Having won three distribution franchise bids in the past two years, CESC Limited is optmistic about more opportunities in this space going forward, says Aniruddha Basu, managing director, CESC Limited. However, more needs to be done by the government to ensure that the distribution franchise (DF) model works successfully and attracts serious players. Excerpts from a recent interview…
How would you assess the sector’s performance in the past year? What have been the sector’s major highs and lows during this period?
Overall, the past year has been reasonably good, one of the biggest positives being the improvement in the power supply situation with adequate power availability. The energy and peak power deficits were at an all-time low of 0.7 per cent and 1.6 per cent respectively in 2016-17. Generation capacity increased to 330 GW in 2016-17, an 8 per cent jump over the previous year. Notably, renewables comprised the major share of the capacity added and were at par with thermal capacity additions for the first time in the country. Also, giving credence to the government’s 175 GW target, the total installed renewable energy capacity crossed the 50 GW mark last fiscal. Solar tariffs reached an all-time low, making this the cheapest form of energy. Another positive trend was declining coal imports. Reforms in distribution also brought some respite. The initial results of UDAY indicate that there has been some reduction in aggregate technical and commercial (AT&C) losses and a lowering of interest costs, besides an improvement in the cost-revenue gap.
However, the primary concern that remains is the low pick-up in power demand. As a result, the plant load factors of thermal plants were at very low levels of below 60 per cent, resulting in increased stress on the sector and the banking system. Also, with spot trading prices dropping to nearly Rs 2.40 per unit in 2016-17, discoms continued to shy away from signing new long-term power purchase agreements (PPAs). Another major disappointment last year was the renegotiation and dishonouring of PPA contracts by states for thermal and renewable energy projects.
What, according to you, are the biggest issues and concerns for the sector?
While the power sector has seen an unprecedented turnaround in recent years, an average Indian consumes a dismal 1,000-odd kWh of energy annually, much lower than the global standards. While our electricity generation is on track, the challenge lies in making it accessible to all. In a country of 1.3 billion people, more than 200 million people live without electricity, especially in rural areas.
The poor financial and operational health of the distribution segment is the power sector’s biggest challenge. This is in part responsible for a host of other issues. The generation segment is witnessing a lack of demand for long-term PPAs. State discoms are opting to purchase cheaper power from the exchanges, instead of planning for their long-term power requirement. Besides, power plants operating at low PLFs are adversely affecting the overall health of developers, especially independent power producers, which, in turn, is leading to the build-up of stranded assets. The push for renewable energy is further constraining the existing coal-based capacity. Prolonged PPA dispute resolution with discoms is also constraining cash flows for developers. In order to comply with the tightened emission and water consumption norms, gencos have to undertake additional investment. They are also faced with space constraints for setting up additional equipment for compliance.
What were some of the growth and business highlights of CESC Limited during the past year?
CESC is a vertically integrated utility. During 2016-17, the company’s revenue from operations in Kolkata increased by over 6 per cent to reach Rs 72.2 billion. The Budge Budge generating station is one of the country’s best performing power plants and has continued to excel. In the Kolkata business, CESC met the needs of over 3.1 million customers and added 96,000 new customers in 2016-17. Over 90 per cent of new connections were provided within a day. The adoption of various e-services and digital solutions, which began two years ago, has increased significantly. CESC undertook continuous upgradation of its distribution infrastructure. During 2016-17, about 440,000 meters were installed on account of new supplies and replacements. The peak power demand last year was 2,059 MW and on June 19, 2017, CESC successfully met a load of 2,159 MW. Investments are being made regularly to strengthen the distribution network and enhance reliability as well as for the replacement of older plants and equipment. CESC is at the forefront of deploying advanced technologies and innovations to maintain its lead in the distribution business and provide better customer services. Many extra high voltage [invariably gas-insulated substations (GIS)] and high voltage (HV) substations were added, the 220 kV underground and lower voltage networks were extended, advanced metering infrastructure (AMI) and radio frequency mesh network was installed in some parts of the city, a large number of ring main units were automated, and several high tension and low tension automation projects were commissioned. With the clear objective of providing the best customer-centric services, CESC has further enriched its bouquet of virtual office services through diverse digital platforms and outreach initiatives, complemented by motivated employees and technology interventions. Innovations by employees are nurtured, recognised and rewarded. In the past year too several significant contributions were made by them. In distribution, too, the company was recognised for its stellar performance by winning several prestigious awards and accolades.
What are the plans outlined for the new distribution franchises won recently? What are the key steps needed to give a fillip to the DF model in the country?
CESC won three DF tenders – for Kota, Bharatpur and Bikaner, all three in Rajasthan. The first two franchises became operational in 2016-17 and the one for Bikaner in May 2017. These currently have a combined customer base of 400,000. The DF is valid for a period of 20 years. CESC has already rolled out operations in all the three circles and the going so far has been as per plan. The major focus will be to deliver the best service experience to consumers and bring about efficiency improvements across the value chain. Many more franchise-based opportunities are expected in the country. The key success factors will be a supportive government and the right mix of people and technology.
For the DF model to work effectively, it is critical to address issues such as the availability of reliable baseline data. Provision for complete audit by accredited agencies post takeover along with the inclusion of a methodology for price adjustment may also be considered. There is also need for clarity on the allocation of government grants under scheme like the Integrated Power Development Scheme for work in the DF area to avoid duplication of capex and ensure proper utilisation of assets. The DF areas need to be given due and proportionate allocations. Similarly, semi-finished projects (such as SCADA/ GIS systems) need to be rapidly concluded and handed over.
Further, close coordination with different agencies is needed for technology roll-outs such as optical fibre, internet of things (IoT) and AMI. Also, the award of franchises is made on a certain baseline data of consumers and sales. Vulnerability comes in when high-end consumers opt for open access. A mechanism may be thought of to compensate franchisees through negative indexation in the energy purchase price. A key driver for the allocation of franchises is the need for reducing AT&C losses. With UDAY and a perceptible reduction in losses, other drivers such as the enhancement of reliability and customer services may also be factored in for putting in place a revised model for such awards. It is also important that only serious players with an appropriate track record and credentials in distribution be considered for the award of franchises to ensure success.
How would you sum up the company’s growth strategy for the next few years?
CESC is geared up to consolidate its strengths and offer best-in-class distribution services, conforming to global benchmarks, in Kolkata and other areas of operation. We are keen to build and manage modern distribution networks, harness the most appropriate technologies combining power and telecommunications/automation, use IT and analytics for prompt and optimal services, adopt predictive and proactive maintenance practices, and offer an array of digital services to consumers for new connections, complaint redressal and bill payments.
What is the company’s long-term outlook for the power sector? What is your wishlist for the new power minister?
Distribution is the likely growth engine. With adequate conventional generation at this time and aggressive renewable energy growth targets, there is bound to be buoyancy in load growth, propelled by the country’s economic growth. Our annual per capita consumption is still far below the world average. With inevitable growth in industry and commerce, and more and more urban migration and smart cities coming up, electricity is set to play a pivotal role in the future. For example, the smart city roll-outs need extensive grid modernisation and reliability enhancements.
The private sector can play a significant role here – in terms of both expertise and investments – provided an appropriate long-term business model is in place. The drivers for granting franchises or even licences could perhaps be extended to areas where efficient and reliable operations are required, in addition to the lowering of AT&C losses.
Our wishlist is to enable enhanced private sector participation in the distribution segment. The government is facilitating and nurturing the ecosystem and wherewithal for solar and wind integration, distributed generation, microgrids, IoT encompassing smart meters, home automation, sensors, widespread monitoring and control of smart devices, economical illumination, green buildings, demand response, e-vehicle charging and integration and storage. All these need rapid assimilation of the right technologies, the right people and long-term investments. This is where the private sector can play an important role. Our wishlist also includes reforms to ensure greater competition in power distribution, revisiting the tariff structure, bringing down the cross-subsidy burden on industrial consumers, as well as regulatory reforms for improving long-term viability for private investors.