Discom Losses and Re-inventing India’s Power Sector | UPSC

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IASbhai Daily Editorial Hunt | 28th Oct 2020

“I didn’t fail the test. I just found 100 ways to do it wrong.” – Benjamin Franklin

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020-21.

EDITORIAL HUNT #211 :“Discom Losses and Re-inventing India’s Power Sector | UPSC

Discom Losses and Re-inventing India's Power Sector | UPSC Discom Losses and Re-inventing India's Power Sector | UPSC

Rahul Tongia |  D. Rajasekhar
Discom Losses and Re-inventing India’s Power Sector | UPSC

Rahul Tongia and D. Rajasekhar are researchers with the Centre for Social and Economic Progress (CSEP), a not-for-profit think tank, originally established as Brookings India

      HEADLINES:

India’s DisCom stress is more than the sum of its past

      CENTRAL THEME:

There must be an overhaul of the regulation of electricity firms and their deliverables using common sense metrics

SYLLABUS COVERED: GS 3 : Electricity : Energy

      MAINS QUESTION:

DisComs could not reap benefits for the state due to lack of management and technical issues. Critically analyse the power sector in India -(GS 3)

      LEARNING: 

  • Indian Power Sector
  • Loans and Stimulus
  • States are the defaulters
  • Policy Recommendations

      INTRODUCTION: 

Long gone are the days of scarcity of power; while the physical supply situation has mostly improved, the financial picture has not brightened much

  • CORNERSTONE OF POWER SECTOR : Distribution Companies (DisComs) have been called the lynchpin(backbone) but also the weakest link in the electricity chain.
  • KEY ELEMENT :  India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs.
  • SEVERAL CHANGES : These include structural changes in the regulatory framework as proposed by the Electricity (Amendment) Bill, 2014.
  • RECENT INTERVENTION : The UDAY scheme to address financial issues being faced by companies distributing electricity.
  • POWER DEFICIT : Inadequate generation capacity was the key contributor to power deficit.  However, generation capacity has improved due to high participation by the private sector.

      BODY: 

MORE LOAN THAN STIMULUS

  • BAIL OUT : New Delhi responded to COVID-19’s economic shock with a stimulus package of ₹20-lakh crore, out of which ₹90,000 crore was earmarked for DisComs.
  • FISCAL STIMULUS : While it was called a stimulus, it is really a loan, meant to be used by DisComs to pay off generators.

Discom Losses and Re-inventing India's Power Sector | UPSC

INCOME STATEMENT OF DISCOMS | SOURCES : CSEP.ORG

  • GRAVE SITUATION : The scenario right now  does not seem to be solved by a fill-up, even though such a liquidity injection is required but probably is insufficient.

Newspaper reports abound with stories of how DisComs owe one lakh crore rupees to generators, and without such an infusion the chain will collapse.

  • MULTIPLYING DUES : The dues to generators are several times higher than this number, and, worse, the total short-term dues of DisComs are multiple times higher, which excludes long-term debt.

DATA ON LIABILITIES AND LOSSES 

  • TRANSMISSION LOSSES : Aggregate Technical and Commercial (AT&C) loss is the percentage of power procured by the discom for which it did not receive any payment.
  • AVERAGE LOSSES : The national average for AT&C losses for 2012-13 was about 25%.  In countries such as UK and US, AT&C losses are about 6-7%.
  • ATTENUATION LOSSES : Technical loss is the energy lost as heat when electricity is carried over wires.  Poor equipment increases this loss.

However, reduction in AT&C losses (1.1% per annum) has been slower than the target (3% for utilities with losses above 30%; 1.5% for others).

  • LACK OF METERING : Commercial losses are caused by theft and pilferage of power, poor billing and collection systems.

SEVERE CHALLENGE OF PAYABLES TO DISCOMS

  • ABSENCE OF STANDARD TARIFFS :Regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets, which are effectively IOUs, which are to be recovered through future tariff hikes.

About a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.

  • UNPAID BILLS : Consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.

STATES AS DEFAULTERS

  • DEFAULTERS : State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.

Discom Losses and Re-inventing India's Power Sector | UPSC

LOAN APPLIED BY DIFFERENT STATES | SOURCES : CSEP.ORG

  • ANNUAL CASH FLOW  :  The shortfall in subsidy payments appears very low — only about 1% — but cumulative unpaid subsidies make DisComs poorer by over ₹70,000 crore just over the last 10 years.
  • COID-19 IMPACT : DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower off-take.

COVID-19 has completely shattered incoming cash flows to utilities.

  • LIQUIDITY INFUSION : We will probably need a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt.
  • RISK MAPPING : If there is a haircut to be taken, all the risk and future obligations should not be placed on DisComs alone.

Generators, transmission companies, and lending institutions must all chip in.

RENEWABLE ENERGY BECKONS

  • RISE OF RENEWABLES : The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage.
  • ALTERNATE POWER SUPPLIES : And as battery technologies mature, their dependence on DisComs may wane entirely.

Improving AT&C losses is important, but will not be sufficient.

  • A QUICK REVAMP : We need a complete overhaul of the regulation of electricity companies and their deliverables.
  • EFFICACY : Much of inefficiency is tolerated in the name of the poor but they do not get quality supply.
  • PRIVATISATION : The financial problems of DisComs have been brewing for many years, and it is unlikely that a silver bullet, even privatisation, can solve the problems overnight.

      IASbhai Windup: 

RECOMMENDATIONS

  1. NEED A BIGGER BAILOUT : The State needs to plan for a much larger loan package than announced, more so if COVID-19 creates prolonged cash flow challenges.
  2. TARIFFS WILL NEED TO RISE : DisComs avail long-duration loans at reasonable terms, this will necessitate a measurable consumer tariff increase .
  3. STRUCTURAL REFORMS : Real solutions will need structural reforms and aligning risks.
  4. ACCOUNTABILITY : Improving data and transparency is a low hanging fruit in power sector.
  5. POLICY AND INSTRUMENTS : One-size doesn’t fit all – we need flexible and innovative solutions
  6. EVOLUTION IS THE KEY : If DisComs don’t improve, they would be relegated to the scraps of the future grid. In contrast, they could evolve to play a meaningful role in an equitable and efficient electricity system.

We need to apply common sense metrics of lifeline electricity supply instead of the political dole-out of free electricity even for those who may not deserve such support.

       SOURCES:   THE HINDU EDITORIAL HUNT | Discom Losses and Re-inventing India’s Power Sector | UPSC

 

 

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