Necessity of Electricity Distribution Companies

Context:

Under the new regime, a competitive industry structure in generation has evolved and India now has one of the cheapest rates for solar power supply in the world.

The Electricity Act 2003:

• It provided the framework for the dismantling of the State Electricity Boards and the separation of generation, transmission and distribution into separate companies. 
• Electricity generation was delicensed, while transmission and distribution remained licenced and regulated activities. 
• Promoting competition, protecting consumer interests, and the supply of electricity to all were key objectives of the legislation.
• The share of private investment in the creation of new generating capacity has increased rapidly. 
• Competitive procurement through long-term power purchase agreements (PPAs) grew.
  • Tariff-based bids for the supply of electricity to distribution companies (Discoms) has been the key to the extraordinary success of the National Solar Mission.

The U.K. model & sustainability for India:

• In the U.K a mandatory power pool had been created where all generators submitted bids for the next day, indicating the quantity they could supply along with the price. 
• This mimicked the intersection of the supply and demand curves to get the market price. 
• Full retail competition had also been introduced and consumers could choose from among several suppliers who had emerged to serve the market. 
• Though these reform ideas had a strong constituency, these were found to be unsuitable for India.
• Adopting the free market (power pool) model would have meant that all electricity would be sold at the price of the electricity from the most expensive plant at which demand would be fully met. 
• The resultant steep price shock could just not be absorbed.
• For decision-makers, such deregulation became a non-starter once the full implications were understood.

Discoms in India:

• The Discom has the responsibility of projecting demand growth and making arrangements for reliable electricity supply. 
  • It does this by entering long-term power purchase contracts. 
  • Power-generating capacities have risen rapidly and the power supply position has become comfortable. 
  • There has also been the milestone of the completion of rural and household electrification, where discoms have been pivotal.

Open Access and Cross-subsidy:

• The Electricity Act gives consumers with a load of 1 MW and above the right to open access.
• This cross-subsidy surcharge became necessary as higher-end industrial and commercial consumers pay more and cross-subsidise the lower-end households whose tariffs are less. 
  • However, the explicit mandate in the Electricity Act to the State Electricity Regulatory Commissions, to progressively reduce cross-subsidies, remains unimplemented. 
• This has resulted in the cross-subsidy surcharge continuing and acting as a barrier.

Trading and Optimal Utilization:

• Power exchanges have come up to enable trading and optimal utilization of the total generating capacity in the country. 
• The exchange prices are volatile — either a little above marginal cost when demand is modest and shooting up when demand surges, necessitating the imposition of price caps. 
• This is not an unexpected phenomenon as demand for electricity is inelastic.

Problems with Discoms:

• ‘Reforms’, ‘markets’, ‘competition’ and ‘consumer choice’ for Discoms are seen as the weak link in the supply chain of electricity.
• Rising cumulative losses and an inability to pay generators on time. 
• Domain of Political Economy.
• The inability of regulators in the States to determine cost reflective tariffs. 
• State governments find it difficult to give timely subsidies as required by law. 

Possible Solutions:

• The need of dispensing with the Discoms and letting the free market solve the problems of the power sector appears deceptively simple and attractive.
• For the political economy issue of misgovernance and rent seeking in some States, privatization may perhaps be the only solution.
• Further strengthening of long-term PPAs with Discoms. 
  • Financing, equity as well as debt are de-risked by these PPAs which have the implicit guarantee of the state. 
• To drive the energy transition, the state had to invite bids for renewable energy through “contract for differences” which assured successful bidders’ payment.

Consequences of the Ukraine War:

• It has led to ironical consequences.
• Electricity prices went up many times due to the inelasticity of electricity demand.
• The government was compelled to give cash support for lifeline consumption, profits of energy companies reached record highs, and the government had to impose taxes on their windfall profits. 
• Gordon Brown, the former Prime Minister, went so far as to call for temporary nationalization.

Power Sector in India:

• The existence and development of adequate power infrastructure is essential for sustained growth of the Indian economy.
• India’s power sector is one of the most diversified in the world.
• Sources of power include conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. 

Electrification Schemes in the country:

• Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY)
• Ujwal DISCOM Assurance Yojana (UDAY)
• Integrated Power Development Scheme (IPDS)
• The Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) Scheme 
• De-dieselise the farm sector and generate additional income for farmers by producing solar power

Conclusion: 

• The consequences of implementing the reform idea of doing away with the centrality of the Discom must be thought through. 
• Lessons from the experience of the last year in the U.K. should be analyzed. There are no quick-fix easy solutions.

News Source: The Hindu

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