Context

The power sector in India is at an inflection point. Three developments are triggering a shift across the power chain, generation and distribution in particular, and are in the process deepening existing faultlines, and exacerbating the distress.

Three changes driving the shift in power sector

1) Central government’s approach towards distribution segment

• Till recently, the Centre had preferred to incentivise states, nudging them to address the issue that lies at the heart of the power sector’s woes — turning around the operational performance and financial position.
• However, despite multiple attempts, not much has changed.
• But over the past few months, the Centre appears to have changed tack.
• The Centre no longer appears content to simply nudge states into acting.
• This change in stance is evident from enforcing the tripartite agreement to recover the dues owed to power producers like NTPC by discoms in Jharkhand, Tamil Nadu and Karnataka to now regulating coal supplies to states where power generating companies have been delaying payments.

2) Covid impact on government finances and ability to support discoms

• Notwithstanding buoyant tax revenues this year, Covid has wreaked havoc on government finances.
• The general government debt stands at 90 per cent of GDP.
• Add to this demands for greater welfare spending, uncertainty over state government finances once the five year GST compensation period ends next year, and the limits to which states can continue to support discoms will increasingly be tested.
• To what extent accounting jugglery can be used once again to clean up discom debt is debatable.
• After all, even the liquidity facility arranged by the Centre to help discoms pay off their obligations will have to be paid back.

3) Loss of monopoly and shift towards renwable

• Until now, consumers had little recourse to alternate sources of supply.
• Consequently, discoms, which are essentially geographical monopolies, were able to charge higher tariffs from commercial and industrial consumers to cross-subsidise agricultural and low-income households.
• But the situation appears to be changing.
• Migration of high tariff paying consumers through open access and investments in captive power plants is gaining traction, driven in large part by the emergence of solar as an alternative at seemingly competitive tariffs.
• This reduced reliance of high tariff paying consumers on discoms will only exacerbate their already precarious financial position.
• The pace at which this transition is occurring will only accelerate in the coming years.
• On the supply side, at the global and the national level, there is a push towards cleaner fuel, solar in particular.
• Flowing from this — though with debatable relevance given the current levels of per capita emissions — is the domestic policy thrust towards renewables.
• Solar, in particular, benefits from both explicit and implicit subsidies — land at concessional rate, exemption from interstate transmission charges, discounted wheeling charges, cross-subsidies for open access, SECI taking on counterparty risk, and others.
• It also enjoys “Must Run” status.
• On the demand side, at current tariffs, solar is emerging as an attractive alternative for the high tariff paying commercial and industrial consumers.
• On their part, discoms are trying to salvage a losing situation.
• To stem the flow of high paying customers, some have begun levying an additional surcharge on whoever opts for open access to lower the cost differential.
• Others are shifting from net metering to gross metering — essentially charging consumers higher tariffs — above particular consumption levels.

Conclusion

Continuously subsidising discoms for their AT&C losses (operational inefficiencies), and for not supplying power at commensurate tariffs to low-income households and agricultural customers (for political considerations) will become fiscally untenable.

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