From generating capacity to demand, a blueprint for India’s electricity policy
It must prioritise customers by improving the quality of supply. Demand creating investments will improve the viability of the sector, reduce stressed assets, enhance growth, and generate livelihoods
India invested ₹18 trillion in the power sector over 2013-19 as per the Task Force on National Infrastructure Pipeline (NIP). The ambition for the next five years is to invest ₹23 trillion in power and renewable energy.
NIP articulates a vision for investments to improve the quality of life of citizens. The goal for the power sector is affordable and clean energy with a 24x7 supply for all, enabled by reliable transmission and distribution infrastructure.
Reliable supply is also emphasised in the National Electricity Policy (NEP1.0, 2005). It also recognised inadequacies in the distribution network as the reason for unreliable supply.
Over the last 15 years, access has improved, but the quality of power remains poor. The initiatives to measure power quality on a consistent and comparable basis have not succeeded. Directives by the central electricity authority and regulators to report indices such as the Customer Average Interruption Duration Index (CAIDI), the Customer Average Interruption Frequency Index (CAIFI) have been ignored. Customer surveys, a norm in consumer-facing industries, are conspicuous in their absence.
Also Read | Monetise assets, the right way
The ministry of power recently constituted a committee to review the NEP. This is an opportunity to re-examine the priorities, particularly concerning the efficiency of investments and to incorporate scientific cost-benefit criteria for investment analysis to ensure maximum value for money.
Our analysis reveals that it is time to shift gears to prioritise the customer and the creation of demand. A considerable surplus exists, given the peak demand of 185 GW relative to the installed capacity of 383 GW. Improving the quality of supply can be a key driver.
India’s generation capacity expanded 300% since NEP 1.0, from 124 GW in fiscal year (FY) 2006 to over 383 GW by FY 2021, growing at an 8% compound annual growth rate (CAGR). Over the same duration, the demand grew at less than 5%. Current marginal deficits (0.1%) do not reflect the lack of supply. Reduction in plant load factors (PLFs) from over 77% in FY 2010, to approximately 53% in FY 2021, is proof.
In addition to the utility-owned capacity of 383GW, an additional 75 GW of grid-connected captive capacity is owned by large commercial and industrial (C&I) customers. This does not include medium-sized generators, owned by C&I as backup, and small generators and inverters owned by individual homes. Limited data is available, but one report estimates the medium-sized C&I market, on a conservative basis, to be 15GW annually. No data is available for small generators, inverters and uninterruptible power supply (UPS).
Cumulatively, the total investments in capacity, primary and backup may be ₹25-50 trillion, considering an average investment of ₹5 crore/MW. With declining PLFs, low-design capacity utilisation factor (CUF) of renewable generators and intermittently operated backup capacity, the capital-output ratio of investments is low and falling. Unreliable, underinvested, and under-maintained distribution networks are the primary reason.
Underutilised investments stress finances by increasing the power procurement cost, which constitutes 80% of a typical distribution company (discom)’s cost structure. Power Finance Corporation (PFC)’s Performance of State Utilities report reveals that aggregate technical and commercial (ATC) losses reduced from 23.5% to 22.0% between FY 2017 and FY 2019, but the financial losses increased 50%, from ₹0.4 trillion to ₹0.6 trillion, over the same duration.
Given the socio-political considerations in tariff setting, rapidly increasing power purchase costs worsen Discom finances. In the long run, low utilisation creates non-performing assets, increases risk aversion and raises the cost of capital. Parliament’s Standing Committee on Energy indicates that stressed generation capacity exceeds 20 GW, with investments over ₹1 trillion.
Therefore, a key policy priority should be to enhance the utilisation of assets. Distribution improvement and reform is the place to start. Network upgrades will create incremental demand through various routes.
First, by the electrification of sectors relying on other sources. The Indian Railways embarked early on electrification and has made progress, but electric vehicles and cooking are unrealised opportunities. Electrification will also enable a reduction in the hydrocarbon import bill.
Second, by serving the existing demand currently met by backup capacity. Improving the network will decongest demand. Network upgrades require significant investments, but they also reduce losses. The existence of a large diesel Genset market is evidence of the willingness to pay, provided supply is reliable. Therefore, investment in distribution will payback fast and reduce the demand for backup, as evidenced by the case of Delhi.
Third, by creating incremental demand through incentivising consumption. All capital-intensive industries go through cyclical demand-supply mismatches and price discounts are common when over-supplied. Coupled with improved quality, reforming the regulatory framework to enable Discoms to determine the price based on demand-supply and customer credit-worthiness will enhance market orientation and improve finances.
New demand from productive sectors will support growth and create livelihoods, a much-needed boost from the Covid-19-induced slowdown.
Investments in the generation sector will still be required when the demand catches up with supply.
However, such investments should again be prioritised based on cost-benefit analysis, with the allocation of full costs — financial and economic. Renewables may still be on the top, even after accounting for the transmission charges, when environmental benefits are accounted for. Investments in coal may also be required, but more likely in renovation, maintenance, emission control and in making them more flexible.
NEP 2.0 needs to prioritise customers by improving the quality of supply. This requires an objective analysis to prioritise investments. Demand creating investments such as distribution network upgrades will improve the viability of the sector, reduce stressed assets, enhance growth, and generate livelihoods.
Gaurav Bhatiani is director, Energy & Environment, Research Triangle Institute (India). Rakesh Kacker retired as secretary to the Government of India. He has worked extensively in the energy sector. Somit Dasgupta is senior visiting fellow, ICRIER and former member, CEA
The views expressed are personal