Electricity distribution remains the weakest link in the electricity value chain. Plagued by low collections, increase in power purchase cost, inadequate tariff hikes and subsidy disbursement, and mounting dues from government departments, the distribution segment is in need of urgent reforms. After UjjwalDiscom Assurance Yojna (UDAY), was launched in 2015, there have been indications that the central government will launch another reform intervention, the Atal Distribution System Improvement Yojana (ADITYA), to address the segment’s challenges. Industry experts comment on the proposed scheme and the expectations from it…
Do you think the power distribution segment will benefit from the proposed performance-linked reform scheme, ADITYA? What are your expectations from it?
After the very successful Saubhagya scheme wherein each and every household has been provided with electricity connection, we believe that ADITYA is going to be another defining scheme for sustenance of the distribution segment, given that it proposes to address the systemic issues of distribution companies through the involvement of private players under the public-private partnership (PPP) route or distribution franchise route, especially for discoms with high loss levels. So far, we have not been able to address the issue of private participation in the sector despite success stories such as the Delhi PPP. As we move forward as a growing economy driven by technology, the distribution segment will need to reinvent itself as a value creator. Further, with long-lasting market interventions as proposed in the amendment to the Electricity Act 2003, the convergence of sectors such as transport and electricity due to e-vehicles, and consumers becoming prosumers, utilities need to evolve in order to handle the dynamic demand-supply situations and network contingencies. Private participation in distribution will help to bring in retail consumer management expertise, technology leadership, change management expertise and effective governance.
We look forward to this scheme to enhance the much-needed private participation in the distribution segment. We wish to see all the states moving to low loss levels and technology integration for reliability improvement, loss reduction, and better consumer service delivery. We hope that the scheme is implemented in letter and spirit, and the funds are utilised effectively to transform the distribution segment in India and bring it in the league of discoms of the developed nations. State governments should use this opportunity to adopt long-term solutions to get their discoms out of financial stress. We believe low demand for power is actually the root cause of all problems in the power sector.
T.N. Arun Kumar
A robust power sector is essential for the economic development of a country. In India, of the three segments in the power sector, generation and transmission have been self-sustaining, while the power distribution segment continues to be weak. Over the years, successive governments have announced various schemes to bail out the sector with the last one being UDAY. ADITYA, a performance-linked reform scheme, is yet another attempt by the government to revive the ailing state power distribution utilities. As per recent reports, the scale of the scheme is massive and proposes a Rs 1,100 billion central grant to state discoms. The scheme is divided into three parts with the first part proposing infrastructure upgradation, involving the installation of smart meters. The second part suggests inefficient discoms undergo institutional reforms such as lowering AT&C losses or eliminating the ACS-ARR gap to take advantage of investment support. This is expected to incentivise states to involve the private sector (by way of privatising operations of high-loss-making discoms or introducing more distribution franchisees) for improving the efficiency of distribution utilities. The third part of the scheme is said to be about the development of human resources and future technologies in the sector with central government support. Like the previous attempts to revive the ailing distribution segment, this scheme also shows potential, but unlike previous schemes this appears more result oriented, as discoms will be required to first invest and perform and then seek support (from the central government). The scheme thus looks promising and should certainly benefit the sector if implemented in right earnest.
The distribution segment has seen private sector participation but not as much as in the generation and transmission segments and the examples are also few and far between. Barring a few distribution licensees in Delhi, Mumbai and Kolkata, and some distribution franchisees, the segment is nowhere close to the kind of enthusiasm shown by the private sector in participating in generation and transmission business. While the reasons for this are varied, PPP is warranted as the segment yearns for competition and improvement in performance standards. In this context, the foremost expectation from the proposed scheme would be to have provision for suitable incentives in order to ensure that states embrace private sector participation in the distribution space by themselves. First, this would not only bring about operational efficiencies in the power distribution space, but would also reduce the subsidy requirement of discoms and free up states’ resources to be gainfully deployed in other important areas. Second, one of the major issues these days with state discoms is huge overdue from their own state government departments. The proposed scheme may address this issue with stricter monitoring of the same. Last, the new scheme should build up on where UDAY left off and hence the mechanism for tighter control/monitoring of incremental losses by state discoms should continue.
The Indian power sector is on the verge of yet another wave of “reform”. If one counts the tsunami of all the past “reforms” that the power sector has witnessed, by now it should have been the most “reformed” sector in the country! It doesn’t get more ironic than this!
So, why is it that the more things change, the more they remain the same? Well, the problems start with the distribution segment, and travel all the way up in the value chain to the transmission segment, generation segment, power markets, coal sector, original equipment manufacturers (OEMs), and finally, banks. While the triple challenge of REEVES (renewable energy, electric vehicle, energy storage) is on the cusp of further complicating the power sector’s future, the past problems of loss and theft, populist tariffs, unviable subsidies, poor customer service and poor infrastructure still persist. How will another wave of reforms solve the problems faced by the distribution segment) for the “last time”? Is “reforms” another word for bailout?
In my view, the policy myopia starts with the obsession to reform “discoms”. Instead, what we actually need is “distribution segment” reforms, starting with state regulators, then state governments, and finally, discoms. To be fair, discoms have actually reduced losses sharply in the past decade or two, and energy access has reached much farther and wider in recent years, than in the preceding several decades. Still, performance of the distribution segment across states varies widely and remains poor in many states. Private sector participation through licensing or franchising, on the whole after netting off successes and failures, does show a net positive impact, largely based on the “Delhi-Bhiwandi” experience. Nudged by this net positive impact, policymakers are toying with the idea of reviving separation of carriage and content – long discussed but never implemented – so as to facilitate the entry of the private sector in power distribution via the competitive-retail model, while retaining the wires/carriage business for licensees (read state governments).
However, despite improving operations and reducing losses, certain discoms continue to remain in financial stress and witness cash crisis due to three problems – inefficiency in power purchase cost, high capex requirement for remote rural access, and low tariff/ high subsidy/regulatory asset burden. Unless the root cause of this problem – which is much deeper than AT&C losses alone – is addressed, a simplistic separation of carriage and content and/or private sector participation through the license/ franchise route alone will not salvage the situation. It will become another reform on paper, much like the unbundling and corporatisation of state utilities and setting up of “independent” regulators. Further, most private sector players often shy away from entering vast rural areas.
One way out in the near term is to restructure state-owned discoms, or at least parts of them. The need is to restructure the way discom staff is currently employed and engaged, and completely change their terms of engagement to make them linked to performance in compact geographic areas, armed with a high degree of autonomy and delegation, uninterrupted tenure, high rewards and resources for mentoring and strategising. It is an idea that has not been tried due to inflexible terms of engagement, but if given an option, some employees may volunteer to opt for this model of engagement and take it as a challenge to turn around their utility operations in a time-bound manner! A peculiar example is Kanpur, where Kanpur Electricity Supply Company Limited (KESCO), a state-owned discom, achieved a sharp reduction in AT&C loss when the state government attempted privatisation, and continued to perform even after that threat had subsided. Inspired by that success story, the rewards of success sharing could usher in a similar turnaround.
Regarding sectoral reforms, a policy revamp is needed on multiple fronts – REEVES, separation of carriage and content, separation of storage and content, as well as power market/trade reforms. For a subject as “federal” as power, no one silver bullet can solve the problem.