“Utility Death Spiral” was a hotly debated topic in the US, following the 2013 report of Edison Electric Institute prediction that the widespread adoption of renewable energy (especially on-site electricity generation) will destroy the traditional utility business model that power companies had been using for all these years.
The “death spiral” for utilities was predicted to occur because the more people opt for captive-generation, the more Discoms will be forced to seek tariff increases on a shrinking customer base… thus driving even more customers to go for Self/ Captive generation.
The prediction, however, turned out to be more of a myth than a reality with the proactive coping strategies adopted by the US utilities.
Unlike the US where the cause of the predicted death spiral was anticipated due to migration of consumers to distributed on-site solar generation, however, in the case of India, the discoms are caught in a “death spiral” due to “imposition of high tariffs” caused due to a combination of power surplus situation, migration of consumers to open access / captive power & mandatory procurement of Renewable Energy power added on to the subsidized agricultural power and power theft.
The perennial gap between revenue requirement and revenue collection started due to government’s policy of providing subsidized power to agriculture & sustained power theft and the difficulty in raising the tariff of non-agricultural consumers to such levels such that the cross-subsidy from the non-agricultural consumers is able to compensate for the subsidized agricultural power and the power theft. Recognising this problem, the regulators passed on this subsidy burden from the ratepayers to the taxpayers in the form of government subsidy. Unfortunately, the subsidy for the power gets the last priority of allocation from the government kitty and most often does not get paid till it becomes a life or death case for the discom.
The losses keep getting accumulated till a breaking point is reached at which point, the central government will step in with amnesty schemes which are given different names. In the earlier regime it went by the name of FRP ( Financial restructuring package ) and in the current regime, it goes by the acronym UDAY ( Ujwal Discom Assurance Yojana). While the structure of the support may keep varying but the fundamental principle is a carrot & stick approach by which the Discoms are pressurized to raise the tariffs. Under this compulsion, the tariffs get bumped by 15%-20% across the board, the discoms get little more oxygen to breath and it is business as usual for next 5-6 years till the accumulated losses of the discoms again touch the Rs 1-2 lakh crore levels.
This boom-bust cycle of the Discoms is perhaps in some ways linked to the 5 year election cycle. The central government perhaps prefers the tariff shock to be passed on to the customer during the first two years of its assuming office so that by the fifth year when the public goes to the polls, this would have faded from the memory of the public and may not impact the electoral outcome.
This strategy may have worked in the past, however, there have been significant changes in the last 15 years which have added new dimensions to the miseries of the discoms. The enactment of Electricity Act 2003, the power sector reforms, unbundling of the vertically integrated state electricity boards, rapid power generation capacity addition by both public & private sector, a significant increase in renewable power plants, development of power exchanges etc.have brought in new variables.
In addition to the traditional factor of free / subsidized agricultural power & power theft, the following three factors have further compounded the burden of the Discoms: a) Power surplus situation b) Open access policy providing freedom to MW category of customers to choose their supplier c) Compulsion on discoms to purchase higher quantum of renewable power (at a comparatively higher cost) to meet the increasing Renewable Power Obligations.
Impact of Power Surplus Situation & Open access policy:
A series of events from 2003 to 2010 have led to Discoms signing up a large number of power purchase agreements both with the private sector and public sector. These long-term PPAs were a mix of projects based on tariff fixed by the regulator and projects thru competitive bidding. All of these PPAs had been structured on a two-part tariff system with a fixed capacity charge and a variable fuel charge. The implication of this tariff structure is that in the event, the contracted discom is not able to absorb the power from the generator, they have to pay the full fixed capacity charge irrespective of the power they offtake and the variable charge will be payable in accordance to the energy drawn.
The power surplus situation has led to low price on the power exchange with the current price at a level of Rs 2.50/KWhr ( US 3.67 cents/KWhr). As against this, the discom tariffs in most states have reached a level of Rs 7/KWhr . The low price of power from the power exchange have made the power exchange power to be more competitive to the discom power in spite of adding the wheeling & cross-subsidy surcharge and the transmission and distribution losses. This has caused a significant number of discom’s high-value consumers to migrate to open access power from the power exchange.
Yet another group of consumers have set up their own renewable generation projects availing of the tax benefits and netting off their consumption against generation.
Also, the investments have gone largely into IT & ITES industries which do not contribute significantly to demand. The manufacturing sector growth has also slowed down causing a reduction in power offtake.
The combined effect of all the above factors is that the actual power demand is significantly lower than the anticipated demand by the Discoms based on which they had contracted long-term PPA with large number of power generators. As a result, the discoms are not in a position to absorb the power what they have contracted for and the power generators have to back down. However, there is an obligation on the part of the discoms to pay the full fixed charge which is leading to an increase in tariff.
Impact of increasing Renewable Power Obligations:
The discoms are also under pressure to source higher quantum of power from renewable energy sources considering employment, energy security and climate change compulsions. The cost of power from renewable energy sources are comparatively higher than the power available either from the exchange or the power at variable cost from contracted power generators. This also puts additional pressure on the discom to raise tariff levels.
All the three factors, leading to a higher tariff, is ultimately imposed on the shrunk customer base which results into an even higher tariff to the remaining customers, which will trigger more migration and cause Discom’s “Death Spiral”.
What is the way out?
The coping strategies that could be adopted by the government / discom are as follows :
If the government desires that the Discoms should come out of the perennial “Death Spiral” that they are caught in, it is imperative that the policymakers adopt a strategy combining the benefits of the new technologies and customizing them to address the unique challenges faced by the Indian power sector.