During his recent visit to the United States, the Prime Minister lauded India’s energy transition towards achieving net-zero carbon emissions by 2070. One key component of this transition has been the transformation in the power sector, which has leapfrogged on the back of the power sector reforms initiated 25 years ago and reinforced during the past decade. The future of power sector reforms hinges on achieving two climate change and sustainability targets linked to our declared National goal of achieving net-zero carbon emissions by 2070. These two targets are the complete phasing out of fossil-fuel-based power (by 2070) and the graded annual reduction of carbon intensity of energy during this period. Since the Government will have to balance these sustainability goals with the imperatives of rapid economic growth and job creation that are critical for the prosperity of India, the strategy for the next generation of power-sector reforms must optimise the trade-offs between sustainability and economic prosperity.
The journey so far
Post-independence, the Indian Electricity Act of 1948 laid the foundations for developing the country's power sector, vital for India’s economic growth and industrial development. The development of the power sector was anchored in the integrated state-run and controlled electricity boards (SEBs). Thus, it created state-run monopolies for generating, transmitting, and distributing electricity. These were supplemented by the Central Power utilities NTPC (1975), NHPC (1975), PowerGrid Corporation (1989), etc., that were set up to address inter-state issues of power development (generation and transmission). After 40 years of working of this model, its inadequacies were exposed, especially regarding the adequate supply to meet the growing power demand of a country that had taken off on a high growth trajectory. This was exacerbated by issues of quality and the cost of power supply. At the root of the three problems of quantity, quality, and price of power lay the SEBs' inefficiencies, partly caused by a work culture that lacked incentives for managers and employees and the lack of competition in the markets for power.
The states of Odisha in 1993-94 and 1998, Haryana in 1997-98, and Andhra Pradesh in 1997-98 were the front runners in pursuing power-sector reforms. The fundamental reforms involved unbundling the three functions viz; generation, transmission, and distribution of the SEBs and creating separate independent corporate entities to perform these functions. The power sector's most significant wave of post-independence reforms was set in motion by the passage of The Electricity Act of 2003. This Act consolidated the electricity generation, transmission, distribution, and trading laws. The focus was on promoting competition, protecting the interest of consumers, supplying electricity to all areas, rationalising electricity tariffs, ensuring transparent policies regarding subsidies, and promoting efficient and environmentally benign policies. For the first time, an independent regulatory system was envisaged to bring fairness to the sector from both the producer and consumer perspectives.
Much has happened since then—the SEBs have been unbundled, the regulatory regime is in place in all states and at the appellate level, and the installed power generation capacity in the private sector is now 51 per cent. More importantly, 15 per cent of the power generated in June 2024 came from renewables. Thus, having completed the first generation of reforms, India is on the path of balancing its growing energy demand and its commitment to net-zero emissions by 2070. Therefore, energy transition for achieving our climate change goals must involve the integration of renewables and enhancing the share of nuclear energy and biofuels in the energy mix. Of course, these three energy sources come with their concomitant challenges of intermittency, waste management and the impact on food security.
Generation – Legacy Thermal Power and Climate Change
Emboldened by the fifth-largest coal reserves in the world ( 9.5 per cent of the global reserve), India has anchored its power requirements from thermal energy (coal/lignite) since independence. As of June 2024, thermal installed capacity in the country at 243 GW is about 54 per cent (coal is about 49 per cent) of the total installed capacity of 446 GW. However, coal-based capacity addition has recently slowed down, and its contribution to the energy mix is decreasing due to the government's emphasis on renewables.
While thermal generation would continue to fulfil the country’s base requirements for at least two decades even if no new thermal plants are planned henceforth, the increasing presence of renewables in the energy mix implies that TPPs (Thermal Power Plants) will increasingly have to operate with greater flexibility, straining equipment and thus increasing the O&M (Operation & Maintenance) costs, causing further stress on the financials of the TPPs. Further, to balance the intermittent supply from Renewable Energy sources, TPPs may need to be retrofitted to attain the flexibility required, especially during peak demand periods. It is accepted that gas-based thermal plants are best suited for meeting peak demand since they are easier to ramp up and down. The Central Electricity Authority estimates that by 2031-32, India needs an additional 80 GW of baseload power. Presently, only 27 GW is under construction. Given India’s energy requirements, energy mix, and dependence on imported nuclear fuel, we must now develop a trajectory to phase out TPPs as technology helps us source our energy from renewables, and bulk energy storage becomes technologically and financially feasible.
In this scenario comes the first significant reform that we suggest. During the first generation of reforms, the focus was on quantity viz increased installed capacity. The next generation of reforms should focus on both technical and financial efficiency. Technically, TPPs should recognise the increased role of renewables and become more flexible in operation. Of course, this implies increased capex and O&M expenditures, with upgraded and modernised control systems. Second, they should invest in cleaner energy, viz—SOx and NOx reduction and carbon capture technologies. TPPs have to be operationally and environmentally efficient. Going forward, we should only set up highly efficient advanced ultra-supercritical thermal units. Since these changes will increase the cost of generating thermal power, they may lead to higher electricity tariffs being set by regulators. Hence, all existing TPPs should be mandated to target a path of operational excellence and cost minimisation, focusing on achieving the best parameters in heat rate, auxiliary power consumption, oil consumption, and optimally timed coal stocks.
This should be followed by a new National Merit Order Despatch system that includes all thermal plants. It should have data-driven decision-making by a national power exchange and grid that optimises the despatch across economic parameters, technical constraints (transmission), and environmental regulations. It must also factor in the increased share of RE, the peaking availability during the day (solar), and the fact that renewable energy has low (or zero) marginal costs. In India, we currently have a de-centralized model of scheduling and despatch with a spot market for electricity operating separately from the transmission system operators. The current interchange scheduling mechanism based on the interconnection of the five regional grids is operated by the National Load Despatch Centre. However, with increased RE integration and the complexity of interchange scheduling, we need to integrate scheduling and despatch to bring economic efficiency. To summarise, the first reform requires a new national merit order for thermal power despatch so that the cheapest generators are requisitioned first, and the most expensive generators are indented last; in effect, this implies that the most costly thermal plants will operate to meet peak demand. This will be supplemented by an online spot exchange for (sale and purchase of) electricity and an integrated national load despatch system. This reform is the first step toward creating a national market for energy from all sources, whether thermal, nuclear or renewables.
The benefits of this reform include a systematic ordering of all generating sources in India. This will enable rational planning of phasing out thermal plants based on their merit order, with the most inefficient plants being closed first. It will also help to benchmark all new generating plants, whether thermal, nuclear, or renewables-based, in terms of their merit order so that the most efficient projects are taken up first.
Renewables and Energy Storage are the challenges
India’s energy transition strategy appears to be on course. With an RE installed capacity of 197 GW and a total installed capacity of 443 GW, we have already achieved the Nationally Determined Contribution (NDC) target of 40 per cent non-fossil fuel power capacity ahead of schedule. The target is to achieve 50 per cent non-fossil fuel-based power capacity by 2030. However, we must also bear in mind that the electricity generation from fossil fuels in 2023-24 was around 76 per cent of the total generation. So it’s not only about installed capacity but the actual generation that counts regarding emissions.
While we have made substantial progress in harnessing solar and wind, we also need to leverage power generation from biomass and biogas, both of which are 24/7 resources. However, these sources have still not achieved significant capacity additions and thus do not offer the benefits of economies of scale. The key, ultimately, would be their integration with intermittent solar and wind resources at distributed generation levels.
In this scenario, we suggest the second area of focussed reform for India’s power sector. While our RE strategy has been transformational in its approach, and a lot has happened in the last decade, we must devise a new vision now. First, we need to focus on innovations in integrating solar and wind to harness their full-day potential. Second, the existing grid infrastructure needs massive investments and upgradation to handle the variability of RE sources. From the perspective of technology innovations and investments, the key focus areas would be transmission infrastructure, smart grids, grid stability and energy storage solutions. Only then would the Indian power systems be able to integrate the RE seamlessly, ensuring a robust and sustainable grid system. Until cost-efficient electricity storage technology is rolled out, the implied cost of intermittent supply of renewable energy such as solar and wind shall have to be factored in by the Regulators to suitably compensate electricity generation and distribution companies, whether in the public or private sector. As the proportion of renewable energy (RE) in the power grid rises, energy storage will become increasingly essential for integrating and managing RE. This applies to both the extra-high voltage transmission grid, where large-scale solar and wind farms are connected, and the sub-transmission grids, which accommodate rooftop solar panels and other small-scale renewable energy resources. This requires a policy that supports the power utilities, including those in the private sector, both at the regulatory and financial levels. At the same time, Public-Sector undertakings that can facilitate the energy transition, including the Rural Electrification Corporation, Power Finance Corporation, India Renewable Energy Development Agency and SECI, would need to step up their role in supporting investments in grid infrastructure that lead to India’s smooth energy transition.
Transmission – connecting India
The first generation of reforms involved separating the transmission function from generation and distribution for greater transparency, efficiency, and accountability. The system has worked well, with most transmission utilities doing well despite being impacted by the financial stress in Discoms. Today's transmission sector needs innovation and investment rather than any policy reform. With the increased integration of RE leading to a shift in greater flexibility in the operation of TPPs and energy storage solutions, the grid would need to become more robust and smart. Given the first suggested reform on the National Merit Order Despatch, we recommend that in the second reform, each state's ATC (Available Transfer Capacity) must be augmented to the levels of its total intra-state peak demand so that the National Merit Order Despatch can yield the most optimum results. Huge investments and upgradation in the national grid, like introducing monopoles with insulated cross arms to tackle the right-of-way problem, are required to cut down on transmission losses and increase redundancy, thereby improving the quality and cost of power for the consumer. These investments will benefit consumers, generators and transmitters in terms of greater flexibility and cost advantages.
Distribution – the Achilles heel
The chain is as strong as its weakest link, and the weakest link for the power sector in India is its Distribution Companies (Discoms), which are responsible for distributing electricity to crores of consumers. The net worth of the distribution utilities continues to be negative at INR 1,44,711 crore as of March 31, 2023, and their total borrowings increased from Rs 6,14,853 crore as of March 31, 2022, to Rs 6,84,379 crore as of March 31, 2023. Although, as per the Power Finance Corporation’s (PFC) latest report on the performance of state power utilities for 2022-23, the all-India aggregate technical and commercial (AT&C) losses for distribution utilities in FY 2023 are at 15.3 per cent, lower than the 16.23 per cent in FY 2022 and the payables for power purchases and billing efficiency also showed an improvement, yet there are miles to go. In this context, we recommend the third important reform for distribution.
Post-2003, most SEBs unbundled their distribution function into a single or multiple Discoms (depending on size), and some, like Punjab, continued with a combined generation and distribution entity. However, post-unbundling, most Discoms remained state-owned and managed, with only a few operating in the private sector. Severe financial problems and the concomitant high debt levels continued to plague the state-owned Discoms.
After this unbundling exercise, the Government of India made three significant attempts to restore the financial health of the state-owned Discoms. However, since these exercises were conducted without addressing the organisational issues, managerial deficiencies and operational problems of Discoms, each attempt provided only short-lived relief. The first attempt was through the notification of the Scheme for Financial Restructuring of State-Owned Discoms on 5th October 2012, which had two primary objectives. The first was to address the immediate liquidity needs of the Discoms, which would allow lenders to mitigate the risk of their loans becoming non-performing assets. Second, the restructuring of loans was accompanied by the Discoms or State Governments undertaking "concrete and measurable" steps to enhance the operational efficiency of the utilities. So, it was expected that this Scheme would ultimately strengthen the viability of the weakest link within the power sector value chain. However, only a few States/Discoms opted for this scheme.
Further, the continued practice of supplying free or subsidised electricity to specific sections of consumers, albeit with an assured state government reimbursement to Discoms (an unsure assurance), continued to impact their operational efficiency and financial stability. The regulators' failure to provide adequate and timely tariffs for the Discoms impeded devising a road map for private participation, thus further impacting long-term operational efficiency. Of course, the only visible gainers of the scheme were the lenders/banks.
After that, on 20th November 2015, the Government of India notified the UDAY (Ujwal Discom Assurance Yojana) Scheme for operational and financial turnaround of state-owned Discoms. This scheme was much more successful. While 16 states opted for both the financial and operational parameters, the others opted for operational parameters only; in the latter case, the state government did not take over the debt of these Discoms. This scheme aimed to increase electricity tariffs annually, adjust quarterly fuel costs, reduce interest burden, rationalise coal prices, lower fuel costs through coal swapping, minimise operational losses, etc. The scheme's impact was visible over time, as the AT&C losses displayed a downward trend, and the ACS-ARR (Average Cost of Supply-Average Revenue realised per unit of electricity) gap improved for 2017-20. UDAY, essentially a debt restructuring plan for Discoms, also became a rescue plan for the lenders. However, several Discoms again slipped into financial doldrums because of the lack of redressal of their critical operational issues. In 2020-21, the Government of India introduced UDAY 2.0 and the Liquidity Infusion Scheme, targeting key improvements such as installing smart prepaid meters, timely payments by Discoms, etc. The initiative sought to rejuvenate Discoms and establish a competitive market framework, allowing electricity consumers to select their preferred service providers.
However, according to the PFC report 2022-23 on utilities, the aggregate losses for distribution utilities increased from Rs 26,947 crore in 2021-22 to Rs 57,223 crore in 2022-23. Thus, despite increasing energy sales and revenue, overall losses have surged, partly due to rising unpaid tariff subsidies. Overcoming these issues will require holistic strategies to manage debt, improve revenue streams, and boost operational efficiency for the Discoms. The utilities are relapsing into their prevalent position before UDAY 1 and 2 and the Scheme for Financial Restructuring. Meanwhile, the consumer continues to suffer from poor availability, poor quality, and high power costs.
This brings us to our third suggested power-sector reform, which pertains to distribution. We have only two parameters in mind: the AT&C losses and the ACS-ARR gap. With feeder-level metering having been accomplished in most utilities, it is now possible for all distribution units to be accounting units and profit centres. Nationally, we should target a global standard of AT&C losses of < 5 per cent from the current levels of around 15 per cent in 5 years. All utilities must ensure that their operational ACS-ARR gap is at least zero and moves negative over five years to wipe out their accumulated losses.
The power sector is vital for Viksit Bharat both socially and economically. It cannot be a loss contributor to the economy because of its operational and financial inefficiencies. Given our history of managing this sector, this target AT&C loss is impossible to achieve with current organisational structures and management practices in the public sector. Several examples of privatising power distribution in India have demonstrated the improvements that private-sector participation in power can bring, albeit after initial hiccups in the transition period. Of course, we must also not forget the financial and operational efficiencies accrued in telecom, banking, and aviation due to private sector participation. Thus, private participation in the distribution sector should be a rule rather than an exception as we move towards our goal of Viksit Bharat. How the vulnerable groups have to be protected along with this structural and organisational reform of Discoms is an issue we deal with now.
Subsidies – Targeted and DBT
According to the 2022-23 PFC report on utilities, the tariff subsidy billed by Discoms increased from Rs 1,44,469 crore in 2021-22 to Rs 1,69,532 crore in 2022-23, which is about 17.53 per cent of their total revenue. The report highlights that while the billed subsidies increased, the gap of unpaid subsidies also widened over the year. It has long been felt that some power availability is necessary, and as a welfare state, the government must ensure its provisioning to its poorest citizens’ homes. In several states, the power consumption of up to 100 units per month per household was zero billed to start with. However, over time, the subsidy net widened, with states provisioning free power for agricultural tube wells and small industries and gradually for all types of electricity consumers. The situation has come to such a pass that around 50 per cent of the revenue accruing to a Discom is from tariff subsidy in some states. While there is always a case for providing carefully targeted subsidies to those at the bottom of the pyramid, the non-targeted subsidies have compromised the fiscal health of the states. When the tariff subsidy billed isn't received, it makes the fiscal health of the utilities perilous. Another problematic issue is that the Tariff Orders of the State Regulators have been unable to improve the operational and financial efficiency of the Discoms.
With this background in mind, we suggest the fourth important reform: that all tariff subsidies be transferred directly to the beneficiary and that no tariff subsidy be billed to the Discom. This implies that a state government which provides an electricity subsidy to any consumer (all of whom must be metered) should do so only through DBT to that consumer. Technology makes this feasible, transparent, and efficient today. Systems can be devised so that when a subsidised consumer pays her bill to the Discom, she automatically receives her subsidy directly from the state government in her bank account. This would bring operational and financial efficiency to the working of the Discoms. It will make subsidy provisioning targeted and transparent, improve the fiscal health and operational efficiency of the Discom, and also help the state government manage its subsidy budget better in the long run.
Conclusion
As our economy continues to grow rapidly at an annual rate of 6 to 8 per cent, our energy requirements will grow at an even quicker pace and will more than double every decade. The power sector will require massive investments to keep up with this demand in an environmentally sustainable manner. Such investments will be forthcoming if we implement the four important power-sector reforms highlighted above. These are: A national merit order and load despatch system integrated with a spot exchange for power; Transmission grid and interchange reform for Renewables; Privatisation of Discoms; and Direct-benefit transfer of subsidies to consumers. A national power market based on these reforms will be competitive and efficient; it shall attract investment and provide consumers with reliable, quality, and cost-effective supplies of power that will pave the way for sustainable energy for Viksit Bharat.
(The authors are former Chief Secretaries of Punjab. The views expressed are personal)
