The utter economic necessity of reforming India's power sector
The COVID-19 pandemic and the nationwide lockdown to contain its proliferation has, in turn, set off an unprecedented blow to the already moribund power sector.
Indian power sector needs reforming, because
- Continuous increase of payables by power DISCOMS: The total liquidity package of Rs 90,000 crore announced for discoms and more than Rs 70,000 crore has been sanctioned and Rs 25,000 crore has been disbursed.
- It has led to significance increase of payables of discoms which is a growing concern and the amount released by the government until now is not sufficient.
- Growth of Indian power sector: The IEA anticipates India’s power system to grow to an installed capacity of up to 1 500 GW by 2040.
- It will push the scale of India’s power market beyond the size of the EU’s synchronised grid, which connects around 1 000 GW of installed generation across 27 countries.
- It will bring it much closer to the size of China’s grid, which handled 2 000 GW in 2019.
- Fuel Security Concerns: The thermal capacity addition is plagued by the growing fuel availability concerns faced by the Industry.
- The coal supplies by CIL is restricted to around 65% of actual coal requirement by coal based thermal plants, leading to increased dependence on imported coal with the cascading result of high power generation costs.
- Financial Health of State Discoms: The mounting AT&C losses and operational inefficiencies have adversely affected the financial health of State Discoms which are currently plagued with humongous out-standing debts.
- Under-procurement of Power by States: The increasing power generation costs due to limited fuel availability, poor financial health of State Discoms, high AT&C losses have contributed in suppressed demand projections by State Discoms.
- Inimical Financing Environment: Over the last 4-5 years, the leading rates have increased significantly from the time of project appraisal resulting in project cost overrun and hence higher end tariffs.
- Policy Paralysis: The micro level policies governing the fuel cost pass-through, mega power policy, competitive bidding guidelines are not in consonance with the macro framework like The Electricity Act 2003 and the National Electricity Policy.
Measures to be adopted for reforming Indian Power sector
- Promotion of renewable energy for power generation: India has set an ambitious target of setting-up 300 GW of solar capacities over the next 10 years.
- The government also plans to double the solar modules or cell manufacturing in two years, which is expected to increase the appeal of the sector even more for investors.
- Increase in investments in renewable energy: It is believed that the investments in the renewable energy segment can surge by as much as 35 per cent.
- The push towards clean energy is driving global investor interest in the Indian renewables sector that has been reflected in the project tenders in India getting oversubscribed amid strong participation by global investors.
- Reform the electricity tariff system: The IEA commends the government’s push for reforms towards cost-reflective tariffs and direct subsidy schemes.
- India’s governments could explore two measures through reducing cross-subsidization from industrial demand and providing direct transfers for vulnerable consumers, paid out of state budgets, instead of paying price subsidies for residential users to discoms.
- Implementation of direct benefit transfers as a means of subsidy reform: The direct transfers for the most vulnerable consumer groups and streamlined electricity tariffs for all consumers are revenue-neutral for state budgets.
- The government should present new guidelines for tariff structures across India as models for state governments and regulators to follow.
- Achieve an India-wide wholesale electricity market with efficient trades: The power trading is largely a physical exchange of ancillary services to stabilise the synchronised system.
- The central government should boost a diverse set of flexibility options for the cost-effective integration of higher shares of variable renewables.
- Seize the economic recovery as a major opportunity to boost the power sector resilience: The government needs to make sure that the governance of the distribution sector is adequate to meet those challenges and safeguard its physical and financial resilience.
Road ahead
- There is a dire need to develop both conventional and non-conventional forms of energy, wherein, three key factors must be kept in view for developing an energy mix:
- The pattern of energy demand seen in the country;
- The availability of fuels; and
- Fuel production and import costs
- The regulators need to be sensitized to the challenges faced by the sector and policy framework needs to be crafted and enforced to ensure a win-win situation for all the stakeholders.
- A robust and sustainable credit enhancement mechanism for funding in Energy Sector needs to be put in place through increased participation by global funding agencies like The World Bank, ADB etc. in the entire value chain.
- The private sector has been playing a key role in generating power and a more supportive environment will help in bridging the energy deficit of the country.
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