Indian Discoms in a “DEATH SPIRAL”

“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 :

• Increase the customer base: There are two ways of doing this. One would be to make migration to open access or self-generation unattractive so that there is no incentive to migrate & second would be – attract new customers to absorb the surplus power.
• The only way to make migration unattractive is to maintain the tariff at such a level that it is competitive to the alternate power. To achieve this, one has to address the various factors causing the tariff increase.
• Power surplus situation: The main power surplus occurs because of nighttime demand being much lower compared to daytime & evening demand.  This is best addressed by the development of Electric Vehicles whereby the batteries can be charged in the night & also during low demand period. This will also increase the customer base and lead to tariff reduction.
• It may also be prudent that instead of developing only coal projects as base load for “Round the clock” power need, we also look at developing a solution for meeting the power demand only for 16 hour period rather than “Round the Clock” power.  The ideal technology for this is the solar thermal technology with thermal storage.  PSUs like NTPC, NHPC, Coal India, IOC, ONGC etc who are all contemplating setting up large solar park using solar PV as per the diktat of the Government are better placed to develop solar thermal power project with thermal storage and leave the PV projects to be developed in a decentralized manner by private / cooperative developers. This is the only cost-effective dispatchable renewable power solution at present.
• The major issue which has been perpetually crippling the power sector is the agricultural subsidy.  The main problem with agricultural subsidy is the absence of metering due to which it is difficult to assess the exact consumption for agriculture vis-à-vis theft losses since both these are arrived at indirectly.  The fact that the agricultural consumers are viewed as unremunerative, the power is supplied to them for a limited period,  mainly to meet the irrigation needs.   With the cost of solar PV projects attaining grid parity, the government may consider setting up at least 20% of the planned 100,000 MW of solar in a distributed manner in each village with grid connectivity, which ideally suits the distributed solar energy. The solar developers may be asked to set up 1MW – 10 MW ( depending on whether the village has a 11 KV or 33 KV line connection )  on a feed-in-tariff basis and provide 10%  free power to the village on whose land, the plant is set up.  In some ways, this is similar in concept to the royalty payment being given by Hydro projects or royalty given to coal-bearing states.  In case the village is not able to consume the 10% power, they may be compensated monetarily or they may invite commercial establishments to relocate by offering them lower tariff compared to the tariff they pay in their earlier location.  The same concept may be extended to wind projects also. This will provide a direct subsidy to the villages and can reduce the cross-subsidy burden of the non-agricultural consumers to that extent. This will also benefit the villages which do not have much agricultural land since they will attract more solar projects.
• It is understood that Dhundi Saur Urja Utpadak Sahakari Mandali, a newly-formed solar pump cooperative in Kheda district, holds the distinction of being the world’s “first solar irrigation cooperative”  was formed in mid-February by bringing together six vegetable farmers in Dhundi.  Each farmer installed a solar irrigation pump in their fields by contributing a partial amount, with International Water Management Institute (IWMI) pitching in the rest. The solar pumps were connected to the power grid of Madhya Gujarat Vij Company Limited (MGVCL), and a 25-year power purchase agreement was signed recently allowing the farmers to sell back the surplus energy at a rate of Rs 4.63 per kWh equivalent of solar energy. Within two months the farmers had sold 5000 KWhr of energy to discom.
• The above example clearly establishes the beneficial concept of setting up the solar projects in a distributed approach rather than large solar parks.

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.