India@100: The energy access challenge in power sector

Without addressing the issue of discoms’ financial viability on a war footing, the target of delivering affordable, reliable and clean power to consumers to ensure energy access will remain a pipe dream

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India@100: The energy access challenge in power sector

As we celebrate the 75th year of our Independence, India’s power sector has grown significantly in size and crossed several milestones. Power generation capacity has grown 300 times from 1,362 MW in 1947 to 403 GW as of June 2022, with renewables (including hydro) forming 42 percent of the installed capacity. The transmission and distribution network length has significantly increased from around 23,000 circuit kilometres in 1947 to 134 lakh circuit kilometres as of March 2020. One of the most important milestones has been the universal electrification of all households, with the grid reaching the remote corners of the country. There has also been a notable improvement in power supply in recent years, with the average Indian household receiving more than 20 hours of supply. During the same period, power supply in rural areas, particularly in northern India, has significantly improved.

Despite the above-mentioned developments, India needs to do more to achieve goal number 7 of the Sustainable Development Goals (SDGs), ie, ensuring access to affordable, reliable, sustainable and modern energy for all. India’s power sector is grappling with several challenges such as stranded thermal power capacity, low plant load factor (PLF), non-performing assets (NPAs) in the generation sector, an increase in the prices of coal and its inadequate availability. In addition, limited investment in transmission, increasing government dues payable to power distribution companies (discoms) and the debilitating financial viability of discoms are also areas of concern. These issues are expected to compound in the coming decades with a rise in the electricity demand from several sectors of a growing economy. The enhanced demand will have to be met predominantly from renewable energy, which in turn comes with its own challenges.

Therefore, the sector must address the current issues to ensure reliable electricity access to all and prepare for future challenges. Also, the stakeholders’ efforts should align with the national target of developing a financially robust and climate-resilient power sector by 2047.

In this context, various power sector stakeholders should prioritise three things: decarbonisation of the sector with improved integration of renewable energy, transitioning the traditional grid into a smart grid to absorb extensive penetration of distributed energy systems, and having a financially viable distribution sector. Also, while targeting these milestones, consumers’ access to affordable electricity supply and their role in demand-side management should be at the centre stage.

Decarbonisation of power sector

By 2047, generation from coal-based plants is expected to peak, while renewable energy, predominantly wind and solar, would contribute around three-fourths of the electricity generation in India. Currently, renewable energy (without hydro) accounts for around 13 percent of electricity generation. With discovered solar and wind tariffs in the range of Rs 2-3 per unit, a leapfrog in the share of renewable energy in the total generation mix is a reasonable expectation. However, obstacles remain due to the locked investments in coal-fired plants, the intermittent nature of renewable energy, congestion in the transmission network, and the poor financial situation of discoms.

Considering that coal-fired plants would continue to play an essential role in the near future, addressing the challenges mentioned above by 2047 by increasing the penetration of renewables would require effective policy interventions. This would include efforts to improve the existing thermal fleet’s efficiency, phasing out older and inefficient plants and repurposing them for alternative uses such as solar plants or thermal energy storage. The Central Electricity Authority (CEA) has been regularly reviewing older thermal power plants — 25 years or older — for retirement. This is a positive step in the direction of clean energy transition.

Besides these efforts, in the coming years, there are expectations that the cost of storage will also reduce with investment in technology and an improved supply chain of critical minerals. New developments such as hybrid solar-wind systems, offshore wind plants and distributed renewable energy (DRE) would further address the intermittency issue of renewable energy. Policymakers and other stakeholders, including developers, generators and discoms, must continuously keep a tab on each of these developments and create an ecosystem for their swift deployment.

However, enhanced integration of intermittent renewable energy demands a flexible and reliable smart grid that could easily balance the power system by managing variability related to renewable energy sources. The policymakers, therefore, should prioritise the evolution of a traditional and inflexible grid to a smart and flexible one.

RE penetration by 2047

By 2047, India would need 1,125 GW of renewable energy. And pursuing this target through utility-scale systems will be highly land and water-intensive. Therefore, tapping into DRE potential through Rooftop Solar (RTS) deployment and solar-powered products, such as solar pumps, would be central to the country in achieving its clean energy targets. For agricultural consumers, in particular, DRE could be a win-win situation. It would ensure reliable daytime power to farmers and create an additional income source from selling excess energy to discoms. It could also be instrumental in generating local jobs in rural areas.

The union government has already instituted programmes such as Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) to promote the adoption of DRE solutions in agriculture. RTS consumers have also received incentives such as installation subsidies from state and Central governments. At the same time, state electricity regulatory commissions across the country have introduced net and gross metering regulations to complement these initiatives. The Ministry of New and Renewable Energy (MNRE) recently released a policy framework to promote and adopt DRE-based livelihood applications.

However, till now, these initiatives have had limited success due to issues such as high upfront investment costs and regulatory constraints. Realising the technical potential of 210 GW for RTS in urban areas would be critical for clean-energy transition and energy access by 2047. It would also require access to financing, reforms in net metering regulations and improved consumer awareness. Similarly, for PM-KUSUM, steps such as support for innovative financing solutions, streamlining land regulations, discoms aligning scheme targets with their power purchase planning, etc, could support the uptake of the scheme among the farming community.

Off-grid DRE and storage can also play a pivotal and complementary role in easing pressure on discom finances in the coming years

While the steps mentioned above will support the transition to a cleaner generation profile, its uptake will depend on the financial health of state discoms, which remains the most pressing concern at present. The Covid-19 pandemic has further deteriorated discoms’ finances. Without addressing the issue of discoms’ financial viability on a war footing, the target of delivering affordable, reliable and clean power to consumers will remain a pipe dream in the coming decades.

Financially viable discoms

As one of the world’s fastest-growing large economies with increasing electricity demand, India should aim to achieve reliable energy access by 2030 in line with SDGs. Looking at the progress made in household electrification and improving the supply situation, 24×7 quality supply by 2030 seems achievable. As per CEEW’s India Residential Energy Survey (IRES) 2020, rural households in many northern and eastern states receive less than 20 hours of daily electricity supply. To ensure round-the-clock supply, the financial health of discoms has to improve substantially.

Poor cash flows for discoms arise from several operational inefficiencies such as billing inefficiencies and low revenue recovery from specific consumer segments such as rural consumers, including agricultural consumers. Delay in subsidy disbursement from state governments and unpaid dues from its departments also affect discoms’ cash flows negatively. Also, inadequate tariff hikes lead to the build-up of regulatory assets and associated carrying costs. This further creates a vicious cycle wherein investments in the augmentation of distribution infrastructure and maintenance of the existing network suffer and impacts discoms’ ability to supply 24×7 quality power to their consumers. Also, due to their negative cashflows, discoms have to depend on short-term borrowings for their working capital requirements. The cost of these borrowings has a bearing on the electricity tariff.

 

The government has recently launched the Revamped Distribution Sector Scheme (RDSS) to arrest the increasing losses reported by discoms. The scheme plans to install 250 million prepaid smart meters across the country to reduce the Aggregate Technical and Commercial (AT&C) losses to 12-15 percent by 2024-25 and improve the quality, reliability and affordability of power supply. The installation of smart prepaid meters would ensure up-front payment from consumers to discoms for energy consumed, elimination of meter reading and billing-related issues and automatic disconnection and reconnection. These advantages of the smart meters would address the challenge related to delayed or non-recovery of revenue to some extent.

Notwithstanding, the Central and state government have to undertake several other measures to support discoms in their financial revival. These would include measures such as having increased market-based power procurement, ensuring cost-reflective tariffs in line with the National Tariff Policy (2016) and timely disbursement of subsidies from states to discoms. Electricity/Energy departments should also issue no-dues certificates to each state department to avoid arrear build-up, and introduce performance-based incentives for discom staff with an effective monitoring system.

Off-grid DRE and storage can also play a pivotal and complementary role in easing pressure on discom finances in the coming years. It can provide clean energy access to consumers with a low propensity to pay and support discoms particularly in meeting peak demand. This would also help reduce the subsidy burden on the exchequer. Therefore, state governments and discoms can leverage the existing PM-KUSUM scheme to ensure that before the centennial celebrations of our independence, agricultural feeders are segregated and solarised.

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Stakeholders, particularly consumers, will also have an important role to play in addressing discoms’ financial woes.

Consumer participation

To meet India’s growing energy demand cost-effectively and reliably, tapping into demand flexibility as a resource would be crucial. This could be achieved through behind-the-meter interventions such as promoting energy-efficient technology use, implementing time-of-use tariffs and demand response programmes. Such demand-side interventions can help discoms reduce electricity demand, especially during peak hours.

The Centre has taken several initiatives to promote efficient energy use since the enactment of the Energy Conservation Act (2001). These include the Standard and Labelling Programme, demand aggregation initiatives such as Unnat Jyoti by Affordable LEDs for ALL (Ujala), Perform, Achieve and Trade (PAT) scheme for industries, etc. Between 2010 and 2018, India saved 12 percent of additional energy, primarily due to efficiency gains in the industrial sector driven by the PAT scheme. The target to install 250 million smart meters under the RDSS scheme will further support demand-side management.

Besides, with increasing energy demand expected in the next two decades, energy efficiency should be mainstreamed by providing access to innovative financing or business models, scaling the Bureau of Energy Efficiency’s (BEE) Standard and Labelling programme to additional appliances, improving consumer awareness and introducing behavioural nudges to promote star-rated appliances. Also, there should be a trajectory for introducing the Time of Day (ToD) tariff for all consumer categories by 2047 in a phased manner. A ToD tariff will ensure that consumers can respond to the price signals and shift their consumption to non-peak hours.

Inequities in energy access

Electricity tariffs in India are telescopic in nature, and the total cost of electricity supply is often not passed through to the consumers, predominantly domestic and agricultural. The objective is also to ensure affordable electricity for a large section of low-income consumers. Inadequate tariff hikes and flaws in tariff design have had an adverse impact on discoms’ finances and will require tariff rationalisation to support India’s energy transition. However, it should be done keeping in view the concerns of equity and affordability.

Since affordable electricity supply may remain a pressing concern for grid-connected consumers in the coming decades, the Centre and states should come to a consensus on a lifeline tariff to improve energy access in line with the National Electricity Policy (2005). Governments and discoms should strive to improve the targeting of beneficiaries and disbursement of subsidies into their accounts, potentially through a robust and well-tested Direct Benefit Transfer (DBT) mechanism.

As the country celebrates Azadi ka Amrit Mahotsav on the 75th anniversary of our Independence, we must take stock of the current situation to celebrate the milestones achieved and raise ambitions for the future. With an effective policy framework in place, India should be able to celebrate the centennial year of its Independence with universal access to affordable and quality energy for all its citizens.

The author is a programme associate at the Council on Energy, Environment and Water (CEEW), an independent not-for-profit policy research institution.

Disclaimer: This is an Op-ed article. The opinions expressed in this article are the author’s own. PSU Watch does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content within the article or for any damage or loss caused by and in connection to it.

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