Solving Tomorrow’s Challenges

Need to change entire systems

By Dr Rahul Tongia, Senior Fellow, Center for Social and Economic Progress

Climate change will be mankind’s most pressing challenge in the co­ming decades. For India, decarbonisation of the electricity sector is paramount because of the disproportional role of electricity in the economy. Maki­ng this a Just Tran­sition is a policy imperative that will require a combination of innovation, redistribution and new frameworks. However, there are other transformations afoot in the electricity sector that overlap and are equally vast in scope: digitalisation and decentralisation. Many people think of these two as being smart grids and mini grids, respectively, but the changes are more disruptive, implying a move away from command-and-control, centralised planning and cost-plus regulations.

India has achieved almost 100 per cent household electrification, and now the focus is on ensuring quality supply. The need is to have sufficient capacity at the right time and the right place with the right characteristics (predictability, control, ramping, etc.) And, of course, at the right price. It is also worth emphasising that this is not a supply problem, but one where managing demand and efficiency should play a key role. Part of the chan-ges ahead concern market design, which leads to pricing signals and other incentives for stakeholders. The mo­st obvious change relates to adding time-of-day signalling. Whil­e it ultimately must extend to consumers, a starting point would be to add such signalling for wholesale markets and generation.

India has some of the world’s most ambitious renewable energy targets: 450 GW by 2030, compared to about 100 GW today. Leaving aside the financing challenges, we cannot ignore two realities of rising renewable energy capacity. As its penetration in the grid goes up, its marginal value declines, and the marginal cost of integration rises. We have to change entire systems (pricing, contracting, transmission, capacity, etc.) to ma­ke them more nimble and resilient. While the role of storage for time-shifting will soon become inevitable, that is still a few years away. Lower-hanging fruit with respect to storage includes its contributions to ancillary services and avoiding congestion. A little bit of curtailment of renewable energy (throwing it away) would actually be cheaper than full storage.

While technology is an important part of making improvements and changes in the Indian electricity grid, technology does not operate in a vacuum. Determining winners and losers will probably be the most important challenge in India’s energy transition in the coming years. Social welfare redistribution has alwa­ys been a hallmark of energy policy – see the enormous cross-subsidies in electricity retail tariffs. This equilibrium has relied on overpayments by select users (commercial and industrial) to offset underpayments by residential and agricultural consumers. Ultimately, with technology shifts, including rooftop so­lar (viable today) and batteries (approaching competitiveness for some users), if we don’t improve our markets and regulations, such users will simply exit the grid.

Smart meters and smart grids can certainly be used to cut down theft and even improve quality of supply, but beyond simply solving “yesterday’s problems”, we should design th­em for solving tomorrow’s challenges, which include renewables integration, managing electric vehicles (EVs), and empowering consumers with more choices and flexibility. Smart grids are actually a continuum and we have to become smarter steadily. The biggest bottleneck isn’t the price of a smart meter but utility preparedness. For everyone who says “I need more data”, ask, “Are you harnessing the data you already have?”

There are many things we do not know about the future, including the prices of technology solutions, renewable energy and even fossil fuels. A carbon tax would certainly change things. While we cannot make accurate predictions, we should at least recognise and internalise a number of trends. Regardless of the specifics, because of technology and competition trends, we will need to rethink how we segregate fixed and variable costs.

Ultimately, we must enable and embrace the change, instead of resisting it. If we are worried about distributional effects on the poor, we can always devise new instruments to protect them. But if we muddle up pricing and regulation “in the name of the poor”, or we overspecify solutions (such as picking technology winners), we risk greater societal harm. There are many changes ahead, and we have to experiment and learn. We cannot copy solutions that have worked in other countries lock stock and barrel – our heterogeneity, legacy and ambitions are all different. As the saying goes, “the only constant is change”.

 

 

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