The rise of renewables has implications for the finances of Discoms. If not managed well, small & rural consumers could suffer

https://www.thehindubusinessline.com/opinion/managing-the-inevitable-energy-transition/article26904873.ece  

For the most part of the 20th century, planning broadly involved estimating future electricity demand, adding ever larger conventional generating power and connecting these to load centres through transmission lines.

Electricity was supplied to consumers by a monopoly, a vertically integrated utility. Pricing was based on the principle of cross subsidy, wherein large industrial and commercial consumers paid higher tariffs to ensure affordable tariffs for agriculture and households. However, all that is rapidly changing, largely due to national policy initiatives and global techno-economic changes.

Competitiveness of renewables coupled with reducing costs of battery storage and rising costs of coal-based power means an increasing share of renewable energy in the supply mix. In the long run, this is likely to drive electrification of other sectors such as transport, cooking, and industrial processes, partly addressing issues of local air pollution, energy security and rising energy import bill. These trends can effect a paradigm change in the energy sector.

The broad commitment across parties towards universal, affordable and reliable access to electricity as well as modern and clean cooking fuels is welcome. However, a lot of work needs to be done to turn it into a sustained reality.

Currently, there is limited rigour within the government in critically evaluating and prioritising needs, anticipating changes and risks and preparing for them. This can lead to serious long-term implications in terms of resource-lock-in and path dependency, especially considering the long life and capital intensive nature of the investments.

Two steps are critical to avoid such lacunae. First, the gaps and discrepancies in public availability of crucial data should be addressed. Second, analytical capability within the government should be enhanced.

Energy Analysis Office

In order to assist the government in policy and decision making, an analytical agency needs to be set up that is empowered to collect and reconcile data, analyse trends, publish reports and suggest policy interventions. The agency would leverage as much as possible from existing technical agencies such as CEA, PPAC, and CCO.

This agency, tentatively called the Energy Analysis Office (EAO), should involve multiple ministries. Two important prerequisites for such an office to be effective are policy relevance and independence from political influence.

This balance can be arrived at by placing the EAO under the administrative control of the Executive, but by having its budget approved and work reviewed by Parliament. The EAO should take a long-term view towards the sector’s challenges and provide policy relevant inputs to the Executive. Public participation should be encouraged.

Focus on small

Within the electricity sector, the emerging trends in renewables and storage create numerous opportunities for large consumers to explore alternative, economical sources. However, loss of revenue from these high paying consumers is likely to mark the end of the current business model of the electricity distribution companies (Discoms).

Two serious implications for the Discoms’ future arise. One, given the uncertain demand, power purchase, which accounts for more than 70 per cent of the cost of supply, will become more complex and riskier. Simultaneously, the loss of cross-subsidising consumers would necessitate sharp increase in either the tariff for small, rural, and agricultural consumers, or the State subsidy.

If not managed appropriately, these changes can lead to severe financial stress for Discoms, poor supply quality for small consumers, stranded assets, and bailouts, with implications for the banking sector.

To avoid such consequences, there is an urgent need for fundamental changes in the way Discoms plan and operate. Increasingly, markets and competition would need to play a substantial role. Allowing large consumers to choose their suppliers for the long term helps them reduce costs, while also enabling rational capacity addition. Discoms should avoid adding new baseload capacity without rigorous demand-supply analysis.

Solarising agricultural feeders can help in capping subsidy while providing day-time reliable supply to farmers. These measures can allow Discoms to focus on improving supply and service to small and rural consumers.The energy transition offers an opportunity to avoid inefficient resource lock-ins with significant environmental and economic effects. But unless well managed, the transition will unfold chaotically, with the small and rural consumers being the likely sufferers.

The writers are with Prayas (Energy Group). This is the last of three articles on challenges facing the Indian energy sector