New Delhi: A massivepowercut in the maximum city, known for reliable power, is indicative of a wider malaise inpower distribution. An enquiry has been ordered by the Chief Minister;CEAwill also send a team to Mumbai. But the causes are well known. State owned DISCOMs deliver low quality of supply, may not be always interested in customer satisfaction, and lose money on every unit supplied. COVID-related stress is infecting even the best, creating operational challenges and deteriorating performance standards. Distribution therefore requires a conceptual shift towards a more decentralized, manageable, and robust business model.
In 1995, when the Orissa Electricity Reform Act was formulated, it flagged privatisation as a key component for a service-oriented business, regulated by competition in the market and light-touch regulation. However, the privatization experience has been mixed, and progress slow.
Twenty-five years on, there is renewed hope for privatisation. In April 2020, the Finance Minister announced, as a part of the “Atmanirbhar” COVID package, that the government is keen on divestment and private participation in strategic sectors such as energy. This is a welcome development. Learning from experience, can we get it right this time? The Ministry of Power recently prepared and circulated a set of Standard Bidding Documents for the privatization process.
We however suggest a more nuanced approach i.e. adoption of creeping privatisation, or taking multiple small steps and involving multiple stakeholders, based on the local context. This is very different from the traditional winner-takes-all type approach of big-bang divestment. Such an approach enables minimum disruption and, more importantly, enables local, ground-up solutions, with active participation of stakeholders.
Delicensing in 1991, followed by reforms in the Electricity Act 2003 led to half the generation capacity to be privately owned within three decades, without any big-bang privatisation. Delicensing and mechanism of autonomous regulation, via the regulatory commissions at the centre and in the states, provided the backstop for financial closure of private projects. Capacity addition during the past decade (210 GW) surpassed cumulative addition during the previous six decades (160 GW).
We need to lay the ground for a similar transformation in distribution. International experience suggests that distribution companies in India may be too big. For example, there are over 3000 distribution utilities in Unites States. Smaller ones (municipal) serve 2,000 customers (median) and the larger one (investor-owned) serve about 400,000 customers each. Network is a scale business and India’s population is four times that of the US. Nevertheless, the 70-odd distribution companies are too few and far. Their large size, customer base, and heterogeneity of terrain lead to inefficiencies, slow decision-making, and poor customer service. It is hardly surprising that employees disengage, and customers have low willingness to pay.
Our research suggests that the optimum size for Indian distribution companies is about 2.5 million customers. This corresponds to population of an average district in India, suggesting a strong case to resize distribution. Doing so will take management and decision-making closer to the customers, facilitate competition, and provide more granular data for regulators to benchmark performance.
Private sector distribution utilities have been successful in delivering better quality of power supply and customer service in relatively high-income urban settings with concentrated and relatively heterogeneous load. Smaller distribution entities will create similar heterogeneity, enhance ownership and engagement, and bring localization and continuity to their management. Furthermore, they will be easily approachable and accountable to customers.
Three support mechanisms will be critical for encouraging “creeping privatisation” of distribution utilities.
The first is availability of low-cost transition finance to absorb subsidies and losses till the business transforms. Transition finance on easy terms is also critical to liquidate the accumulated arrears of cost increase that are approved by the regulatory commissions but not passed through to tariff. Fiscal support for niche privatisation of distribution is good economics because of the multiplier effects through the development of new, local, utility service entrepreneurs.
The second mechanism is flexibility to purchase power directly from the market. This will require a change in the market structure, along the lines proposed by the CERC Staff paper in 2018 1 . Such a change will create efficiency for the entire country by dispatching least cost generation, leading to cost reduction for customers. One goodwill mechanism to incentivize states to move in this direction is to provide a transition alternative such as rationalizing the cost of supply from legacy PPAs, particularly those awarded on negotiated basis such as NTPC.
The third one is the flexibility for distribution utilities to evolve their own commercial norms within broad regulatory ceilings, i.e., tariffs, conditions of supply, and ability to offer differentiated products at varying price points, based on customer needs. Such flexibility is critical as consumers evolve to prosumers, enabled by technologies such as net metering, distributed generation, demand response, electric vehicles, and battery storage in distribution system operations. This will
incentivise optimum utilization of resources, considering customers’ preferences and willingness to pay.
Privatizing distribution remains the preferred policy choice. Starting with Union territories, owned by the Central Government, will create examples, templates and the moral authority to demand co-operation from states. However, a disaggregated, flexible and incentive-based approach is essential for the success of distribution reform. We have an opportunity to think differently; to transform distribution businesses into demand-driven organizations, owned and operated by local stakeholders. Local producers or wholesalers of electrical equipment or consumer durables could be the electricity services providers of tomorrow, creating “good jobs” and boosting local opportunities for medium and small-scale businesses.
[This piece was authored by Gaurav Bhatiani, Director, Energy & Environment, RTI International India and Sanjeev Ahluwalia, Advisor, Observer Research Foundation]
[DISCLAIMER: The views expressed are solely of the author and ETEnergyworld.com does not necessarily subscribe to it. ETEnergyworld.com shall not be responsible for any damage caused to any person/organisation directly or indirectly]