Sustainable Way Forward

Strategies to mitigate the financial woes of Rajasthan’s discoms

 

 

Power distribution is the most socio-politically sensitive and challenging segment of the power sector. Discoms are liable to generation and transmission service providers and are supposed to be attuned to the rising expectations of consumers as well as the socio-political environment at every moment.

Most state/UT discoms, except those in Maharashtra, Gujarat, Punjab and Delhi, are suffering huge financial losses every year. The operational and financial losses of Rajasthan’s discoms for 2019-20 were approximately Rs 125 billion, with the accumulated financial losses being approximately Rs 1,350 billion.

The annual revenue receipts at the present tariff are just about sufficient to meet the power purchase, repair and maintenance, establishment, and general administration expenses, terminal benefits, etc. For capital expenditure, discoms depend on loans, state equity and centrally sponsored schemes.

Capital expenditure such as release of connections, system augmentation, renovation and modernisation are essential, but normally non-remunerative – that is, they yield less than the cost of capital – and thus, debt servicing adds to the financial losses every year. The interest burden of these loans, availed of under various schemes, has been contributing heavily to the financial losses.

The Rajasthan government and the regulator have to restrain tariff hikes every year as the actual cost of power in the market is declining – round-the-clock (RTC) green power is available at Rs 3.60 per unit, while at the Indian Energy Exchange, the average rate for the Rajasthan grid is Rs 3 per unit. Consumer awareness is at its peak, with the Electricity Act and rules becoming more consumer friendly.

In this scenario, conventional measures cannot lead to a financial turnaround for the discoms and prevent the exacerbation of their problems. The deteriorating financial health of the discoms has also adversely impacted the finances of the state through the interest burden liability of the Ujwal Discom Assurance Yojana – approximately Rs 50 billion annually.

The subsidy for existing agricultural consumers is approximately Rs 150.78 billion annually. The state government intends to meet the long-pending demands of the farm sector by releasing pending agricultural connections and ensuring day power to all agricultural consumers in the state. There are approximately 375,000 pending agricultural applications as on March 31, 2020, requiring an expenditure of approximately Rs 48.75 billion by the state and the discoms, which would increase the annual state subsidy burden by Rs 38.61 billion at the present tariff.

Agricultural tariffs are heavily cross-subsidised by the industrial and commercial categories, which need to be phased out to attract industrial investment in the state. The annual state subsidy for agricultural consumers is likely to rise to Rs 226.33 billion by 2023-24.

The estimated cost of transmission and distribution (T&D) augmentation for day power supply to agricultural consumers by 2023-24 is Rs 30 billion. The release of pending agricultural connections and ensuring day power for agricultural consumers will enhance the agricultural peak power demand from the present 6,000 MW to approximately 12,000 MW. This will cause difficulties in power management.

Hence, the release of pending agricultural connections and day power supply to agricultural consumers in the state by 2023-24 will demand an expenditure of about Rs 130,000 per connection, totalling Rs 4,875 billion; an expenditure of Rs 30 billion for T&D system augmentation for day power supply; and an additional annual state subsidy for agricultural consumers of Rs 76.33 billion.

Neither the state nor its discoms can afford such a huge financial burden, especially given the ongoing Covid pandemic and their current financial condition, as mentioned before. For the state to meet the demands of the farm sector and ensure the financial sustainability of the discoms, out-of-the-box thinking and non-conventional means will have to be adopted and adapted.

New strategies            

Releasing pending agricultural connections through the dedicated stand-alone solar power opex model by 2023-24

This is already in practice and is currently being undertaken through the PM-KUSUM scheme. But farmers and the state will face difficulties in arranging capital contribution, and carrying out operations and maintenance, after five years.

There are about 375,000 pending applications, with an approximate load of 4,875,000 HP. The estimated capital cost of a stand-alone solar system suitable for a 10 HP pump set is Rs 425,000. The estimated levellised tariff per HP per month for a 25-year contract or power purchase agreement (PPA) will be Rs 565, and the annual cost of solar power supply for a 10 HP pump set will be Rs 67,740. The amount chargeable to consumers, at Rs 100 per HP per month, will be Rs 12,000. The state annual subsidy liability for 10 HP pump sets is Rs 55,740. The state annual subsidy liability per HP is Rs 5,574. The state annual subsidy liability for the 375,000 pending connections, released through the stand-alone solar power opex model, is approximately Rs 27.18 billion (fixed for 25 years). The state annual subsidy required, as per conventional energisation at the present agricultural tariff, is approximately Rs 38.61 billion (subject to increase with tariff hikes).

In this model, farmers will only have to contribute what they normally would for a new connection – nothing additional will be needed. Further, a solar generator/contractor will be selected for each aggregate capacity, lot-wise (subdivision/division/circle), for 25 years, through tariff-based competitive bidding per HP per month. The contracts or PPAs thus offered will have flexibility for capacity addition or deletion.

Consumers will be billed at a flat rate – fixed charges plus solar tariff. Solar energy can be metered to check compliance with renewable purchase obligations/ renewable energy certificates. Through battery storage, farmers can use lights and fans alongside other farm equipment without the need for a separate domestic connection.

Under this model, the state may avail of a central subsidy under the PM-KUSUM scheme towards state tariff subsidies. The discoms and the state will not incur expenditure for releasing pending agricultural connections and day power supply. The conventional power purchase cost for solarised agricultural consumers will be nullified. Discoms may seek tariff approval from the regulator.

In sum, this will lead to farm sector demand mitigation, without any capital liability for farmers, discoms, or the state. The annual saving on state subsidies at the present tariff rate will be approximately Rs 11.43 billion. The saving on capital expenditure for conventionally releasing the pending agricultural connections will be approximately Rs 48.75 billion. The saving on expenditure that would otherwise be incurred for day power supply to these consumers will be approximately Rs 5 billion.

Solarising electrified agricultural pump sets through the stand-alone 25-year opex models

This is also being undertaken under the PM-KUSUM scheme, but is at a disadvantage because of state and farmer capital requirements, pilferage, and loss of surplus feed-in power due to multistage transformation and long distribution lines.

Existing agricultural consumers, as on March 31, 2020, number approximately 1.4 million. The approximate load of these consumers is 14,838,755 kW or 19,038,754 HP. The estimated capital cost of a stand-alone solar system suitable for a 10 HP pump set is Rs 425,000. The annual state government subsidy requirement at the present tariff, along with tariff cross-subsidy, is approximately Rs 150.78 billion.

The estimated levellised solar tariff per HP per month under the 25-year opex model is approximately Rs 565. The annual solar power bill for a 10 HP pump set is Rs 67,740. The annual fixed charges payable by consumers at Rs 100 per HP per month (less than the present tariff rate) is Rs 12,000. Annual state subsidy liability for a 10 HP pump set is Rs 55,740, the annual state subsidy liability per HP being Rs 5,574. The annual state subsidy liability by 2023-24, if all existing pump sets are solarised, will be Rs 106.12 billion. The annual state subsidy liability by 2023-24 at the present tariff, escalated by 20 per cent, will be Rs 180.93 billion. The value of the redundant, retrieved material, at 40 per cent of the original price, is approximately Rs 76.16 billion. The expenditure for day power supply will be reduced to zero. The value of power transformers rendered redundant at rural substations will be approximately Rs 5 billion. The expenditure on the separation of feeders for rural and agricultural supply will be reduced to zero. Further, the state may avail of a central subsidy under the PM-KUSUM scheme towards state tariff subsidy, as mentioned before.

Financially ailing discoms and the state find it hard to mitigate the farmers’ demands for release of pending connections and day power as these entail a capital expenditure of Rs 78.75 billion, raising the annual state subsidy to Rs 226.33 billion by 2023-24. The stand-alone solarisation of the state’s farm sector may be a panacea for this predicament as it would not require the state’s capital, reduce the state’s subsidy by 38 per cent, reduce tariff cross subsidy, bring miscellaneous revenue of Rs. 81.16 billion as salvage value of redundant goods and many associated benefits like huge investment and local employment.

To sum up, the advantages of total solarisation by the year 2023-24, under the 25-year opex model, for the state’s farm sector include mitigating farmers’ long-pending demands, namely, day power supply and release of pending agricultural connections, without any capital burden on farmers or the state. The annual state subsidy burden will also be reduced by approximately Rs 86.24 billion. There would also be a saving of approximately Rs 78.75 billion on conventional capital expenditure for day power and release of pending connections. Revenue from redundant retrieved material would be roughly Rs 81.16 billion. Long-term agricultural tariff hikes will no longer be required. Power pilferage and electric accidents in rural areas will also be minimised, and the chances of fatalities attributed to night-hours power supply will be eliminated. Lastly, agriculture-neutral discoms will have significantly reduced their aggregate technical and commercial (AT&C) losses, leading to improved financial health.

Agriculture-neutral discoms

For such discoms, the peak demand expected by the year 2023-24 is likely to be reduced by approximately 12,000 MW. Energy purchase may be reduced by approximately 57 per cent. Discoms will not need to enter into fresh PPAs for conventional/renewable energy or augment their transmission service in the near future. They can also get rid of financial liabilities towards the release of new agricultural connections, operations and maintenance of the agricultural network, meter reading, etc. Power pilferage and T&D losses will be reduced as well. It will be possible to achieve the dream AT&C level of around 10 per cent. Further, although a detailed analysis is yet to be carried out, agriculture-neutral discoms shall certainly undergo a financial turnaround, without any further tariff hikes in the near/medium term.

Power management for agriculture-neutral discoms

The peak demand for agriculture-neutral discoms will be far below anticipated levels in the medium/long term. Fresh PPAs for conventional or renewable power and transmission service augmentations will not be required in the near future. The larger portion of long-term power purchases at the present tariff is undertaken on a cost-plus basis, with tariffs being determined by terms and conditions that were prevalent when the power market was not competitive and the cost of capital (interest) was higher. Thus, a revision of the tariff regulations is required to optimise the cost of power and bring it closer to the present market price. Since thermal power plants will be operating at low annual plant load factors, reducing operational pollution and doing away with the installation of flue gas desulphurisation systems may be pleaded to contain the power purchase cost. Further, as RTC renewable power (with storage) is likely to be available in bulk at the periphery of the state at Rs 3.60 per unit, decommissioning of cost-prohibitive thermal plants by way of equivalent capacity RTC may be considered. This may require the loading of about 10-15 paise per unit on renewable RTC generation.

    Arjun Singh, Former Managing Director, Jaipur Vidyut Vitran Nigam Limited and B.M. Bhamu, former MD, Ajmer Vidyut Vitran Nigam Limited

(The views expressed in this article are the personal views of the authors. Figures used are approximate.)

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