Eco Survey gives Thumps-Up to India’s Power Sector

Impressive strides made in the power sector in the last two years: addition of record generation capacity, moves towards one market in power, reform of discoms and development of renewable energy

Eco Survey gives Thumps-Up to India’s Power Sector

Taking note of the sweeping changes that have been made in India’s power sector in the past two years, the Economic Survey 2015-16 tabled in the Parliament on Feb 26 by the Finance Minister Arun Jaitley said that 2014-15 witnessed the highest ever increase in generation capacity of 26.5 GW compared to the average annual addition of around 19 GW over the past five years.

It added that capacity enhancements have brought down the peak electricity defecit to its lowest ever level of 2.4%. Central and state governments have come together to address problems related to the health of distribution companies and the debt overhang problem via the Ujwal DISCOM Assurance Yojna (UDAY).

The Survey also noted that that renewable energy targets have been revised from 32 GW to 175 GW to give a policy push to the renewable sector and sustainable development. Grid parity for solar generation is on its way to becoming a reality with auctions under the National Solar Mission resulting in all time low tariff of Rs. 4.34 per KWh.

The Survey points out that the complexity of the tariff structure because of different tarriffs for different sectors prevents economic actors from responding sufficiently to price signals. Simplification in tariffs may improve transparency and yield consumption and collection efficiency along with governance benefits.

Further, the Survey states that the debt overhang of discoms has traditionally been a major bottleneck for the power sector. The States with highest losses are those where tariffs fail to cover the costs of electricity supply. Several states are now attempting to close this gap under the UDAY scheme.

Power sector’s impact on ‘Make in India’

The Economic Survey notes that the electricity supply and its quality impacts industrial outpout. The electricity tariffs are unusually high for Indian industry, especially when quality is taken into account. The use of diesel generators in on the rise to protect against uneven power supply with total capacity around 72 GW and growing at the rate of 5 GW per year. High tariffs and erratic supply have led to a slow but steady decline in the growth of industrial electricity purchases from utilities and a gradual transition towards captive generation.

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The compund annual growth rate (CAGR) of captive power generation between 2006-07 and 2014-15 is 9.3% compared to 4.6% for electricity procured from utilities. This could be exacerbated in the coming years as decline in oil prices and costs of renewable energy alternatives may prompt a further shift to captive power.

Need of making India “One Market in Power” – Providing ‘Open Access’

The Survey states that steps have been taken towards ”Making One India” in the power sector. The Open Access (OA) policy introduced under the Electricity Act 2003, which allows consumers with electricity load above 1 MW to procure electricity directly from electricity markets was the first step towards discovering a single market price for power around the country. Power Exchanges were set up in 2008 to operationalize the OA policy and create a national electricity market where price discovery occurs through competitive bidding. Increases in cross subsidy and additional surcharges for purchasing electricity from power exchanges, have acted as significant barriers, though they are key to balancing DISCOMS.

The power generation capacity has increased while the financial ability of discoms to purchase electricity has diminished. This has resulted in current power plant load factors reaching their lowest mark at around 60% as The Survey notes that the time is ripe to allow industries with higher power demands to absorb excess generation capacity through “Open Access” to energize “Make in India”.

Progressivity in tariff rates to reduce burden on the poor

The Economic Survey says that India’s domestic power tariff schedules have greater scope for progressivity. It discusses the need to balance greater revenue collection with greater welfare allocations. It suggests that the tariffs for the poor can be reduced while covering costs and without unduly burdening those better off. Cross-subsidization will occur within the residential consumers itself – i.e. rich consumers with high consumption intensity within the residential sectors subsidise prices for consumers with lower consumption due to differential demand price elasticities.

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Box: Sweeping Changes

Since the present government came to the power , the Economic Survey 2015-16 tabled in the Parliament here today by the Finance Minister Shri Arun Jaitley states that the several sweeping changes have taken place in the power sector which are as follows:-

·There has been record addition to generation capacity. 2014-15 marked the highest ever increase in generation capacity: 26.5 GW, much higher than the average annual addition of around 19 GW over the previous five years.
·Capacity enhancements in the power sector are unprecedented. These measures have helped to reduce India’s peak electricity deficit to 2.4 per cent, the lowest ever.
·There has been a comprehensive initiative to improve the health and performance of power distribution companies—UDAY, the Ujwal DISCOM Assurance Yojana
·Indian Railways is attempting to shift to open access for power purchase.
·Renewables have received a major policy push. Targets have been revised from 32 Gigawatts to 175 Gigawatts by 2022. In the latest round of auction under the National Solar Mission, tariff reached an all time low of Rs. 4.34 /KWh.
·Tantalising signs of moving to One Market in Power are becoming evident.

Notwithstanding these major successes, the Economy Survey observes that the complexity of the Power Sector is such that daunting challenges remain.

In particular :

·Complexity of tariff schedules prevents economic actors from responding sufficiently to price signals.
·Average tariffs in some cases are set below the average cost of supplying electricity.
·High industrial tariffs and variable quality of electricity adversely affects “Make in India”
·Price and non-price barriers come in the way of single-nationwide electricity prices through open access.
·Determination of progressive tariff schedules for domestic consumers.
The Survey discussed some longer term policy issues for the power sector which are as follows:-
·Power tariff schedules are currently complex. For example, in certain states there are separate tariffs for poultry farms, pisciculture, wetland farms (above and below a certain size), mushroom and rabbit farms, etc. By contrast, other energy products are characterised by a single price—or at most a few prices—across end users.
·Given high tariffs on industry, firms may be shifting from purchasing electricity from utilities to generating their own power.

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o 47 per cent of firms report using a diesel generator
o Between 2006-07 and 2014-15, electricity procurement from utilities grew by 4.6 per cent annually, slower than the 9.3 per cent growth in self-generation.

·Cross-subsidy surcharges and non-price regulatory measures are key tools for balancing DISCOMS’ equity and access considerations, but they may also hinder the creation of a nationwide electricity market.
·Compared to other developing countries, India’s domestic power tariff schedules have greater scope for progressivity. Increases in tariffs for rich households can be achieved while maintaining or reducing tariffs for the poor.

The Economic Survey 2015-16 suggests that the new paradigm of surplus power sets the stage for continuing these reforms so that India can become ‘one market’ in power; the burden on industry can be relieved, allowing it to become internationally competitive as envisaged in “Make in India”; tariffs can be made simple and transparent, avoiding proliferating end-use charges; and by taking advantage of the possibility of greater progressivity in rate-setting, charges for the poor could be reduced while generating more revenues.

In all of this, State Governments and State Regulators will have a key role to play, with helpful facilitation from the centre. The power sector is a perfect crucible for making effective the cooperative-competitive federalism experiment that is now India, the Survey adds.