Overview | September 2016
Change, adapt & innovate
Still our AT&C losses and other inefficiencies in Discoms are on the top of the world. The current round of reforms offer an opportunity for them to transform.
India´s power sector is at an inflection point, given the government´s conviction that electricity is a critical enabler for economic growth. Distribution sector in particular, is in the focus with new generation of reforms initiated by the government. The flagship schemes of the Centre have been designed to target specific segments within the distribution sector viz. Integrated Power Development Scheme (IPDS) to focus on urban electricity infrastructure, Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY) to address rural electrification, Ujwal Discom Assurance Yojana (UDAY) to improve Power Distribution Companies´ (Discom) finances and National Smart Grid Mission to embed IT systems within the power sector. This article explores the opportunity with the Discoms through these schemes and key focus areas to transform their operations. The article also touches upon possible disruptions in the sector, for which Discoms need to gear up with a well thought out strategy.
Loss reduction: A glass half-full
India´s distribution losses, estimated at 25% (2015), are among the highest in the world and despite successful programmes in several states, this remains a significant issue requiring urgent attention. The vast majority of state distribution utilities need significant improvement in efficiency of their operations. Whilst total financial losses (y-axis in graph) are relatively moderate in most cases, operating losses (x-axis) are high. The regulators, in consumer interest, are increasingly reluctant to allow higher than normative losses. The disallowed costs accumulate in the utility´s balance sheet worsening their financial position over time.
State utilities often cite social circumstances and political influence as a reason for high losses. However, private distribution utilities operating in similar areas show better performance as do utilities in many developing countries who successfully dealt with similar social issues.
In reality, most state utilities are ill equipped to analyse and address their network problems. This means that even the utilities investing to upgrade their network are not well informed on where to spend, and whether that is delivering the necessary outcomes. All these issues can be classified relating to process, technology and people, collectively, representing poor project management, which gets magnified in dynamic field conditions. The private distribution utilities (and Distribution Franchisees (DF) upon taking over license areas given to them) invest considerably in project management.
Secondly, state distribution utilities tend to focus on interventions that are engineering based, and not sufficiently on social aspects. There is good evidence from several developing countries where attention to social issues helped address underlying causes of losses, including theft and non-payment. Some of these initiatives can be localised for Indian distribution companies too.
Energy access: Delivering Socio-economic impacts
The Government of India has set a goal to electrify 100% of village by May 2018. The GARV dashboard set up for this shows that only 8,799 villages remain unconnected. So, it is important that the focus is on household electrification and quality of supply. Two states that did this well, Gujarat and Madhya Pradesh, adopted a comprehensive approach.
Our experience shows that states seldom account for social and economic benefits from rural supply; instead they are held back by concerns of losses from adding more ´subsidised consumers´. On the other hand, we also saw state governments take interest and remove any impediments, when faced with credible evidence of the societal gains.
The state of MP undertook an ambitious feeder segregation programme which split rural residential and agricultural lines, thus allowing 24 hour power supply to homes, and a restricted 10 hour supply to agriculture farms.
The rural economy gained significantly. Agriculture production grew by an average 22% in last 4 years despite a drought in two of those years. This helped Madhya Pradesh avoid the agrarian distress that affected many other states. The gains in the farming sector are particularly helpful to Madhya Pradesh, as it was rated poor on calorie intake (2711 kCal per person per day, which is below the national average of 2752, and well behind say, Haryana at 2992 kCal). The outcome has helped farmers nearly double farm productivity by use of multiple cropping. This led to significant improvement in rural incomes. Rural electrification is helping narrow the urban-rural divide.
Electricity use in rural areas grew from one-third of urban areas in 2011 to one-half in 2015:
a major transformation in just four years.
UDAY: Disentangling Distribution
A majority of the state power utilities are in deep financial distress which limits their ability to invest in people or technology, thereby, over a period eroding their operational performance. This pushes them deeper into financial distress.
The UDAY scheme improves balance sheets of state utilities by transferring non-project debt to the respective state government. The utilities are expected to use their improved financial position to invest in upgrading networks to reduce losses, and pursue other Scheme provisions to reduce the cost of bulk power purchased.
The previous bail-out scheme in 2002 was aimed at settling overdue payments, but did not address the underlying problems of the state utilities. UDAY builds on the lessons from the past experience and offers more tools for turnaround of state utilities.
Consumer benefit comes from lower cost burden from financial and operational inefficiency. They also gain from avoided costs from better quality of supply and from utilities´ ability to buy and maintain continuity of supply of power. Further, under-invested networks are cause for accidents especially during monsoons, which can be avoided.
UDAY and other policy measures can help state utilities turnaround, and in fact even support costs of additional capital spending and losses from rural electrification in the process, without burdensome tariff increases.
This positively impacts the poor and marginal users of electricity who can ill afford higher rates (54% of disposable income is spent on food, and 12% on fuel & light).
Digital Applications: Bringing in transparency & accountability The government is innovatively using digital media and Apps to disseminate information on progress of government schemes (e.g., UJALA dashboard for distribution of LED bulbs, GARV dashboard for rural electrification, URJA App, wherein consumers can track information regarding IPDS), there are more in store such as real time outage management etc. Apart from this, several Discoms have launched their own applications for better consumer connect. This has led to active civil society involvement too, and will benefit from further innovation.
All these initiatives have brought in a fundamental change in how utilities operate. With the ´power in the palm´ being with the consumers, Discoms are becoming more accountable. However, to realise the true power of these digital opportunities, utilities need to transform operations. To begin, they must develop a digital transformation strategy that can be successfully embedded and scaled in the organisation. It is also essential to understand that by their very nature, digital transformations also bring about a cultural shift, which the Discoms need to adapt to.
Probable Disruptions: An opportunity to innovate
Structural Changes: The first generation of structural reforms involved the functional unbundling of generation, transmission and distribution. This helped deliver significant gains on technical and financial performance and customer service. The next generation of structural reforms entails unbundling of distribution and supply viz., separation of carriage and content. This is aimed to spur competition and offer choice to customers. The separation of carriage and content is far more challenging technically than functional unbundling undertaken earlier.
The experience from developed countries suggests that the preparation for these readiness conditions adds more value than competition per se. In fact, competition measured, say in terms of customer switching, is low viz., less than 15% of customers in almost all OECD countries.
The experience from retail competition in the England and Wales (1990-98) suggests that low levels of competition in the retail market only replaced monopoly with an oligopoly. It led to reduction in electricity bills for large users, but the benefits to smaller users are less clear. This will be a serious risk in India where large users subsidise smaller retail users.
However, the outcome from separation of carriage and content is that capital expenditure on networks is better planned, distribution operating costs, including theft and losses are reduced, and quality of supply is improved. The experience from countries that implemented it, and academic research suggests that outcomes are positive.
Managing greater variable energy sources: India´s renewable energy capacity, currently at 14.2% of total, is targeted to grow 11 fold (to 175 GW) by 2022. This poses major challenges to grid stability, due to variability and uncertainty of renewable generation, especially, wind and solar, which being asynchronous generators respond very differently to network disturbances, faults, and operator control than do ´conventional´ synchronous generators. This will require major transformation of business and operating model of the utilities, apart from effective development of new electric technologies capable of properly managing power systems that have large penetration of renewable generation, distributed generation, energy storage, electric vehicles, demand management programmes etc.
Distribution sector stands on the verge to take a big leap on the back of slew of schemes. However, it needs to be seen if this leap would help the sector climb a new pedestal and drag themselves out of the current quagmire. This would depend on the Discoms resilience to change, adapt and innovate. But with all stakeholders´ eyes firmly on them, they can ill afford to take a wrong foot forward.
Author: Rahul Raizada, Director- Power and Utilities, PwC India
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