The COVID pandemic and the resulting lockdown was an ongoing economic and health crisis.
It is valid for the energy market, as though every household has "power on."
Consider the figures — there were 2.9 billion units of power demand across the country on April 30th 2020. Last year, it was 3.9 billion units on the same day. This reduction in demand is entirely from the relatively higher-paying commercial and industrial sectors. Even at a conservative ₹5 per kWh, this amounts to a revenue loss of ₹500 crores per day for Discoms.
Discoms remain with the service sectors that are subsidized (poor households and agriculture), while the sector from which the subsidies are recovered has vanished. This scenario would make the already fragile condition of Discom finance significantly worse. It will also have a ripple effect on power generator finances.
The crisis will further compound the many problems faced by the power sector even before COVID. The most important of these are financial sustainability and payment reliability. It would be easy to kick the can down the road in the light of the current crisis, but there is a real opportunity to take a step back to address these problems, especially at a time when energy demand is low and is likely to stay that way for at least a few months, if not longer.
Subsidy issue
First, with regard to 'Make in India,' there is an opportunity to bring fresh, COVID-influenced industrial investment from Korea and Japan, which is diversifying away from China. Despite other regulatory issues, industrial tariffs must become competitive from the outset: electricity prices for the Indian industry are among the highest in the world. Thailand encourages its manufacturing industry to work through the night by offering vastly discounted power.
We know that fuel oil prices in India have been totally out of control, and refineries have even been upgraded to pay for low sulfur fuel, so a tariff change for fossil fuels is eminently possible, even politically. The cross-subsidy scheme of India has uneven impacts on the competitiveness of sectors; industrial power tariffs need to be competitively priced to be specifically targeted at manufacturing. In order for this to happen, agricultural tariffs need to be dealt with squarely. The political consensus appears to be shifting towards a DBT grant similar to that of PM-KISAN and freeing up all tariffs thereafter, with no scope for unfunded subsidies.
Renewable power
Second, as India continues to integrate renewable energy into the grid, a market-based automatic mechanism for the integration of infirm renewable energy into the grid is needed. All countries, like India, are struggling with this. The nine-minute light-off event of 4 April demonstrated the technical capacity to manage grid flexibility in at least one direction. But one must also remember that this was a planned event — the grids had time to slow down the supply in preparation and reduce the damage caused by a sudden shock.
With renewable energy, this luxury is not available — weather patterns change and forecasting will never be 100 % accurate. The management of the nine-minute event has reassured us that the Indian grid is robust, which means that it is also strong enough to integrate more renewable energy — and this is timely given the growth forecasts for renewables.
If we are able to design a market that competitively discovers costs and imposes penalties on the dispatch of renewable energy across a nation-wide grid, the 'must-run' status of renewable energy will be achieved without a regulatory push. Additional power spikes associated with 175GW of renewable energy can be built with a boost to battery storage availability in each grid — estimated at 2.5 per cent for each MW of renewable energy installed. The Central Electricity Authority has extensively investigated this issue and concluded that, with minimal downturns, the expected increase in renewable energy in the future can be fully expended.
Coal plants
Third, what to do with idle, old, inefficient coal plants. With a reduction in energy demand across the country, the output from coal and lignite plants has been adjusted downwards. This is a good time to recognize that there has been a steady decline in fossil fuel generation in the last 10 years — the plant load factor for 2019-20 was 56%, down from 78% a decade ago.
At the same time, many of these plants had to install flue gas de-sulfurization (FGD) systems, but the commitment to retrofit 440 units of 166.5GW by December 2022 is far behind schedule. As an example, only two out of 33 plants in the polluted NCR have met their FGD targets, and this delay can no longer be allowed given our renewed public health concerns.
Unless a replacement program is devised, utilities will continue to lose money through locked-in fixed-payment contracts. Rather than having low-performance, old, and polluting thermal plants across the board, some of these old units could be encouraged to shut down on the basis of generation costs, the remaining plant life, and the economics of installing pollution control equipment.
If the cost of installing FGD at existing efficiencies is higher than the cost of incoming new renewables, it would be a good time to rethink the future life of these plants. This will increase the PLFs of larger, newer, more efficient plants, including those of NTPC, and will also help to mitigate the country's ongoing air pollution problems.
Financial health
And, finally, all of this requires a solution to the perennial and oldest issue of the financial health of the Discoms, not just a lifeline. The government recently announced a $90,000-crore "loan" to Discoms in order to clear the generator charges. While clearing due to generators is a welcome step, it is not enough to have mere riders attached to such loans. Unless this opportunity is used to create real reform, it will be just another colossally expensive step that simply shifts problems to other entities. It will also be a short-term measure, and fees will begin to build up again almost immediately.
The proposed Electricity Amendment Bill, 2020, is an ambitious step in the right direction — moving towards cost-reflective tariffs, eliminating subsidies, and strengthening the sanctity of contracts through enhanced enforcement and security of payment to generators. Each State may be asked to approve the legislation with its variant, which could become a condition for receiving assistance from the centre in this time of crisis.
However, the proposed bill could have gone further to introduce the radical reforms needed — mostly in the distribution sector. Many of the reforms proposed earlier — carrying and content separation, more effective Renewable Purchase Obligations, and default open access to renewable energy — were either dropped or watered down in the current draft. A bold reform move would be the complete abolition of cross-subsidy at a fixed future date, the full substitution of agricultural power for cheaper sources such as solar energy, installation of smart meters, and a requirement to comply with payment guarantee considerations that are more reliable than the current 6-9 month letters of credit on offer.
It is said that India is only reforming when there is a crisis. We've got a monster of a crisis now, and not to use this crisis for meaningful reform would be a waste of opportunity.
