Reforming power-pricing: Constraints must be reconciled through policy interventions and reforms

By AK Verma

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Extending electricity connection to every household is the greatest power reform touching the life of the common citizen. Now, 24×7 quality power at affordable prices must be ensured. But, the buzz on the next round of power reforms is centred on the amendments to the Electricity Act (EA) and/or the Tariff Policy proposed rather than the addressing of structural issues fettering power supply. Power sector suffers from problems of plenty due to the surplus generating capacity, increasing renewables without retiring old and polluting coal-fired generators, long tenure of power procurement agreements, excess tied capacity and aggressive energy efficiency drive.

By March 2020, the installed capacity was 370.05 GW, excluding 54.93 GW of captive capacity. So far, the electricity demand in the country has never gone above 183 GW. Even tied capacity is also around 300 GW. Power distribution companies (discoms) are also mandated to buy renewable energy under the Renewable Purchase Obligation. As a result, states have more than 30-40% of the installed capacity either backed down or shut down. About 15-35% of total fixed cost payable by discoms corresponds to unscheduled electricity.

India has taken significant steps to improve energy efficiency, avoiding about an additional 15% of annual energy demand and 300 million tonnes of CO2 emissions over the period 2000-18, according to IEA analysis. Replacement of incandescent bulbs by LED lamps under the UJALA programme has resulted in 47.08 TWh annual saving of electricity, avoided peak demand of 9,425 MW and saved Rs 18,831 crore a year.

Energy efficiency reduces the power bill of consumers, but power demand decreases and adds to the fixed costs that utilities pay. The higher landing cost of power is antithetical to the affordability of electricity consumption. The ministry of power must rework the targeted numbers to reconcile conflicting factors for the passing period. A trade-off between sufficiency and affordability of power must be made immediately for all kinds of consumers.
EA 2003 provides for tariffs to reflect the cost of supply progressively.

The Tariff Policy aims to keep tariffs for all categories of consumers within the maximum range of 20% below or above the average cost of supply. A recent analysis by IEA finds that residential tariff on PPP basis in India is higher compared to Russia, China, the US, Indonesia, Canada, Korea, etc. Hence, the scope of tariff hike without impacting the household finance is limited. In India, as with all other forms of subsidies, removing cross-subsidies on electricity has proven to be difficult.

The cost of removing cross-subsidies is daunting in terms of price inflation and household consumption, especially in rural areas. Through the direct benefit transfer (DBT), the government (central or state) can reduce the financial burden placed on households by the tariff hike. Till a robust system of DBT develops, the possibility of misplaced priority for energy security, and also free riding and theft of power by unscrupulous consumers cannot be ruled out. Thus, the abolition of cross-subsidies in India is not possible without placing a considerable financial burden on households.

Cross-subsidies in electricity tariff should also be seen in the context of other subsidies along the value chain. In the case of coal, underground mining is subsidised by opencast mining. Transportation of coal is through Railways and freight subsidises the passenger fare. Similarly, the transmission of conventional power subsidises the transmission of renewable energy. Therefore, removal of cross-subsidy from tariff alone would not rationalise electricity pricing. Ideally, all cross-subsidies should go, the inefficiency of utilities should not be permitted, but the tariff must reflect the cost of supply.

A major cause of concern in states with high regulatory assets is narrowing headroom for tariff increase in future tariff periods. Regulatory assets and non-remunerative tariff fixation have set in a vicious circle of creating larger debt and unsustainable discoms. It would be desirable to delegitimise regulatory assets.

Subsidies or tariff compensation to discoms are around 15% (from 10% to 30%) of the aggregate revenue requirement of discoms in various states. The subsidy is not limited to agriculture consumers alone, as many domestic, non-domestic, and even industrial consumers receive free or subsidised power. Though the quantum of subsidies is already significant and increasing rapidly, it is barely able to keep pace with the rise in the average cost of supply in many states.

Increased subsidy commitment, along with delays and pendency in payment compounds the situation. With the rising cost of supply for discoms and the increasing demand from newly electrified and financially weaker households, the need for subsidies would increase.

With the growth in open access and captive consumption, discoms may not have the ability to raise enough cross-subsidy, which further underlines the need for increased subsidy support. State regulators are duty-bound to safeguard consumer interests and encourage competition in the sector, but the contradictions and constraints of power pricing must be reconciled through policy interventions and reforms.

Former IFS officer and served power sector for long. Views are personal