Distribution companies (discoms) are under increased pressure to begin maintaining an uninterrupted supply of electricity. In her recent annual budget speech, India’s finance minister Nirmala Sitharaman noted that the discoms’ “monopoly behaviour” is a deterrent to the country’s economic growth.

As a means of correcting the problems, Sitharaman announced actions were underway to open the power sector to more competition, thereby providing consumers with choice putting greater pressure on the discoms — who will remain the primary operators of, and investors in, the grid for the foreseeable future — to ensure better reliability and quality of power supply.

These efforts to reform the traditional discom business model are creating fresh opportunities for distributed energy resources (DERs). They should be explored fully for the economic, reliability, and environmental benefits they can provide, relative to traditional grid investments.

If, as is likely, clean distributed energy resources are found to be critical elements of a least-cost plan for improving reliability, lowering total costs and cutting emissions, then the regulatory rules should ensure that implementing that plan will be the discoms’ most profitable course of action.

Maturing market?

India’s power sector has matured over the last few decades, especially with the reforms ushered in by the Electricity Act in 2003 and per-capita consumption of electricity has more than doubled since then. Yet, a large number of consumers still depend upon a combination of grid and backup supply solutions including diesel generators, kerosene lanterns, lead-acid batteries, gas water heaters for reliability and quality of power.

These dirty and expensive decentralised systems in use today are not a policy choice, but rather a forced outcome of India’s discoms inability to meet their customers’ needs.

However, the falling costs and wider availability of cleaner technologies have now altered this value proposition. They allow for discoms to shift from wires-only solutions to non-wires alternatives and greater reliance on clean decentralised solutions. While reliability has largely been a private cost, in some cases discoms have implemented pilots to optimise power supply and distribution costs.

These dirty and expensive decentralised systems in use today are not a policy choice, but rather a forced outcome of India’s discoms inability to meet their customers’ needs.

In addition, there has been a push from the central government for the development of decentralised solar capacity that can inject power at the sub-distribution level grid to meet local reliability needs while avoiding transmission infrastructure upgrades and network losses.

A Ministry of Power’s scheme aims to set up ten gigawatts (GW) of decentralised solar projects, install 1.75 million stand-alone solar agriculture pumps, and solarise one million grid-connected agriculture pumps. Discoms are the implementing agencies for this scheme and stand to benefit from reductions in power procurement costs and losses due to these installations.

Discoms in some states have been actively pursuing energy efficiency and demand-side management measures, such as time-of-use tariffs with special volumetric rates during off-peak periods, manual and automated demand response pilots for load reductions, appliance replacement schemes, and solar PV microgrids with battery storage, among others.

These measures will further assist the discoms in improving local grid reliability at a low cost. And while they also create value by saving money and improving local reliability, they may also lead to revenue losses for the discoms. This is because prices are volumetric in nature — as they should be for the sake of economic efficiency and fairness.

Revenue concern

Reductions in sales usually result in lower revenues. However, the structure of prices — and especially their relationship to underlying costs — can either exacerbate or mitigate the revenue impacts from changes in sales on discoms’ bottom lines.

One example of this are the cross-subsidies built into tariffs: commercial and industrial (C&I) consumers pay more than their fair share of the costs of supply so that agricultural and low-use residential consumption can be served at low, non-compensatory prices.

This has been a long-standing feature of electricity pricing in India. But it means that measures to improve efficiency at C&I sites will have a particularly adverse impact on discom net income, whereas end-use efficiency for residential and agricultural users will actually improve the discoms’ financial health.

Furthermore, time-of-use prices — where costs are allocated to hours of use — also determine when it is better, from a discom’s financial perspective, to avoid consumption.

The challenges that arise out of legacy decisions, such as tariff design, inter-class cross-subsidisation and even long-term contracts with thermal power plants, are barriers to solutions that would otherwise benefit the entire system. The trick to overcoming these obstacles is to make sure that the interests of the individual actors — the discoms, the customers, and competitive providers — are best served when their actions best serve the public interest.

For lawmakers, this is about understanding where the incentives lie and correcting them when they work against desired objectives.

A version of this article originally appeared in Foresight Climate & Energy.