Power Sector in India – Overview, Problems, Reforms

The power sector in India, like many other sectors in the Indian economy, is presently facing numerous issues. At least three indicators of the health of India’s power sector, demand, supply or generation and capacity utilisation of power plants are painting worrisome picture fuelled by the broader on-going economic slowdown and the continued deterioration in the financial health of discoms. Government measures have mostly focused on short-term problems without addressing the core issues and their causes. A comprehensive strategy to promote the growth and development of this sector is a need of the hour.

India’s power sector:

• The power sector has three main segments:
• Generation: It is the process of producing power using different fuels and is done in generating plants.
• Transmission utilities carry bulk power from the generation plants to the distribution substations through the grid at high voltages.
• Distribution: Distribution utilities supply electricity from the substations to the consumers through distribution networks. Distribution is the selling stage and operates at lower voltages.

Generation:

• Many different energy sources are used to generate power.
• These include coal, natural gas, hydro, nuclear and renewables (Solar, wind, small hydro and biomass).
• In the last two decades, India’s power generation capacity has increased considerably. This is mainly due to the delicensing of power generation in 2003, which enabled unlimited participation of private players.
• Currently, private utilities generate about 46% of the country’s power, followed by state utilities (30%) and central generating utilities (24%).
• India is the third-largest producer and consumer of electricity in the world as of July 2019.
• It is ranked 4^th in wind power, 5^th in solar power and renewable power capacity as of 2018.
• Also, it is ranked 6^th in the list of countries to make the most investment in clean energy.

Renewable energy generation:

• In March 2019, the Union Cabinet announced that hydropower projects will also be classified as renewable energy projects along with wind, solar, biomass and small hydropower.
• Renewable sources could either be connected to a grid or be off-grid systems.
• As of January 2019, the total grid-interactive renewable power capacity (excluding hydro) is at 45 GW.
• The government has set a target of installing 175 GW of renewable energy capacity by 2022 (excluding hydro).
• To achieve this target, the government needs to add an average capacity addition at around 33 GW per year. Currently, it is just around 24 GW per year.
• It should be noted that wind and solar power have lower plant load factor than thermal power due to intermittent wind speed and sunlight and thus, the renewable capacity addition needs to be higher than for thermal power plants to generate the same amount of electricity.

Transmission:

• It is carried out mostly by central and state companies.
• The transmission segment was separated from the central government agency in 1989 and the Power Grid Corporation was established.
• Power Grid Corporation is in charge of planning, implementation and maintenance of the interstate transmission system and operation of national and regional power grids.
• Following the implementation of the Electricity Act, 2003, consumers can buy power from any power generating plant through non-discriminatory access to transmission and distribution lines, according to the specifications set by states.
• India’s transmission lines have grown at an average annual rate of 6.5% between 2007 and 2019.

Distribution:

• Distribution involves the maintenance of the distribution network and retail supply of electricity to the consumers.
• It is mainly carried out by state-owned discoms.
• Currently, the state discoms are faced with poor financial health, leading to the negative effects on their ability to purchase power for supply and the ability to invest in improving the distribution infrastructure.

What are the issues faced by India’s power sector:

Issues with power generation:

Continuation of the high deficit:

• In 2018-19, the Central Electricity Authority had estimated that India had an energy surplus of 4.6% and peak surplus of 2.5%.
• Yet, the energy deficit still persists in several states and Union Territories like Jammu and Kashmir and the north-eastern states.
• Also, certain states like Chhattisgarh, Odisha and Uttar Pradesh continue to face peak deficit despite having high generation capacity.

A decline in capacity utilisation of thermal power plants:

• Despite the increase in generation capacity, the Plant Load Factor of the thermal power plants has declined from 78% in 2009-10 to 61% in 2018-19.
• Plant Load Factor (PLF) is the measure of the output of a power plant compared to the maximum output it could produce.
• Private and state-owned generators have the poorest PLF when compared with the central ones.
• Low PLF means that the thermal power plants have been lying idle, which may be due to non-availability of fuel (gas or coal), surplus capacity or low demand for power or demand being met by other sources.
• Even if the thermal plant is not used, it still incurs high costs.
• The Standing Committee on Energy, in 2017, stated that the inefficient capacity utilisation is due to numerous issues in the power sector like:
• Weak financial conditions of discoms, leading to a decrease in demand for power and lesser utilisation of capacities
• Significant decrease in the solar tariff and its very low gestation period
• Share of hydropower has decreased from 25% in 2007-08 to about 13% in 2018-19.

Uneven distribution of renewable energy:

• Renewable energy is unevenly spread about in the country.
• The NITI Aayog had noted that electricity buyers in renewable-poor states are comparatively less willing to purchase renewable electricity as their cost is higher than the conventional sources.
• In contrast, discoms in renewable-rich states are willing to support additional renewable deployment if they are assured of sufficient willing buyers.

High cost:

• For the discoms, the cost of purchasing power from a thermal power plant is around 75 to 80% of the total expenditure.
• Thus, any change in the cost of power can significantly affect the retail tariff.
• The high tariff is one of the main reasons behind the decrease in demand.
• If the tariff is made affordable, the demand for power will increase.
• The high generation cost can be reduced by increasing the availability of cheaper indigenous coal, rationalising coal supply sources and adopting new technology that supports indigenous coal.

High NPAs:

• According to the RBI, the public sector banks have the highest number of NPAs, most of which are in the power and the telecom sector.
• The reasons for the large number of NPAs are as follows:
• There is insufficiency in the availability of coal in several thermal power plants. Some of these plants require sufficient coal to enable them to run at 85% efficiency. Furthermore, the power plants must mostly use domestic coal and import can be allowed only if they are economically viable.
• Payment delays by discoms: The power plants are stressed because of the delay in the payment by the discoms and the inability to cancel Power Purchase Agreements with such discoms or sell power on the power exchange. PPAs are bilateral contracts between the producers (discoms) and the generators (power plants). This issue can be addressed by allowing the termination of a PPA in if there is a default in payment from the discoms.

Interstate disputes:

• Due to the river-sharing disputes, it is often difficult to construct efficient and equitable mechanisms for river sharing between states.
• This has led to non-availability of water at all times to operate hydro plants within states.
• Interstate disputes also restrict the exchange of surplus power between states.

Issues with power distribution:

The poor financial health of discoms:

• Discoms purchase power from the generation companies to sell it to the consumers.
• Currently, they are incurring huge losses and are struggling with increasing debt, making it difficult for them to purchase power and invest in a distribution network. This situation has led to a decrease in power supply and low-quality distribution infrastructure.

Differences in the cost of electricity:           

• Today, different consumers purchase electricity at different rates based on their consumption category.
• This has led to a huge gap between the average cost of supply and the average revenue realised per unit.
• State governments provide subsidies to discoms to push them to change such differential tariff from low paying consumers.
• Despite this measure, the overall revenue realisation cannot meet the total supply cost.

High AT&C losses:

• AT&C (Aggregate Technical and Commercial) loss is the measure of a combination of energy loss (technical loss, theft and inefficiency in billing) and commercial loss (default in payment and inefficiency in the collection).
• It is the difference between energy input units into the system and units for which the payment is collected.
• Low investments in distribution led to overloaded systems, resulting in higher technical losses.
• Lack of metering and poor billing and collection system contribute to commercial losses.
• Government measures in the past few years have failed to address this issue.
• As of September 2019, the AT&C losses for 13 states are 21.4%.

Quality issue:

Power supply duration:

• Currently, 4.3% of villages in India do not receive electricity for domestic use. Majority of these villages are in the north-eastern region.
• 7% of villages receive electricity for one to four hours a day.
• According to the data collected under Mission Antyodaya that was implemented by the Ministry of Rural Development, in 2018, about 53% of the villages receive electricity for less than 12 hours a day.

Low-quality rural electricity:

• The government initiatives to provide electricity to households are narrowed down to provide only for illumination.
• The electricity for illumination purpose alone does not support small electricity-based commercial activities.
• Also, the discoms that provide such connections see rural consumers as a liability with little to no scope for profitable revenue.
• The government should take steps to provide electricity connections to rural areas that are capable of the supply of quality and reliable power for a reasonable time.

Inaccessibility to power:

• According to the Ministry of Power, India has around 1% energy surplus for the past few years.
• Here, surplus or deficit is the difference between the demand for power and the availability of power. While calculating power demand, only those who are connected to the grid and have access to electricity are considered.
• However, about 300 million people do not have access to electricity in the country.
• India has one of the lowest per capita power consumption in the world.
• Though India has about 18% of the global population, it uses only around 6% of the world’s primary energy.

What were the measures taken by the government to promote this sector?

The Indian government identified the power sector as a key sector that needs to be focused on to promote sustainable industrial growth. Some of the initiatives taken by the government to promote this sector include the following:

Ujwal DISCOM Assurance Yojana:

• Launched in November 2015, it is the Centre’s scheme that aims to rescue the country’s ailing DISCOMS.
• Under the scheme, states can take over three-fourths of the debt of their respective DISCOMS and include them in the fiscal deficit calculations.
• The governments will then issue ‘UDAY bonds’ to banks and other financial institutions to raise money off the banks.
• The remaining 25% of the discom debt will be dealt with either of the two ways:
• Conversion into lower interest rate loans by lending banks
• Be funded by money raised through discom bonds backed by State guarantee.
• In return for the bailout, the discoms have been given target dates by which they will have to meet efficiency parameters like reduction in power lost through transmission, theft, faulty metering and installing smart meters and implementing Geographic Information System (GIS) mapping of loss-making areas.
• This scheme was optional for states. Those states that accepted the scheme can receive additional benefits from the Centre like
• Additional or priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power System Development Fund (PSDF) or similar schemes,
• Additional coal supply at notified prices and low-cost power from NTPC and other Central PSUs depending on the availability.
• Under the UDAY scheme, states should take certain measures like compulsory smart metering.
• The RBI, in its report released in October 2019, warned that with the decrease in power sector demand, economic slowdown and increasing losses of discoms, the scheme is likely to put more stress on the states’ finances.
• The central bank also noted that DISCOMS are the single biggest burden on state finances.

Deendayal Upadhyaya Gram Jyoti Yojana:

• DDUGY is a scheme that aims to provide a continuous power supply to rural India.
• It subsumes the erstwhile Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY).
• Its main components include:
• Feeder separation to ensure judicious supply to agricultural and non-agricultural consumers in rural areas
• Improving the sub-transmission and distribution network
• Metering at all levels (input points, feeders and distribution transformers)
• Completion of already sanctioned projects under RGGVY and rural electrification

Solar power:

• Two national-level programmes were implemented by the Ministry of New and Renewable Energy to promote the installation of solar rooftop systems.
• These programmes include:
• Grid Connected Rooftop & Small Solar Power Plants Programme
• Off-grid & Decentralised Solar

Integrated Power Development Scheme (IPDS):

• The scheme aims to:
• Strengthen sub-transmission and distribution network in urban areas
• Metering of distribution transformers/feeders/consumers in urban areas
• Strengthen and create IT-enabled distribution network.

One Nation, One grid:

• India’s power system is divided into five regional grids with each grid catering to electricity demands for one particular region.
• One Nation, One Grid aims to integrate all these grids.
• The grids are linked with one another to ensure that the surplus power is exchanged between regions.

Saubhagya Scheme:

• Saubhagya scheme or Pradhan Mantri Sahaj Bijili Har Ghar Yojana is an initiative that aims to provide electricity to the households.
• Certain households identified via the Socio-economic and Caste Census (SECC) on 2011 will be eligible for free electricity connections, while others will be charged Rs.500.
• Though the scheme aims to provide infrastructure for providing electricity to all households in the country, the electricity supply still remains a challenge.
• Currently, discoms are facing a financial crisis, despite the necessary infrastructure, leading to the difficulty in providing an electricity supply to the rural areas
• Also, rural areas or areas with more domestic consumers pay lesser tariffs and thus, increasing the supply to this region leads to a rise in losses unless the discoms are compensated by the government.

SAMADHAN scheme:

• The Indian government, through Scheme of Asset Management and Debt Change Structure (SAMADHAN), aims to prevent the liquidation of stressed power projects as energy sector faced a financial crisis.
• This is done by pushing banks to take over the debt of power plants that are experiencing difficulties.
• The idea is to reduce the debt to a manageable level and then convert the remaining unsustainable debt into equity, which can be bided out to the interested buyers.

Smart meters:

• The government has made it compulsory to use smart prepaid electricity from April 2020 in all parts of the country and replace the previous ones in the next three years.
• These smart meters will reduce the AT&C losses significantly and make bill payments easier.

Proposals to amend Electricity Act, 2003:

• Electricity Act, 2003 was enacted to cover major issues involving generation, distribution, transmission and trading in the power sector.
• Several changes have been proposed to make the power sector more market-friendly. They are as follows:
• A single public utility should control the transmission lines.
• Public and private producers and discoms should compete for consumers.
• Changes in tariff structures and subsidies so that they are market-friendly.

What did the Economic Survey 2020 say about the power sector?

• According to the economic survey, the power sector in India has witnessed a paradigm shift over the years due to the government’s efforts to foster investment in the sector.
• It had commended the government’s universal electrification drive and increase in power generation and transmission capacities.
• It further stated that India has improved its ranking in the Energy Transition Index published by the World Economic Forum (76^th position).
• It also noted that installed power generation capacity increased to 356 GW in 2019 from 344 GW in 2018.
• However, the survey did not comment on stressed power assets, the financial health of the ailing distribution utilities, decline in power demand and issues like states defaulting renewable energy contracts.

 What did Budget 2020 provide for the power sector?

• The Centre has proposed an outlay of Rs.22,000 crore for power and renewable energy sector for 2020-21.
• The government had also proposed that discoms should replace conventional meters with smart pre-paid meters and give options to consumers to choose electricity suppliers.
• Power System Development Fund (PSDF) has been approved with over Rs.6,000 crore to create and modernise transmission and distribution systems of strategic importance to relieve congestions in inter- and intrastate transmission systems.

What can be the way forward?

Provide 24X7 power for all:

Electricity is vital for the country’s development. Therefore, it must be made available at all times. To achieve the goal of 24X7 power for all, the following areas should be given higher emphasis:

• Accurate monitoring of power supply at the end-user level
• Quality and maintenance service of the discoms, including efficient transmission, reduce load shedding and shutdowns.
• Human error should be reduced by ensuring tech-driven billing, metering and collection.

Need for balancing power:

• Though the growth of renewables is a positive outcome, thermal energy is the primary source for the power sector and will continue to remain a vital source of power in the near future.
• Also, since the renewable energy sources are intermittent in nature, a balancing power is vital to support the grid and even out the fluctuations.
• For example, if solar energy is utilised in a particular area, it will need an alternate source for the night-time requirement, through gas or hydro based power.
• Harnessing hydropower can exponentially improve the power situation in the north-eastern states, Uttaranchal, Himachal Pradesh and Jammu and Kashmir as they have the potential in this aspect.

Promoting renewable energy:

• Due to the intermittent nature of renewable energy, making renewable energy generation or purchase mandatory can lead to issues.
• The NITI Aayog had recommended that pricing should be in a way that the buyers are indifferent between conventional and renewable energy resources until grid parity is achieved.
• Though renewable tariffs have decreased considerably, there is still the issue of certain discoms not willing to honour their renewable PPAs that are based on higher tariffs.

Strengthening regulators:

• Electricity Regulatory Commissions Act, 1998 mandated the setting up of Central Electricity Regulation Commission along with the State Electricity Regulation Commissions (SERCs)
• The 2003 Act expanded the powers of the commissions by allowing them to grant licenses for inter-state transmission and trading of power and to amend, suspend and revoke licenses.
• The Act also gave Commissions the power to regulate licensees by setting performance standards and ensuring compliance.
• It was observed that the CERC employees’ pay structure, service conditions, and other facilities are dismal.
• Personnel policy for CERC must be provided with its own cadre with adequate promotional prospects and better amenities to those working under the commission on par with their job profile.

Conclusion:

The power sector plays a vital role in the economic growth and development of the country. Issues faced by this sector have a significant impact on other sectors of the economy as well. Therefore, improving the performance of this sector through efficient government interventions should be made the top priority of the government.

Test yourself:

Critically analyse the issues faced by the power sector. Why have government measures have failed to address this issue? (250 words)