What is the issue?
- Disruptions in technology, regulations, and business models are forcing power distribution companies (DISCOMs) to take stock of their future.
- DISCOMs need to get innovative and redesign their tariff structure and business model to tide over this impasse.
What are the problems in plaguing the Indian DISCOMs?
- Indian DISCOMs are financially strained - at the end of FY16, total outstanding debt was Rs 4,146 billion and annual losses were Rs 657 billion.
- There are significant challenges in the sector that demonstrate how short-term measures will not suffice to hold off the long-term collapse.
- Purchase agreements - 75-80% of a DISCOM’s costs are in power purchase and many are locked into expensive agreements (PPAs) for decades.
- Improper planning, and technical constraints in operating the grid, has been costing as much as Rs 200 billion annually.
- Cross Subsidisation - DISCOMs charge “commercial and industrial (C&I) consumers” very high tariffs.
- This is to compensate for subsidies provided to residential and agricultural consumers, for whom tariffs are kept artificially low for political reasons.
- High tariffs combined with unreliable supply have rendered Indian industry uncompetitive in global markets.
- To counter this, industries were forced to build capacity for captive electricity generation – which accounted for as much as 17% of all DISCOM sales in Fy17.
- Notably, C&I consumers currently have new options for distributed generation of renewable energy - like installing solar systems in their premises.
- Hence, by charging exorbitant tariffs and providing unreliable power supply, DISCOMs will eventually drive away their best paying consumers.
- Government Initiatives - “Power for All, Make in India, and speedy deployment of renewable energy” are further complicating the sector’s woes.
- There is a need for DISCOMs to rethink their business models and reorient towards a more sustainable future.
What is the way ahead?
- C&I Consumers - Make in India, as conceived, has a focus on high value-add sectors such as electronics and ICT, aerospace, and defence manufacturing.
- Additionally, a vast majority of the MSMEs (which are mass employers) too are dependent on electricity for their production processes.
- Considering India’s growth rate, there is hence a need for higher electricity-intensity and improved reliability for units.
- A rationalised tariff structure would help to retain existing consumers and draw in new market entrants for DISCOMs.
- Power for All - This is dependent on many factors that range from engineering and execution challenges like:
- Electrifying 3.3 million household per month.
- Ensuring that reliable and regular power is supplied
- Metering and billing the consumption effectively.
- For DISCOMs, addition of these new consumers will saddled with more financial burden due to the subsidies that they’ll have to be provided.
- Agricultural and residential consumers together account for 50% of the sales volume but only 30% of the revenue.
- But there are indications that a considerable chunk of the rural masses are willing to pay higher for unintrupted and quality power supply.
- To cater to this aspiring group of consumers, DISCOMs have to reduce power procurement costs and upgrade their infrastructure.
- Renewables - New renewable energy projects offer hopes for reducing costs and increasing revenue for DISCOMs.
- Renewable energy is also important for India’s battle against climate change, and the full potential of this domain needs to be exploited.
- Private roof-top installations have started producing significant amounts of power lately, but DISCOMs are largely seeing this trend negatively.
- DISCOMs see individual generators are predating their revenues, which needs to change by co-opting them with a more positive approach.
- Notably, these private generators produce and consume at the same time and are charged based on a two-way metering which indicats net power intake.
Source: Business Stanadard
