Urgency of Unbundling: Carriage and content separation in electricity is imperative

Carriage and content separation in electricity is imperative

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The traditional logic of bundling of sector operations is no longer valid.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.