Power sector behemoths Power Grid Corporation of India Limited (Powergrid) and NTPC Limited have come together to form a joint venture (JV) for undertaking distribution operations. The JV company, National Electricity Distribution Company (NEDC), has been set up on a 50:50 equity participation basis. The main aim of NEDC is to undertake electricity distribution and related activities in the states and union territories of India.
The agreement between the two companies was signed in June 2018, but it will be incorporated only after obtaining necessary approvals of the government. While the details of NEDC’s business model are yet to be made official, industry experts believe that it will be a game changer in the distribution segment. Power Line discusses the outlook for NEDC and its impact on the power sector…
The idea of establishing NEDC was conceived about a year ago. A national discom was proposed on the lines of Energy Efficiency Services Limited (EESL), which is a JV of four power sector PSUs – NTPC, Powergrid, Power Finance Corporation and REC Limited.
The creation of a pan-India discom was proposed to aid reforms in the distribution segment, which is facing multiple issues such as high aggregate technical and commercial (AT&C) losses, lack of power procurement bids by discoms despite latent demand, non-cost reflective tariffs and financial imprudence of discoms. While schemes such as the Ujwal Discom Assurance Yojana (UDAY) have helped turn around the segment to an extent, a lot of ground remains to be covered. The financial losses are still high at about Rs 150 billion in 2017-18 though they have reduced by over 60 per cent from Rs 387.77 billion in 2016-17. The AT&C losses of UDAY discoms stand at 18.24 per cent at present, above the targeted 15 per cent loss level anticipated by March 2019.
Expected benefits of NEDC
NEDC can explore different ways to serve the distribution segment. It can obtain a distribution licence or act as an aggregator of power demand and supply. NEDC may also take over operations of weak distribution utilities. As an aggregator of power demand and supply, the company can procure electricity at competitive rates from stressed assets and supply it to discoms. As per ICRA’s estimates, about 40 GW of coal-based capacity is under stress owing to a mix of issues, including the absence of long-term power purchase agreements (PPAs), unviable tariffs, the absence of coal linkages, delays in project implementation, and the inability of promoters to secure funding for projects.
Also, with the impending separation of carriage and content in the distribution segment as proposed in the draft amendments to the Electricity Act, 2003, the NEDC can secure a distribution licence and act as an alternative source of electricity supply for consumers across the country to encourage competition in the distribution segment. However, separation of carriage from content is not expected to be implemented any time soon. Some of the challenges in implementing this measure include segregating losses between wires and supply businesses, subsidy transfers and the cross-subsidisation impact as consumers move from the existing state discoms to the national discom.
NEDC can also work as a distribution system operator/franchisee to improve distribution operations in areas with high AT&C losses. Franchisees have been fairly successful in certain areas like Bhiwandi and Nagpur in Maharashtra, and Agra in Uttar Pradesh. While the core competencies of the two JV partners NTPC and Powergrid is power generation and transmission respectively, they also have some experience in distribution operations as they have implemented rural electrification works under the erstwhile Rajiv Gandhi Grameen Vidyutikaran Yojana. NTPC also has a power distribution JV with the Kerala Industrial Infrastructure Development Corporation (50:50 shareholding) – KINESCO Power and Utility Private Limited. It is already supplying power to KINFRA-owned industrial theme parks.
The way forward
The role and vision of NEDC is yet to be finalised and approved by NITI Aayog and the Department of Investment and Public Asset Management. It is expected that NTPC and Powergrid will leverage their expertise in the power sector through NEDC. Reports indicate that instead of becoming a distribution utility, it may have a character similar to EESL and will work as a contractor to help improve the performance of existing discoms.
Going forward, more government initiatives are expected in the distribution segment. These include imposing penalty for load shedding, disallowing AT&C losses of over 15 per cent as a pass-through in tariff, phasing out cross-subsidies, and maintaining adequate power supply agreements. The launch of UDAY 2.0 and amendments to the Tariff Policy, 2016 are also expected in the near future.