Sanjay Banga, President, T&D, Tata Power
With countries across the world setting ambitious targets to combat climate change, the global commitment to achieving net zero emissions is steadfast. Central to these efforts is the energy transition, a key pillar in reducing carbon footprints. From renewable energy adoption to innovative technologies, nations are racing to meet their respective goals. With ambitious targets in sight, India is emerging as a key player in the global energy transition. The union budget, announced in July 2024, has taken cognisance of the global commitment to the transition and highlighted energy security as one of its nine key areas.
Even though India is the third-largest electricity producer globally, its per capita power consumption is only a third of the global average, and a mere 11 per cent of that in the US. India, while on a dynamic path of progress, faces unique challenges with respect to its per capita consumption compared to other developing nations such as Brazil, South Africa and Mexico. With rising demand, strengthening its power infrastructure to meet future needs is a pressing necessity.
Over the past decade, India’s power demand has surged significantly, driven by economic growth, heatwaves and industrial expansion. As this trend continues, generation capacity has also seen a notable increase, rising from 160 GW in 2006 to 430 GW currently, with expectations of even more rapid growth ahead. In May 2024, as heatwave conditions gripped several parts of the country and temperatures soared past 50 °C in some regions, power demand hit a record 250 GW – 3 per cent higher than the peak demand in the previous financial year (243 GW). With ongoing urbanisation, electric mobility and manufacturing-led growth, this demand is projected to reach 277 GW by 2026-27, with renewable energy set to play a key role in meeting these future needs.
This growing demand and the clean energy integration cannot be fulfilled unless the critical cog in the overall power value chain – the discoms – are overhauled. This is because the discoms, which are closest to the final consumers in terms of revenue collection, are currently not financially secure. They grapple with multiple woes such as fiscal mismanagement and lack of capital expenditure. The pillars of energy security, namely, availability, accessibility and affordability, are not maintained by the state-managed utilities. Power tariffs for the industry are often unusually high, and loss during transmission and distribution is four times the standards of the developed world. Against this backdrop, it is crucial to strengthen the financial state of the discoms in order to become energy secure and ensure affordable and reliable power for the nation.
The private sector promise
The annual discom ratings, announced in March 2024 by the Ministry of Power, depict a unique trend. Among discoms with A+ rating, 50 per cent are run by private sector players. As one travels down the rating table, state utilities dominate. This offers the conclusion that private players in power distribution tend to run a tighter and more efficient ship.
The consistently high performance of private discoms and private sector engagement with different business models have presented a promising solution. However, outright privatisation comes with its own set of challenges, given that the electricity tariff is often made a part of political promises and manifestos.
The promise of free or cheap electricity has proliferated as a way to woo the masses. While there could be many challenges to adopting private sector partnership, political acceptability and employee acceptance of new management are hurdles for policymakers at the state level with respect to taking the discom reform process forward, despite a push from the central government.
According to the ratings, many state-run utilities failed to meet distribution loss targets, and several discoms were awarded low grades, indicating poor financial stability. The absolute cash gap has increased significantly, and this is expected to worsen with an 8 per cent demand growth unless efficient measures are taken.
The middle path of the public-private partnership (PPP) model has been successful in Delhi and Odisha. It provides opportunities for states that have not yet made significant, enduring improvements to their state-owned utilities.
Prior to privatisation, Delhi’s losses stood at a staggering 53 per cent, compared to the national average of 32.5 per cent. Today, Delhi has not only minimised its Aggregate Technical & Commercial losses to 6 per cent – less than half of the national average – but has also become a model for developing countries. This has resulted in significant savings for state government exchequers. These savings have not only been used for public development activities, but have also been passed on to consumers as subsidies.
Similarly, Odisha has also experienced a remarkable transformation thanks to privatisation, and the introduction of advanced technologies and commercial best practices. The transformation has been embraced by the people of the state, who have witnessed a drastic change in supply and management. In the four years since acquisition, the Tata Power-led Odisha discoms have generated over 53,000 jobs, supported over 1,700 local contractors and issued over 1 million new connections, becoming a testament to the region’s growth story.
The existing PPP models of Delhi and Odisha provide insights into how privatisation can help transform the state of discoms. In both models, measures were taken to avoid tariff shock in the initial years, and the focus was on improving operational performance. These models resulted in reduced tariffs, and improved reliability and performance.
Odisha partnership playbook
The first phase of reforms in Odisha, in 1998, faced challenges due to incorrect baseline data and the lack of initial transition support from the government. Learning from this failure, the state should provide non-tariff subsidies to loss-making discoms who are adopting the PPP model, for support during the transition. This approach could help more ailing discoms to seamlessly adopt the privatisation route.
The other challenge in power sector reform lies in ensuring a smooth transition for discom employees to new companies. This can be overcome through wide-scale learning and development initiatives, technological upskilling of employees, sharing organisational cultures, etc. This was done by Tata Power, ensuring an effective change management process in Odisha, covering over 12,000 employees of erstwhile discoms catering to over 4.7 crore customers.
States such as Uttar Pradesh, Rajasthan and Maharashtra, which have been facing operational as well as service-related challenges for their extensive customer bases, should consider the PPP model adopted by Odisha.
Need all hands on deck to drive the PPP model to success
The success of PPPs in the power sector depends on a unified effort by all stakeholders. This would include government bodies, regulatory commissions, employees and private investors. The need is to find a model where all stakeholders can collaborate to create value for customers. It is key for state governments to continue to inject capital to help stabilise tariffs in the early stages and provide administrative support to ensure efficient operations.
Simultaneously, central government-led agencies, which have so far refrained from providing financial support to states where private discoms operate, should reconsider this policy. They could explore avenues to support private companies in the initial stages of transition, such as infrastructure upgrades, subsidies for renewable energy integration or grants to offset initial operational costs. This could help ensure a smooth transition for all involved.
Regulatory commissions must adapt their approach to evaluating the operational expenses of discoms. Instead of relying solely on historical data, they should consider the initial increased expenditures borne by private operators to introduce modern technology and improve management practices. A prudent assessment of this kind would enable discoms to demonstrate operational efficiencies and cost savings over time, justifying the initial investments made.
The resilience of states such as Odisha, which embraced the PPP model despite past failures, illustrates the model’s potential. All states where discoms have been rated low and are facing financial challenges must evaluate their capabilities to perform better. They should learn from successful PPP models to engage the private sector in discom reform.