2016-08-22 / Regulatory & Industry Trends
Reinvigorating Discoms to Build Efficiencies
Surplus hydel capacity
Favorable monsoons have had a positive impact on the power sector; augmenting the hydel power generation capacity by almost 25000 MW. This influx of cheap hydro-power has resulted in a decline of INR 2 per unit of power on power exchanges. It can also be attributed to the fact that cheap power from alternative sources is directly procured from the exchange by the distribution company (discom) in order to improve supply and thus demand is more or less met. Thanks to this, the peak demand deficit has come down to 1000 MW, from 5000 -10000 MW range. Leveraging on this opportunity, discoms are increasingly replacing expensive power with cheaper alternatives.
Predictably, the summer season had witnessed a surge in the demand for power. Delhi offers a classic example in this context. During summer, the peak power demand for Delhi rose to 6,188 MW, breaking all the previous records. However, industry veterans suggest that the power infrastructure is fractured and not prepared to meet the rising demand. It is argued that discoms need to aggressively build their capacities to meet the peak demand conditions.
Solar tariffs & discoms
For instance, the lowest solar power tariff of INR 4.34 per kWh, has made it possible for the sector to come at par with thermal rates. This phenomenon is finding a favor with discom, who were earlier reluctant to purchase renewable power due to its higher prices. The declining solar equipment costs also corroborates to the decline in tariffs. It is understood that demand is a function of the discom’s ability to buy power. A study by Central Electric Authority suggests that the country is likely to have excess electricity of 3.1% during peak hours and 1.1% during non-peak hours. Despite that, it does not translate into consistent electricity supply across the nation. One of the primary reasons for this inconsistency is that discoms from supply-deficit regions are unwilling to buy power in order to cut down on their losses. It is important to improve the financial and operating efficiencies of discoms that operate with an accumulated debt of INR 4.37 lakh crore.
Improving discoms through UDAY
One such initiative is the Ujwal Discom Assurance Yojana (UDAY) that aims to create a paradigm shift in the pattern of distribution of power in India. UDAY bonds have been floated to provide funds and revive debt stricken discoms. This has attracted the insurance sector’s attention due to its low credit risk, attractive spreads and guarantee from the state government. UDAY bonds worth INR 1 lakh crore were issued last year. Bonds worth another INR 1.5-1.75 lakh crore are expected to be introduced in the current financial year.
Installations of smart meters, as an integral part, are critical for the success of the success of this scheme. A typical smart meter allows utilities to monitor load and consumption patterns and makes the consumers understand the impact of their electricity usage. A rollout of 35 million smart meters are being targeted by the end of 2019. Among other things, the deployment of smart meters include the overarching infrastructure and technology, as its most critical components.
Now that the GST has been proposed, its implementation could hike the renewable costs and tariffs. The cost of manufacturing equipment are expected to rise and various fiscal incentives like tax holidays and concessional excise and customs would be removed. The impact on tariffs is significant of the order of Rs 0.5-0.6/unit. The Ministry of Renewable Energy in consultation with Finance ministry, has to introduce measures to mitigate this impact.
The government seems to be focused on making concentrated efforts to provide electricity to each and every citizen of the nation, but there are a host of challenges like pricing the power right for every citizen and making the last mile connectivity effective that it will have to deal with to make this a sustainable solution. Will the revival of discoms play an instrumental role in addressing these challenges is something that we need to ask ourselves?
Contributed by Sunil Jain, CEO & ED, Hero Future Energies