The Ministry of Power's recent initiative for the privatisation of UTs as part of distribution reforms and a further announcement by the Finance Minister in the Budget speech on the distribution sector are welcome steps for strengthening the weakest link of the power sector value chain. The following two major initiatives will have far reaching implications on discoms.
First, about the announcement of tabling of the Electricity (Amendment) Bill of 2021 in this budget session. Once approved, this amendment will have a transformative impact by removing monopoly in the distribution sector, e.g. delicensing of the distribution business and providing customers with more choices to select power supplier. There would be many power suppliers or distribution companies in one licensed area, including existing ones who will own the network and charge wheeling costs to the new distribution companies as State Regulatory Commissions register them. The incumbent discom will also share existing long term power purchase agreement with new entrants.
It would be interesting to see how new business models would evolve, considering current high commercial loss levels and unreliable networks that does not guarantee a 24x7 power supply. This model is presently working in European countries wherein losses are limited to technical losses, and the network is highly reliable with enough redundancy in the system. Additionally, consumers have smart meters to facilitate quick switchover from one distribution company to another. We foresee new entrants as distribution companies striving for customer acquisitions by clubbing various other services to create value for consumers.
Distributions companies will have a back-end system combining water, gas, electricity and even broadband and other entertainment and essential services, thus optimising cost and offering services to fulfil varied customer needs. It will not be surprising to have companies having more in-depth customer insight from other domains like telecom, gas, or even transportation to join the race for distribution services.
We expect the incoming distribution companies to offer innovative solutions and financing options for services like rooftop solar, battery storage, and demand response management using time of day metering to attract new customers. These solutions will lead to reduction of customers monthly bills as per their pattern of electricity consumption. These acquisition strategies will also lead to the diversion of customers from incumbent distribution licensee to new ones.
While on one side, new distribution companies will ask for more reliable power from existing discom, on the other side, the state discoms due to their operational inefficiency and high loss level may further sink deep in the red. Needless to say, as a result of the higher autonomy provided to the Regulatory Commissions under the new Electricity (Amendment) Bill 2021, regulators will not allow an increase in wheeling charges due to inefficient operational performance by the incumbent licensee.
Second, a bailout package worth ₹3 lakh crore is planned in the Budget for ensuring discoms improve their operational efficiency. It is essential to use this package to incentivise the state government to privatise existing distribution license businesses which have failed to bring down their AT&C losses and improve customer service delivery despite many bailout packages offered by the government since APDP in 2001.
The privatisation of discoms has not gained much ground due to political unacceptability in the last few decades. While private players bring efficiency in the system, their investment to improve system reliability and higher Opex in the initial period lead to an increase in tariff and is not politically acceptable. However, a closer look in the present scenario indicates that we are in the best of times to privatise utilities while ensuring that tariff does not increase for the next decades.
Consumer tariff consists of two components: one, power purchase cost which is around 75%-80% and the second distribution cost (about ₹1.5-₹2), which comprises CAPEX financing, employee and maintenance cost. Historically most discoms have entered in long term PPAs and these PPAs are expiring over the next five years and are getting replaced with renewal power and purchase from the open market. Thanks to surplus generation in the country, the power prices are expected to remain lower than existing long power agreement prices and average portfolio cost of discoms will come down in future. This will help in tariff reduction to the end customer.
In the last decade, a fair amount of funding has been extended from centre to the state governments through various schemes like R- APDRP, IPDS, DDUGY, Saubhagaya, and every household is connected to the primary system. The essential requirement is ensuring reliability and continuity of supply by proper maintenance, better governance and management system in place. This improvement in reliability will lead to growth in consumption, reduction in opex, and less distribution cost per unit to push retail tariff downward. Another factor favouring reduction in tariff is a commitment to loss reduction by the private entities. The same should be taken care of properly in the transfer scheme wherein gain due to over achievement is shared in a specific ratio.
The proposed bailout package should now enable the state government to take a bold step for privatisation and ensure the neutralisation of any unwarranted upswing in tariff hike for the first five years after privatising and provide a transition support to the private players to re write the historical legacies with a robust distribution network supporting and fostering much needed competition in the distribution sector.
It is essential to know that providing customers more choice is closely linked with a world class network backbone capable of delivering 24 x7 supply with no commercial loss associated with it. The perennial problem of power sector i.e inefficient discoms, needs to be fixed before we plan for competition in this field and the proposed bailout package should be used to address this malice in the first place.
In light of new proposed Electricity (Amendement) Bill 2021, this is an opportune time for states to think innovatively and even take one step ahead to merge intrastate transmission with distribution network in licenses area and monetize same to invest in the sectors like healthcare and education which deserve higher attention towards building a robust economy. Creation of competition in the proposed bill will enforce distribution companies to bring all new technologies and customer-centricity to optimize operation. Any capital funding from the central government using this bailout package in any other form would be a waste of taxpayers money with no substantial gain.
Views are personal. The author is President, Transmission and Distribution, Tata Power.