity to sustain the grid.
While
environmental considerations are of paramount importance as a global public
good, it's equally essential to ensure a just transition that balances economic
growth and environmental protection. However, there is an increasing intrusion
of political science into the power sector, resulting in policies like
Renewable Purchase Obligations (RPO) for current inefficient technologies like
green hydrogen (RTE < 50%), funded by ratepayers rather than taxpayers. This
socialization of costs through discoms affects affordability and adds a
significant technical and financial burden to their role in the clean energy
transition.
To survive
and fulfil their mandate, Discoms must excel in both governance and financial
management through tariff and non-tariff measures. On the governance front,
achieving 100% feeder segregation and implementing smart metering at all
levels, including distribution transformers, is crucial. Tariff-based measures
involve improving coverage ratios, maintaining updated consumer databases, and
enhancing billing and collection efficiency. Non-tariff measures include
capitalizing on digital assets like consumer databases, offering value-added
services such as behind-the-meter distributed asset management, rooftop solar
power generation, and sharing distribution assets for telecom and broadband
services on a revenue-sharing basis. Other opportunities include providing EV
charging services, establishing a platform for peer-to-peer energy trading, and
collaborating on sub-station infrastructure for various services.
Discoms are
the backbone of our decarbonisation efforts, the conduit for the adoption of
electric mobility (Battery Electric Vehicles or BEVs), and the enabler of the
clean energy transition for industries (such as Green Hydrogen or Green
Ammonia). Strengthening this institution on all fronts – technical, financial,
and through capacity building – is essential. This requires reforms to create
space for private sector investment by unbundling the distribution sector.
Addressing the current governance deficit in Discoms cannot be achieved through
over-legislation or centralization, but by enhancing institutional capacity, up-skilling
personnel, and ensuring financial sustainability in operations.
Government
and regulators must focus not only on cost reduction but also on addressing
capital-intensive aspects to achieve the clean energy transition. In the face
of business-as-usual practices and the rapid integration of e-mobility with the
grid, Discoms and the grid may become unsustainable and collapse sooner rather
than later. To ensure the survival of Discoms, the pace of distribution
reforms, infusion of private investment, and the role of taxpayers will be central
to the success of our clean energy transition, particularly in low-income
states.
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