Mission Viksit Bharat & Net Zero: What must India do?

The critical role of the power sector both in meeting the energy demand for transforming India into a Viksit Bharat and for a successful journey to Net Zero by 2070 needs to be recognised with greater urgency by policymakers and the state governments. Action has to start right away if we are to address the challenges before us for meeting the demand–supply projections even for the time horizon of 2030. The sector is bound to assume a more pivotal role in meeting the energy demand as electrification of various services is a critical element of our energy transition strategy. The share of electricity in the final energy consumed is slated to grow from around 20 percent to anywhere between 35-40 percent by 2047. The sector will also play a comparatively larger role in the decarbonisation of our energy supply in the medium term as it is on a faster path of reduction of emissions per unit of electricity generated as compared to other segments, like direct fossil fuel consumption in industries and transport. The power sector also holds the promise of enhancing our energy security by substituting the use of imported fossil fuels by renewable energy (RE) in industries and transport segments.

Key challenges on the demand side arise from likely changes in load patterns in a day, climate change-induced uncertainties in the demand pattern in various seasons, and the need to increase the role of energy efficiency coupled with demand response. As we promote the use of electric vehicles (EVs) and electric cooking, we must bear in mind that air conditioning load is already set to grow at a rapid rate. As a result of these changes on the demand side, morning and evening peaks will be far more challenging to meet. We are witnessing an unprecedented change in seasons from the set patterns, which is making the task of maintenance planning of our conventional plants even more difficult. Hydro generation is becoming unpredictable in the face of more abrupt changes in river flows. We are still not prepared adequately for the Demand Side Response required in the scenario when a large share of intermittent renewable energy will be flowing through our grids.

On the supply side, key challenges are going to be: increasing storage and flexible resources for integrating 500 GW of non-fossil fuel-based capacity which will be dominantly intermittent renewables, timely augmenting our transmission networks for evacuating power from RE-rich areas, accelerating capacity additions from hydro and nuclear sources, and finally augmenting our distribution networks in ‘smart’ manner for catering to increasing load, both in rural and urban areas.

What actions are required to address these challenges?

Of foremost importance is the need to mobilise the huge investment required for adding power generation capacities, building transmission lines and augmenting and strengthening the distribution system (not just networks but also for smart metering etc). Going by the National Plans prepared by the Central Electricity Authority (CEA), an investment of more than Rs 50 lakh crores is required for upto the period ending FY2031-32. Obviously, it will require a very large share of private sector investment which can be mobilised only if the sector is seen as viable by investors and lenders. The payment discipline brought in by the implementation of Electricity (Late Payment Surcharge & related matters) Rules needs to be continuously enforced. Moreover, investors will ask for long-term PPAs in view of huge uncertainties arising from falling prices of RE and storage technologies and the resultant likely decline in market prices of electricity in the future. Nevertheless, well-functioning markets that operate within stable rules and regulations would be important for dependable price signals and also for the mitigation of delays in payments through the sale of all available power in the markets. Markets would need to be made ready for transitioning to Market-Based Economic Despatch regime as early as possible.

The next important action area is to promote the deployment of new technologies like grid-scale battery storage, offshore wind and Green Hydrogen in a manner that electricity remains affordable to common households. Such technologies have a strong chance of becoming affordable, just like solar PV, only if policy and regulatory support is extended for their scaling up. But such interventions have costs in the near term which need to be socialised through consumer tariffs. Therefore, a fine balancing is required between long-term objectives and the imperatives of keeping consumer tariffs affordable in the near-to-medium term. The government has taken a number of such measures like the waiver of inter-state transmission charges for RE, single part cost of supply-based tariffs for charging of EVs, waiving off cross-subsidy charge for Green Hydrogen etc. It is essential that such concessions are quickly withdrawn as the cost of new technologies decline and their share in energy supply increases, making the socialisation costs too heavy to bear. The government will also have to spare budgetary resources to provide Generation-Based Incentives or Viability Gap Funding (VGF) to support such technologies in order to keep socialised costs within acceptable limits.

Another related action area is fair sharing of grid integration and support costs of RE. Declining costs of battery storage, as discovered in the recent tender of Gujarat utility, is a heartening development, and there is a renewed enthusiasm around real costs of solar power (after incorporating grid integration costs) going below the coal-based generation costs. We need to carefully assess the prudent costs of other services like, the backing down cost of coal-based stations, socialised costs of transmission and distribution augmentation required for RE absorption, the cost of increased ancillary services in the regime of intermittent RE comprising more than 50 percent in capacity. While we need to promote open access by rationalising various charges to be paid by such consumers, there is a need for caution that we don’t go overboard and end up in reverse cross-subsidisation through increased Annual Revenue Requirement (ARR). I am saying this because the share of new solar capacity for open access supply to Commercial and Industrial (C&I) consumers is increasing rapidly in the overall additions. A commercial open access consumer cannot have a business model of accessing open access solar power at Rs 3 per unit whereas grid integration costs are going to be more than Rs 1.5 per unit in the present scenario. These costs will increase as we reach a stage of adding more flexible resources beyond the backing down capacity of coal-based stations.

Even after the increased share of open access and captive consumption, the role of state-owned power distribution companies (DISCOMs) will continue to be very significant as far as the commercial viability of the sector in the foreseeable future is concerned as the pace of private entry in the distribution business is most likely to be sluggish. Regulating the government-owned utilities with a monopoly regime in licensed areas is a challenge of which there is no clear solution in sight. It also does not appear likely that the state electricity regulators will have greater real autonomy unless we are able to amend the Electricity Act in respect of their selection process. Two actions are required to have the best possible results in the present institutional arrangements. We need regulations for a transparent accounting of all network-related costs at various voltage levels linked to reliability indices so that open access players and merchant sellers are not prejudiced and we are able to ensure adequate timely investments in the distribution networks. Secondly, regulators also need to be more calibrated in disallowing the power purchase costs as this impacts the ability of DISCOMs to invest and maintain the network, which we plan to be functioning as a smart network for large RE integration, increasing fleet of EVs, and crores of solar rooftop installations. Secondly, we need to build a broad-based political consensus on restoring and maintaining the viability of the distribution segment just like the one we saw in the early 1990s which was the foundation of bringing in autonomous regulation by expert institutions and unbundling of State Electricity Boards (SEBs). This is going to be very important as the current political approach is towards giving more and more free electricity. Such a consensus would be a pre-requisite for bringing in more and stronger incentives and disincentives for financial discipline in DISCOMs on the lines of the Revamped Distribution Sector Scheme (RDSS), additional prudential norms and additional borrowing limits for states if they stay on the path of agreed power sector reforms.

Another important action area is revamping the skill sets and capacity building in DISCOMs and regulatory commissions. Presently, the skill sets of the workforce in these organisations are limited to traditional areas, like engineering and finance, whereas a future-ready power sector will need significant capabilities in areas such as IT, AI, markets and economics. In addition to the present schemes focussing on investments, we need a ‘Mission’ approach for providing enough number of hands and minds at cutting-edge level in the new knowledge areas, if we want to have a future-ready sector to achieve both a developed India and meet our Net Zero goal.

The author is a former Union Power Secretary (2021-2023). He has chaired the G20 Energy Transitions Working Group under India’s Presidency.

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.

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