India’s electricity sector is at an inflection point. Three developments are triggering a shift in the power chain, particularly generation and distribution, and are deepening existing loopholes and exacerbating the distress.

The first is a change in the way the Center approaches the distribution segment. Until recently, he had preferred to encourage States, pushing them to tackle the problem which is at the heart of the woes of the electricity sector: reversing the operational performance and the financial situation of electricity distribution companies (discoms ). However, despite several attempts, not much has changed.

But in recent months, the Center seems to have changed course. From the application of the tripartite agreement to collect the contributions due to electricity producers like NTPC by the discoms of Jharkhand, Tamil Nadu and Karnataka to the regulation of the coal supply of the states where the production companies of electricity have delayed payments, it no longer seems to be content with simply pushing states to act. The stick is being wielded with increasing force, even states politically aligned with the Center are not spared.

Second, despite plentiful tax revenues this year, Covid has wreaked havoc on public finances. General government debt stands at 90 percent of GDP. Add to that the demands for increased social spending, the uncertainty about state government finances after the five-year GST compensation period ends next year, and the limits to which states can continue to support. discos will be tested more and more. To what extent can accounting juggling be used once again to clean up devastating debt is questionable. After all, even the liquidity facility put in place by the Center to help discoms meet their obligations will have to be repaid.

Third, until now, consumers have had little recourse to other sources of supply. As a result, discoms, which are essentially geographic monopolies, have been able to charge higher tariffs to commercial and industrial consumers to subsidize agricultural and low-income households. But the situation seems to be changing.

The migration of consumers paying high tariffs through open access and investments in captive power plants is gaining ground, in large part thanks to the emergence of solar power as an alternative to seemingly competitive tariffs. According to a study by Prayas (Energy Group), as high-price consumers begin to move away, the share of cross-subsidies in nightclub price support (the other part being a state subsidy) has increased from 29% in 2017-2018 to 23%. cent in 2018-2019 – a decrease of 6 percentage points in one year.

This reduced dependence on consumers paying high rates on nightclubs will only exacerbate their already precarious financial situation. What is even more worrying from their perspective is that the rate at which this transition is occurring will only accelerate in the years to come. This is due to two factors.

On the supply side, globally and nationally, there is a push towards cleaner fuel, solar in particular. As a result, funding is increasingly flowing towards cleaner options – the problems of financing a coal mine in Australia versus the ease with which funds can be raised to finance renewable energy projects show this. clearly.

Flowing from this – although of questionable relevance given current levels of per capita emissions – is the direction of national policy towards renewable energy. Solar, in particular, benefits from both explicit and implicit subsidies – concessional rate land, exemption from interstate transportation charges, reduced transportation charges, cross-subsidies for open access, SECI taking over risk of consideration, etc. It also benefits from “Must Run” status.

Thus, most of the new investments, especially private ones, are directed towards renewable energies. In fact, according to projections by the Central Electricity Authority, by the end of 2029-30, installed solar capacity is expected to greatly exceed that of coal.

On the demand side, at current tariffs, solar power appears to be an attractive alternative for commercial and industrial consumers paying high tariffs (the average cost per unit for commercial and industrial consumers was around Rs 8.37 and 7.41 Rs respectively in 2019-2020 compared to solar tariffs below Rs 3 per unit). And as more renewable capacity comes online and storage costs decline, most consumers’ abandonment of nightclub cross-subsidization seems almost inevitable. Although for most households, with low levels of per capita income, rooftop solar power doesn’t seem like a viable option now – the costs of installing a 10 kilowatt roof panel are rising. at around Rs 4 lakh.

For their part, the discoms are trying to save a losing situation. To stem the flow of paying customers, some have started to impose an additional surcharge on anyone who opts for open access to reduce the cost differential. Others are moving from net metering to gross metering – essentially charging consumers higher tariffs – above particular consumption levels.

But as the dependence of these high-tariff customers on discoms decreases, they will have to rely more than before on tariff subsidies from state governments. However, permanently subsidizing discoms for their AT&C losses (operational inefficiencies) and for not providing electricity at commensurate tariffs to low-income households and agricultural customers (for political considerations) will become fiscally untenable. According to the government, the bill to subsidize agricultural consumers was around 1.1 lakh crore a few years ago.

A status quo scenario will no longer suffice. Unless outright privatization, market pricing of tariffs, the options seem limited. To give an idea, in March 2020, the net worth of all utilities in the country combined was negative at Rs 61,757 crore (although it was positive in states like Gujarat and Maharashtra). In comparison, the combined net worth of the few private sector nightclubs that exist in the country was Rs 24,965 crore positive.

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