Anish De, Partner, Global Sector Head, Power & Utilities, KPMG; National Head, Energy Natural Resources & Chemicals, KPMG in India
The separation of carriage and content in India’s electricity sector has been a much talked about agenda for a decade. It has been a core feature of several draft amendments of the Electricity Act, 2003. However, of late, it has been put on a backburner, presumably because of lack of political acceptability. With general elections approaching in 2024, it will probably not find currency in the near future. Yet it is more necessary now than ever before, in the face of the changing energy sector landscape wherein electricity flows will become increasingly complex. Managing these will be a major technical challenge in itself, but commercially it would be even more so, and can further debilitate the ever worsening public sector utility finances. In contrast, freedom around the commodity (that is, content) can engender huge innovation, while limiting the adverse effects on utility finances.
Unlike most other countries where sector unbundling and corporatisation have culminated in the separation of carriage (wires) from content (supply), India has preferred to retain a unified distribution and supply structure and has licensed electricity operators accordingly. While expedient in the context of the public sector-dominated operations of the distribution sector, the past decades of experience with sector reforms have pointed towards the limitations of bundled operations in this segment. The chronic and acute inefficiencies that have traditionally ailed the sector have not been addressed, as a consequence of which the entire value chain (including the banking sector, which is precariously exposed to the power sector) is affected. The activities in the value chain culminate with the consumer. The loss-making utilities have tended to be more pliable to political considerations and less concerned with efficiency and consumer welfare.
The traditional logic of bundling of sector operations is no longer valid. Modern day power systems for the most part are no longer natural monopolies. Self-generation by customers is shifting the power equation. The advent of new-age needs such as electric vehicles is unleashing new business models. Except for certain specific network functions, most activities are amenable to competition. In particular, the supply function, which involves the procurement and sale of energy (as opposed to its convergence), is very amenable to competition and choice. Most modern power systems have migrated to this paradigm. As a large modern power system, India needs to walk this path.
The core of the idea is to permit eligible consumers to select their suppliers and thus have better control over the services they receive. The associated benefit would be in the form of the government or its agencies withdrawing from the supply function, which is largely commercial in nature. The distribution business would remain a natural monopoly, and in the Indian context would largely remain in government hands, unless privatised. Even though the model has a strong logical construct and could potentially serve the avowed purposes of sector modernisation, there are several high-level aspects that need consideration. Some of these are enumerated below:
Continuation of state ownership of wires: This has not been done elsewhere in the world where network and supply functions have been unbundled. Would this promote effective competition in supply and provide the consequent benefits?
Who is accountable for electricity theft – the network operator or the supplier? Some of the models proposed aim to transfer these to content providers instead of network owners. That would be expedient, but impractical and counter-productive.
Efficiency/Ease of consumer interface: Should the consumer have a single-point interface with the supplier, or should the consumer be required to interface with the distributor as well as the supplier?
How to handle the separation of carriage and content in the case of private sector licensees/ franchisees? Should they be subjected to the same regime of separation? In principle that should be a yes, in my opinion.
What would be the trajectory of opening up of the sector? Should it be done over a four- to five -year phase (as in the UK, where in the initial four years all consumers up to 100 kW were allowed to switch) for all consumers or faster?
Maintenance of adequate reserve margins on part of the supplier needs stipulation. This is key for consumer protection and 24×7 supply in a competitive regime. This is not followed today by integrated utilities. Perhaps carriage and content separation will bring much greater discipline.
Clear treatment would be required for past financial baggage. The accumulated financial losses are very large in several places, and without financial restructuring and parking elsewhere, in many places such separation and competition would be difficult.
The issues are often not exclusively related to carriage and content separation but come sharply in focus when such separation is envisaged. These must be addressed in any event, and carriage and content separation provides a good opportunity to do so. However, the complexity of issues and the federal nature of India would require dexterous management of the transition.
It is important to shed past baggage and modernise the sector rapidly. Once out of the realm of antiquated systems and practices, the segment can become a magnet for innovation. In such a paradigm, electricity will not be an undifferentiated commodity featuring passive consumers. Consumers will be more discerning, choosing their own rate plans and energy sources (including the green variety that is needed for net zero goals); deciding on when to consume based on visible, real-term price signals; sometimes selling electricity back to the grid from their self-generation and storage facilities; remotely managing consumption, feeding back precious information to system managers and operators – the possibilities are infinite. The collective innovation that society has witnessed in recent years will become only more powerful when active delivering networks such as electricity become the means for efficiency and innovation. All of this is already happening in small measures. It now needs to be unshackled. The key question at this stage is not regarding the objectives of separation, but attaining the end goal of efficiency and customer service through such measures. That makes carriage and content separation an absolute imperative.