Reforms Imperative to Address DISCOM Woes NITI Aayog, RMI Report

DISCOM privatization is seen as a crucial way out of their financial mess. NITI Aayog, in collaboration with Rocky Mountain Institute (RMI), has released a report reviewing the reform efforts in the Indian power distribution sector. The report analyzes the learnings and best practices from domestic and global experience to provide state governments considering further reforms to put their power distribution sector on the track to efficiency and profitability.

The report titled ‘Turning Around the Power Distribution Sector’ examines many vital reforms such as the distribution companies (DISCOMs) restructuring, regulatory reforms, operational reforms, renewable energy integration, and managerial reforms.

Amitabh Kant, CEO, NITI Aayog, said, “the report aims to document the best practices and lessons from across India, and where required, across the world. I am certain the report will be an extremely useful resource for policy-makers.”

The report describes a set of pathways to guide DISCOMs on their path forward to unlock enhanced financial and operational performance while increasing their adoption of clean energy technologies.

 The Challenge

The past decade witnessed a remarkable evolution in the power sector. Almost the entire nation got connected to the grid, power deficiency plummeted, and a fourth of the total power capacity installed was renewable energy. However, the power sector still faces serious challenges. According to the report, most DISCOMs incur losses every year.

DISCOMs cannot pay for generators on time due to these accumulated losses. The loss also plays a hurdle to bring in investments necessary to ensure uninterrupted high-quality power and infrastructure development imperative for renewables transition. DISCOMs owed ₹121.91 billion (~$1.63 billion) to renewable energy generators (excluding disputed amounts) in overdue payment at the end of June 2021.

Many efforts have been made to turn the tide in the distribution sector, such as the vertical splitting of state electricity boards into separate entities for generation, transmission, and distribution.

The Electricity Act (EA), 2003, brought about significant changes in the power sector, including delicensing of generation, open access in distribution, and independent regulators at the state and central levels.

Central and state governments launched an array of schemes like Ujjwal DISCOM Assurance Yojana (UDAY), Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), and Integrated Power Development Scheme (IPDS) to upgrade the distribution infrastructure and help the DISCOMs improve their finances.

Despite efforts, a sustainable turnaround in terms of both finances and operations of DISCOMs remains a challenge.

The report suggests that the answer to addressing the challenges faced by the Indian power sector lies in significant policy, organizational, managerial, and technological changes.

Discom Restructuring

The three different functions of generation, transmission, and distribution have now been separated. While there might be vertical unbundling of the power sector on the papers, the ground reality might be different. In states such as Gujarat, the unbundling was an essential step towards improving the performance of DISCOMs.

Most DISCOMs are state-owned, and private distribution licensees serve only about 10% of India’s population. For state-owned utilities to succeed and to ensure a separation between utility and state, good corporate governance practices, including the use of independent directors, are imperative.

Higher private participation in distribution holds out the possibility of greater efficiency. Odisha and Bhiwandi in Maharashtra, where higher private participation took place, saw rapid improvements in metering, billing, and collection.

The Aggregate Technical and Commercial (AT&C) losses in Delhi have come down from about 55% in 2002 to about 9% in 2019 after private licensees took over power distribution.

Delicensing distribution can introduce competition and enable retail choice for customers, as DISCOMs have a monopoly in their area of functioning. However, careful market design should be in place as this reform can be challenging to achieve. DISCOM privatization is seen as a crucial way out of their financial mess.

A public-private partnership (PPP) model can be instrumental in loss-making areas, where the commercial operation might not be feasible without government support in the form of viability gap funding (VGF).

Regulatory Reforms

The state governments should promote autonomy, competence, and transparency of the State Electricity Regulatory Commission (SERC). Tariffs should be regularly revised to ensure that they fairly reflect the actual fixed and variable costs. No new regulatory assets should be created. The existing regulatory assets should be cleared according to a defined schedule over the next three to five years through appropriate tariff changes.

Creating regional electricity regulatory commissions with the participation of the central government can shield regulatory functions from political pressures.

Direct benefit transfer (DBT) can help improve efficiency and reduce leakages for consumers who receive subsidized electricity. It has recently been implemented in parts of Madhya Pradesh. The respective state government should prescribe the details of the DBT program. It could be structured so that consumers do not stand to lose their current benefits but are paid more for efficient electricity use, similar to the ‘Paani Bachao Paise Kamao’ scheme in Punjab. Andhra Pradesh also has decided to introduce DBT on the subsidy extended as free electricity to farmers.

Operational Reforms

The overall AT&C loss in India is as high as 24.54%. Many DISCOMs need to improve their billing by shifting to prepaid or smart meters while being conscious of cybersecurity threats. Prepaid metering can help reduce thefts and increase collection, as in the case of Manipur. Mercom had earlier reported about the importance and the need for installing smart meters as a first step towards DISCOM reforms.

State DISCOMs should use revamped central government reform scheme announced in Budget 2021 to significantly reduce their technical losses through investment in improving their grid.

DISCOMs can significantly decrease their power procurement costs by encouraging the use of solar pumps for agriculture, as the subsidized and sometimes free electricity for agriculture can lead to leakages and high losses for DISCOMs.

States like Rajasthan, Andhra Pradesh, Gujarat, Karnataka, and Maharashtra with large agricultural consumer bases have reduced leakages by separating feeders for agricultural use from non-agricultural use.

Dynamic tariffs, enabled by advanced metering and a smart grid, can reduce the DISCOMs power purchase costs and help manage peak loads.

DISCOMs can also reduce the cost of power by procuring cheaper power from the exchanges whenever the price on the exchange is lower than the variable cost of the PPA. The real-time electricity market traded its highest ever monthly volume of 1.73 BU at an average monthly price of ₹3.02 (~$0.041)/kW at the IEX in June 2021. The trade witnessed a 235% year-over-year growth. The energy exchanges serve as a critical power procurement platform for DISCOMs to support their demand-supply variations dynamically, even at an hour’s notice.

DISCOMs have locked themselves into long-term, expensive power purchase agreements (PPAs). Where feasible, DISCOMs can exit such expensive and long-term PPAs. The Ministry of Power (MoP) has recently provided an option for DISCOMs to continue or exit from PPAs for projects that have completed 25 years of operation or the tenure specified in the PPA with the central generating stations.

Renewable Energy Integration

DISCOMs may need to deploy large-scale energy storage like battery systems or pumped hydro storage systems to bolster the firmness of renewable energy, reduce power procurement costs, and handle a variety of power sources. DISCOMs also need to develop better renewable energy forecasting capabilities to reduce deviation costs and the need for real-time balancing.

Strict implementation of the renewable purchase obligation (RPO) mandate is vital to ensure a better distribution of the excess cost of absorbing renewable energy.

DISCOMs should be fairly compensated for the additional expenses they may incur to integrate rooftop solar power generation. Further, tariffs for rooftop solar should be set so that all consumers and producers face fair price signals as relevant to their state. Off-grid solar plants should receive greater policy encouragement, as they can be cheaper and simpler than grid-connected solar systems.

Mini-grids can provide more predictable power in remote and sparsely populated areas and can provide greater resilience to critical infrastructure in these areas. A PPP model can be explored in such remote areas, with the government providing viability gap funding in return for the concessional supply of power at a specified rate while meeting particular service quality targets.

Managerial Reforms

Easily accessible call centers, convenient bill payment facilities, and accurate billing can help reduce customer dissatisfaction and increase revenue.

Performance incentives can help align DISCOM employees to the interests of the organization. Zones or circles in DISCOMs could be treated as profit centers, with employees being given appropriate freedom as well as responsibilities.

The operation and management of the power distribution business are complex activities that require efficient training and capacity building. They require expertise in various fields: engineering, finance, billing and collection, HR, administration, among others.

The reports suggest that these reforms will become even more critical as DISCOMs move toward grid-modernization and increase their clean energy portfolios.

In conclusion, the report notes that one key lesson from the history of the power sector in India is that the country is vast and diverse for a one-size-fits-all approach. A flexible and home-grown approach to reform supported by state and central political will that allows for ‘learning by doing’ will be instrumental in determining the success of reforms.

Recently, NITI Aayog and RMI had released their report ‘Mobilising Electric Vehicle Financing in India,’ the report assessed that the market size of financing of EVs would be $50 billion (₹3.7 trillion) in 2030—about 80% of India’s retail vehicle finance industry’s current size worth $60 billion (₹4.5 trillion) today.