Power or electricity is very essential constituent of infrastructure affecting economic growth and welfare of the country. India is the 5th largest producer of electricity in the world. At an electricity-GDP elasticity ratio of 0.8 <for 1% increase in GDP, 0.8% increase in electricity generation required>, electricity will continue to remain a key input for India’s economic growth.

Uninterrupted, reliable power at reasonable cost is essential for the success of make in India which in turn is critical for the transformation of industrial sector which would provide jobs to burgeoning young population entering the labour force every month <1m new entrants to labour force every month>.

High tariffs and erratic supply for industry have led to a slow but steady decline in the growth of industrial electricity purchases from utilities and a gradual transition towards captive generation often using diesel gen sets which is more expensive as also more damaging to the environment.

Status of diesel gensets in India-

• 47% of firms report using a diesel generator
• Total capacity of the diesel generators (DG) in the country may be as high as 72 GW and growing at the rate of 5 GW per year
• DG capacity for industrial loads greater than 1 MW is 14 GW
• A substantial portion of the rest (58 GW) may be contributed by micro and small industries, with load capacities of less than 1 MW

Effect of captive power generation using diesel gen sets

• This particularly affects SMEs as they are unable to shift to captive power generation and when they do, they are unable to absorb the higher costs as their margins are generally very low.
•  Agro based and other industries are not able to develop in peri urban or rural areas and rural population either remain stuck in unremunerative agriculture or migrates to urban areas in search of jobs (distress migration)
• It affects competitiveness of our industry and our exports suffer
• Pollution, environmental degradation, climate change, global warming

What are the other issues in India’s power sector?

A- Complexity of tariff schedules

• There are separate tariffs for poultry farms, pisciculture, wetland farms (above and below a certain size), mushroom and rabbit farms, etc <complexity of tariff structure>
• It prevents economic actors from responding sufficiently to price signals due to the high cost of processing the price information <if it’s so complex, our mind can not take economically rational decisions>

Suggestion – Simplification of tariffs with, perhaps no more than 2-3 tariff categories <say low tariff below certain level of power consumption, high after that level and separate category for industrial tariff>

It will improve transparency and may well yield consumption and collection efficiency, along with governance benefits <consumers will be able to take rational decisions, no scope for rent seeking>

B- Tariffs And Cost-

Cmmon sense suggests avg tariff (AT) should not be less than avg cost of supply (ACS) but in India-

• Average tariffs in some cases are set below the average cost of supplying electricity
• Even after adjusting ACS for Aggregate Technical and Commercial (AT&C) losses AT continues to stay below the adjusted level of ACS in most states i.e tariff are set way below the required level <what are AT&C losses? Answer in comments>

Suggestion- -Tariffs reflecting costs are a necessary condition for discoms to sustain themselves over the long-run. So avg tariffs need to be raised while giving relief to poorer section of society. How?

Exploiting Progressivity to Lower Tariffs for the poor

• There is, at present, no specific policy guidelines on the intra-category cross subsidisation or subsidy provisioning
• The tariff schedule is progressive as the consumption increases, although, Avg billing rates (ABR) for all the consumption categories lies below the average cost of supply (ACS) implying that costs are not fully recovered even from high end consumers i.e state or industry subsidizing consumption of rich
• Other countries such as Bangladesh, Sri Lanka, South Korea, Vietnam and Brazil better exploit the progressivity of electricity tariffs in the domestic category <higher ratio of tariffs charged to the rich relative to poor>

Suggestion- make tariff schedule after welfare analysis and charge consumers progressively much more for higher consumption while simplifying tariff schedule

Advantage- cross-subsidisation occurs within the residential consumers itself< rich and consumers with high consumption intensity within the residential sectors subsidise prices for consumers with lower consumption>

Given their relatively inelastic price elasticity, rich consumers will continue to maintain their consumption even after price increase. The net effect is that the residential revenue collection becomes cost neutral for the discoms (loss making at present)

What has govt done so far?

Open access policy and it’s present status

What is open access– simple- open to access electricity from any seller i.e. consumers being able to purchase directly from power producers rather than distribution companies.

Advantage- As it allows generators to sell power to the highest bidders while consumers can source their needs from the most economic seller, it promotes competition and efficiency

Open Access (OA) policy introduced under Electricity Act 2003, allows consumers with electricity load above 1 MW to procure electricity directly from electricity markets

OA provides an aggregation of the country-wide supply and demand on the same platform. Therefore, this constitutes a first step towards discovering a single market price for power around the country <if anyone can buy and sell from anybody freely it would ultimately create a single price for electricity and thus one market for power>

Barriers to open access-

Price barriers- cross subsidy surcharge– Industrial consumers procuring power from discoms subsidize residential consumers but they don’t have to do so if they procure power through open access, electricity regulator levies a surcharge to cover the cost of residential subsidy known as cross subsidy surcharge.

Idea was that cross-subsidy surcharge to be levied on OA consumers would come down over time. Nonetheless, cross-subsidy surcharges over the years have gone up as discoms lobby hard to increase surcharge.

Non price barriers- delay in granting open access, transmission constraints and congestion and transmission losses

In short price and non-price barriers come in the way of single-nationwide electricity prices through open access

Some achievements –

• highest ever increase in generation capacity <in 2014-15 the addition to plant capacity in utilities was 26.5 GW, much higher than the average annual addition of around 19 GW over last five years>
• bringing down the peak electricity deficit in the country to the lowest ever level of 2.4%
• Indian Railways (IR) attempting to shift to open access (OA) for power purchase
• From power deficit to power surplus <it’s possible because discoms are so much under debt that they just don’t want to purchase any more power, all the more important to expedite the shift to open access>
• Grid parity for solar generation is on its way to becoming a reality <tariffs reached an all-time low of R4.34/kWh in latest auction> <What’s grid parity? Why is it important? Answer in comments>/

Some policy decisions of govt of India-

A- Ujwal DISCOM Assurance Yojana (UDAY)  

• States shall take over 75 per cent of discom debt outstanding as of September 2015.
•  Reduction of Aggregate Technical & Commercial (AT&C) losses to 15 per cent by 2018-19.
•  Reduction in difference between average cost of supply and average revenue realized (ARR) by 2018-19.
•  Increased supply of domestic coal to substitute for imported coal.
• States shall take over future losses of discoms in a phased manner.
• Banks/FIs not to advance short term debt to discoms for financing losses.

B. Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)

• Electrification of all villages <how many villages are unelectrified? what is criteris for calling a village electrified? Answer in comments. >
• Metering of unmetered connections for reducing losses.
• Separation of feeders to ensure sufficient electricity to agriculture and continuous supply to other categories.
• Improvement of sub-transmission and distribution network to improve the quality and reliability of supply.

C. Integrated Power Development Scheme (IPDS)

• Strengthening of sub-transmission and distribution network in urban areas.
• Metering of distribution transformers /feeders / consumers in urban areas.
• IT enablement of distribution sector and strengthening of distribution network.

D. Domestic Efficient Lighting Program (DELP)

77 crore LED bulbs to replace household and street light incandescent bulbs

E. National Tariff Policy, 2016

• Cross subsidy surcharge formula revised.
• Regulator will devise power supply trajectory to ensure 24X7 power supply for all consumers latest by 2021-22 or earlier

Installed capacity in India as of 31st march 2016 (ratta laga lo)

• Thermal – 210 GW (185 Coal)
• Renewable – 85 GW ( 43 Hydro plus 42 others)
• Nuclear – 5780 MW
• Total – 301 GW

Break up of renewable energy

• Wind- 27 GW
• Solar- 6.7GW
• Biomass and bagasse cogeneration -4.8GW <what is cogeneration?>
• Small hydel- 4.3 GW
• Total- 43GW

Renewable energy target by 2022

• 100 GW solar power,
• 60 GW wind energy
• 10 GW small hydro power,
• 5 GW biomass-based power

The target for solar is split into 40 GW Rooftop and 60 GW through Large and Medium Scale Grid Connected Solar Power Project

Nuclear energy target

Earlier the target was 63,000 Mwe by 2032 but now govt seems to have slashed it to just about 14,500 Mwe by 2024 as India-USA nuclear deal seems to be floundering (for more refer this link)

Electricity amendment bill 2014

• The Bill amends the Electricity Act, 2003.
• It seeks to segregate the distribution network business and the electricity supply business, and introduce multiple supply licensees in the market i.e separation of content and carriage<distribution network will now become like wires which anybody would be able to access just as we can obtain telecom services from any service provider, we would be able to get electricity from any provider>
• The Bill introduces a supply licensee who will supply electricity to consumers.
• The distribution licensee will maintain the distribution network <like present discoms> and enable the supply of electricity for the supply licensee.

For more info refer to PRS bill analysis here 

P.S.- This completes economic survey volume one in full retail with all the relevant concepts.