Comments Off on Making sense of India’s fast-changing policy landscape: Integrated modelling to inform decision-making
With several notable recent economic reforms, India is one of the fastest-growing emerging economies. The country aspires to become a $5 trillion economy by 2024-25 and a $10 trillion one by 2030. There is ample evidence that India’s growth has been highly unequal in the past. Therefore, transforming this vision of growth into reality will require a comprehensive approach based on a multitude of policies targeting multiple domains. Further, the development trajectory should also be capable of tackling the key environmental challenges that India faces.
In the fast-changing policy landscape of a country as diverse as India, striving for equitable growth will not be possible without gauging regional implications of policy shifts. Equally important will be to understand the direction and distributive impacts of ongoing policies consistently and on a regular basis in conjunction with various decarbonisation goals recently endorsed by India.
A book released in December 2021, Economy-Wide Assessment of Regional Policies in India, takes on these questions. Making use of the outputs from the integrated energy-economy regional model called E3-India, it provides hopeful insight and offers powerful recommendations for India’s energy, economic and environmental policymaking at the national and state levels.
The book (edited by the lead author of this post) is a compilation of articles describing how various ongoing and announced sector-specific policies will, or will not, advance India’s social, economic and climate ambitions in both the near and longer terms nationally and across different states. The focus is largely on recent policies implemented in the primary, secondary and services sectors, including agriculture, capital goods, automobiles, electronics, information technology (IT-ITeS) and energy. The analyses also account for the effects of the COVID-19 pandemic and evaluate the impacts of different policy choices — especially with respect to environmental consequences and energy use — at the national and subnational levels.
The book takes a realistic look at the economic sensitivities and interdependencies at the national and state levels across India. Its aim is to broaden the scope of future action by reducing ambiguity and uncertainty in achieving the key policy targets — that is, by giving policymakers greater confidence that desired outcomes can be achieved. The major policies evaluated against a business-as-usual scenario include: the Agriculture Export Policy 2018; National Capital Goods Policy 2016; National Steel Policy 2017; Electrical Equipment Mission Plan 2012-2022; National Policy on Electronics 2019; Digital India initiative; National Software Policy 2019; Automotive Mission Plan 2026; and several subnational initiatives in a variety of sectors. In addition, the book evaluates regional impacts of national energy targets, along with economic impacts of existing Nationally Determined Contributions for India and economic impacts of Delhi’s airshed management. The book also takes a closer look at impacts of liquidity infusion in the context of COVID-19 through the Atmanirbhar package.
Sector-specific impact analyses of national policies reveal critical regional insights. For instance, the existing policy regime will lead to Gujarat state becoming a leader in international agricultural exports. Maharashtra, Karnataka and Haryana perform exceptionally well in the capital goods sector. With appropriate incentives in place, Haryana also emerges as a leader under the Automotive Mission Plan 2026 along with Tamil Nadu.
Tamil Nadu exhibits diversified leadership by outperforming in the electronics and IT-ITeS sphere along with Delhi and Uttar Pradesh. The state emerges as a front-runner in renewable capacity installation as well, along with Maharashtra, Karnataka and Andhra Pradesh. In contrast, the resource-rich and income-poor states like Chhattisgarh, Odisha and Jharkhand show a greater growth potential only in the capital goods sector.
We find that the more advanced states, like Maharashtra and Tamil Nadu, are already in a position to take up diversified policy action in the short run and direct resources to expand their markets through further integration in the global value chains. Most other Indian states still rely on few specialised sectors and will be able to diversify in the medium to long run only if sustained policy support in terms of investment in both infrastructure and capacity-building is provided. In a country as large as India, with different states endowed with distinct economic and geographic characteristics, formulating policies to strengthen regional value chains is critical for equitable growth of states across all regions.
Regional analysis of sector-specific policies highlights the nuances of regional variations in a particular sector, but in reality, various sectors are highly interconnected. The implementation of a policy in one region therefore has direct and immediate effects in its implementation in other regions and sectors. An integrated analysis that captures the essence of multiple policies simultaneously working together in diversified sectors and development areas is demonstrated in the final synthesis of this book. The comprehensiveness and granularity of the modelling outputs will enable readers (and other researchers, who can download and use the E3-India model free of charge) to derive nuanced and more informed policy insights.
By clearly outlining the short-run as well as the medium- and long-run priority sectors at a regional level in conjunction with impacts of ongoing energy transitions, this book intends to serve as a comprehensive guide for evidence-based economic and energy policymaking in India. Shaping these regional insights into deliverable policy actions ultimately lies in the hands of the policymakers. The book and the E3-India model serve as a primer and a tool to facilitate evidence-based policymaking at the regional level, enabling policymakers to leverage and strengthen India’s unique socioeconomic and geographical diversity, while moving toward national economic growth targets equitably and with a lower carbon footprint.
Comments Off on The E3-India model: It’s come a long way
In 2016, the Regulatory Assistance Project approached Cambridge Econometrics about building a new macroeconomic modelling tool for India. The rationale for the model was simple: India needed to reduce its greenhouse gas emissions, but much of the policy to do so is set at the state level. A model that could identify the impacts of policies to boost state-level sustainable growth was therefore required.
Years later, the outputs of this work are presented in the book Economy-Wide Assessment of Regional Policies in India, edited by professor Kakali Mukhopadhyay. The book covers a range of topics relating to sustainable economic development in India, always with a focus on realistic (i.e., feasible) policy at the state level.
The model that was built came to be known as E3-India — “E3” for energy-environment-economy. It was developed by experts at Cambridge Econometrics, Professor Mukhopadhyay and former RAP colleagues Ranjit Bharvirkar and Surabhi Joshi. Without this collaboration, it is unlikely the model would have advanced to its present state.
The foundations of the model follow the Cambridge tradition, drawing on the demand-driven framework originally developed by Michal Kalecki and John Maynard Keynes. This approach provides several advantages over the more common equilibrium approach to modelling; it does not make assumptions about perfect information, rational behaviour or frictionless markets. In addition, it models labour markets, including involuntary unemployment — matters of particular importance to policymakers.
This demand-driven approach requires that behavioural parameters be informed by econometrics — that is, it requires, among other things, time-series historical data. With the model disaggregating India’s economy into both states and economic sectors, a substantial exercise in data collection and processing was required. Professor Mukhopadhyay led this herculean effort, yielding a tool that researchers today can download and use free of charge.
Another important feature of the model is its tight integration of energy consumption and greenhouse gas emissions within the wider economy. The model ensures consistency between physical and economic measures of energy consumption and prices — something that is critical for effectively assessing sustainability.
The power sector, which will play a crucial role in decarbonising India’s economy, is modelled in additional detail using an advanced framework developed by Jean-Francois Mercure. This allows the user to test policies such as feed-in tariffs, renewable subsidies and coal phaseouts, along with the standard energy and carbon tax policies that other models typically examine.
Each chapter of the book is dedicated to a different sector of the economy. A set of scenarios is used to explore different possible outcomes by implementing combinations of policies. The demand-driven nature of the model allows the analysis to start from a position in which the Indian economy has been set back by COVID-19; many of the scenarios look at ways to restore jobs and prosperity.
Eleven authors, experts in their respective fields, were involved in the production of the book. They put the E3 model to rigorous use, testing its capabilities and performance, and with it have revealed some important truths about the Indian economy and good news about its ability to transform itself into the sustainable, low-carbon powerhouse that it aspires to be.
The book is by no means the end of the E3-India project; in many ways, it is just the beginning. E3-India is a tool that policymakers can use for many years to come as they embark on the journey of promoting sustainable development. The model will continue to be updated. We encourage readers of the book to work with the model themselves, to challenge its conclusions and to examine other scenarios, all with the aim of developing public policies dedicated to improving the long-term welfare of Indian society and the environment. If India is to contribute to meeting global climate targets, much work remains to be done.
Comments Off on Why India should keep coal out of its infrastructure story
As India looks to “build back better” from the Covid crisis, the country would benefit economically, environmentally and socially by investing in clean technologies.
In late 2019, the Indian government announced a $1.4trn National Infrastructure Pipeline (NIP) to jump-start economic growth. This plan includes a high-profile target for the addition of 75GW of thermal power plants by 2025. At a time of overcapacity and low utilisation rates, it makes no economic sense for public or private investors to finance coal power plants in India.
That announcement was before the pandemic. The government is now expected to sharpen its focus on the investments planned in the NIP in an attempt to boost the country’s GDP, which took a huge and unprecedented hit due to Covid-19 lockdowns.
In contrast, the country has seen an influx of funds, from global pension sovereign funds and private equity investors, for investments in renewable energy. It is time to find some common ground for the government and investors that helps meet growth expectations and leads to long-term sustainable growth.
The NIP, along with the power sector reforms currently underway, including those in wholesale electricity markets, should drive investment in economically, and environmentally, efficient infrastructure.
The 2003 Electricity Act delicensed the power generation business and led to a flurry of public and private investments in new power generation assets. New assets were considered vital given the increase in energy peaks and unmet demand, and the growth in GDP overthe past ten years. As a result, around 124GW of new coal power plants were installed from 2010 to 2016, equal to about 62% of the country’s current coal capacity.
However, that investment story has resulted in a not-so-happy ending for many investors.
The capacity additions, which were meant to support the country’s export-oriented manufacturing-driven economic growth plans, suffered from demand failing to pick up as expected. As a result, several thermal plants are operating at historically low load factors. Many are struggling to meet their debt service requirements, let alone expectations of equity returns.
Say’s law, which claims ‘supply creates its own demand’ or, more simply, ‘if you build it, they will come’, did not hold true for investors who developed gigawatts of thermal power plant capacity.
The announcement of a five-year infrastructure investment plan in late 2019 was one of several central government-led mega-schemes aimed at providing long-term project pipeline visibility. Large-scale, multi-year construction infrastructure projects that can attract huge volumes of international and domestic capital at affordable costs are considered a priority to boost GDP. Such projects contribute significantly to direct and indirect job creation. Further, increased access to better infrastructure can lead to capital savings for businesses and increased labour productivity.
But not all infrastructure projects result in equal societal net benefits. Clean energy infrastructure investments not only add jobs and spur business activity, but also lead to greater benefits, such as carbon and other pollutant reductions plus public health improvements. A new thermal power plant will not create these external benefits.
And then there are the costs and economic benefits. The NIP focuses primarily on roads, urban housing, railway freight corridors and energy. The electricity sector allotment – 24% of the NIP budget – aims to stimulate the addition of 75GW of coal power stations and 100GW of renewable projects.
Given the low load factors of existing coal power plants, it does not make economic sense to further invest in creating assets that may remain mostly idle. Instead, infrastructure investment should focus on the renewable projects needed to meet energy demands arising from projected future economic growth. They would also help India to fast-track its transition to a cleaner growth economy and stimulate a post-Covid recovery. Adding more coal capacity will simply create greater environmental challenges for the future.
The NIP sets a target of an additional 100GW of renewable energy projects by 2025. This aim fits well with national renewable energy targets of 175GW by 2022 and 450GW by 2030. But the NIP’s signal for another 75GW of coal power plants is neither in tune with the reality of existing projects nor in line with the overarching theme of ‘One Sun, One World, One Grid’, Modi’s ambitious plan to transfer solar power to 140 countries through a common grid, of which India is a signatory.
Infrastructure is the missing piece in India’s economic growth story. However, the focus and prioritisation should be on building infrastructure that is required and desirable from a net societal benefits perspective. It is not advisable to fall into the trap of creating capital investments that are financially risky or of investing in projects that will quickly turn into non-performing assets, stressing banks and choking capital for deserving businesses and citizens.
“Build back better” should be a catchphrase, but it works if incorporated in plans and forecasts for future growth. There is no trade-off between green growth and economic recovery. In this context, the need for yet another round of investments in coal plants, when the existing ones are already under stress, needs serious discussion.
Comments Off on Early insights from India’s first month operating the real-time market
India’s real-time market (RTM), launched on June 1st, 2020 on both the power exchanges after two years of public consultations by the Central Electricity Regulatory Commission (CERC). The RTM is a centralized market platform which runs a double-sided closed auction, closer to delivery. The market runs every 30 minutes, i.e., 48 times a day. The timeline below shows the process from auction to delivery.
Source: Framework for Real-Time Market, Statement of Reasons, CERC
The two primary objectives of RTM were to:
Optimize the utilization of existing resources to cater to real-time imbalances through a centralized platform, and
Facilitate integration of large-scale renewable energy through larger balancing areas and faster markets.
The RTM has been running successfully for a month now, and the response has been extremely positive with India Energy Exchange (IEX) reporting 237 participants in the first month. Participants have also expressed how the RTM is helping them manage their imbalances in a cost-effective manner. In this blog, I look at early trends and patterns that can be observed from the price and volume data of the RTM from IEX for June 2020. Starting with daily averages, I’ll break down the data into diurnal, regional and area wise trends.
Chart 1 shows the daily average market clearing price (MCP) and scheduled volume. The abnormally low volumes and prices cleared in several time blocks during the first few days could have skewed the results, but we observe the volume growing in subsequent days. The last 10 days of the month saw average volumes above 1,000 megawatts (MWs). Just like in any other market, participants experiment with different strategies and learn from historic data that is generated along the way. Given that the RTM is primarily designed for imbalance management, we can expect the volume to be between 2,000 MW and 4,000 MW in any time block. So, it’s encouraging to see the average volume already going above 1,000 MWs.
Chart 2 shows the average diurnal price and scheduled volume as well as the demand-supply for the month. As expected, the average supply is higher than the demand in almost all time‑blocks, a reality emerging from the capacity surplus in India’s power system coupled with lower demand due to reduced economic activity during this period. The MCP is therefore seen to be following the demand closely. The supply trend is also consistent with solar generation hours and peaks during early afternoon. The supply first declines with the solar generation tapering off; however, a big drop is observed later from around 6.30 pm to 7.00 pm. This could be due to evening ramp-up, combined with the increase in net load to be served, which reduces the availability of dispatchable generators. The average MCP has hovered between ₹ 1,800-2,400/MWh from midnight until around 7.00 pm, after which the drop in supply and rise in demand simultaneously lead to a higher MCP. It will be interesting to observe the results in the coming months as wind generation picks up.
Moving onto regional trends, Charts 3 & 4 show us the average diurnal regional demand and supply for the month. The southern region has clearly dominated the volume of buy bids in all time blocks, with around a 50% share in many hours. Supply is more scattered, with the southern and northern region alternatively dominating every few hours.
One of the biggest arguments for larger balancing areas is to take advantage of diversity in generation and load patterns between different regions. This can be observed here, specifically during a few hours. The northern region has higher supply during the morning peak hours while their demand remains relatively low. This benefits the western and southern regions, catering to their increasing demand in the morning. The demand in the southern region rises after 7.00 pm again while their supply drops drastically. This is complemented by the rise in supply from the northern, eastern and western regions. The overall sell volume of the eastern region has largely remained well above their demand, allowing them an opportunity to sell their generation to a region with higher demand. One can observe many such instances if the data is deaveraged and looked at more granularly.
Distribution companies also have an opportunity to undertake trading activity by selling surplus generation in their portfolio themselves. Currently, the generator has to share the profits with the beneficiary if any surplus contracted power is sold in the RTM. However, if the distribution company itself sells the power, then it enjoys all the profits.
The trends become even more interesting when we look at the individual bid areas in each region. Chart 5 shows the demand and supply of 12 bid areas in the five regions. We can observe straightaway that apart from the northeastern region, all other regions have diversity in demand and supply amongst different areas. Starting with the southern region, which had the highest demand bids in all time blocks, 98% came from area S1 i.e., Karnataka, Andhra Pradesh and Telangana primarily. The other two bid areas hardly placed any demand bids, let alone got cleared. On the other hand, 72% of the supply bids came from S2, which is Tamil Nadu and Pondicherry.
In the western region, W2 i.e., Maharashtra, Gujarat, and North Goa, dominated the demand with an almost 90% share. From the supply side, W1 & W3, i.e. Madhya Pradesh and Chhattisgarh respectively, which have low-cost solar as well as thermal plants closer to coal mines, placed 70% of supply bids. Similarly, we see N2 and N1 dominating the demand and supply respectively, while N3 i.e., the state of Punjab, has almost negligible participation in the month of June. In the eastern region, E1, which includes the states of West Bengal, Sikkim and Bihar and Jharkhand, had 85% of the demand bids; one of the reasons could be simply because E2 only consists of Odisha. However, E2 alone contributed to almost 50% of the supply. Although not equal, the share of demand and supply from the two areas in the northeastern region is consistent on average.
This visibility is a direct result of a common marketplace, which allows everyone to transact in the most economically efficient manner while providing the system operator more control over the resources post gate closure. It would not be possible for buyers and sellers to have so much information in real-time without such a platform. The benefits of regional diversity were also experienced in the security constrained economic dispatch (SCED) pilot; however, the RTM goes a step beyond and puts a fair value on the power transacted.
Lastly, Chart 6 compares the average diurnal RTM and Day Ahead Market (DAM) prices in IEX. The trend of both of these prices is similar, with RTM prices lower than DAM in most of the time blocks on average. In the long run, as the market matures, the arbitrage between the DAM and RTM should reduce and therefore the volume of the RTM should grow to the extent that it is cheaper to procure power from the RTM than schedule day-ahead. Although, more than 90% of all wholesale market transactions take place bilaterally, we are witnessing distribution companies revamp their power procurement strategies and optimize between buying from their own portfolio of contracted generators and from the power exchanges. This would increase the buy-side liquidity in both the markets and create strong price signals for others as well.
These high-level observations help us, to some extent, understand the diversity of participation and how buyers and sellers in different areas can take advantage of different scenarios. The intent of this article is to highlight some of my observations based on the price‑volume data alone. The market has only been running for a little over a month and, therefore, there’s a long way to go and a lot more data to be analyzed. A few interesting questions to explore would be the impact of the RTM on renewable energy curtailments and whether distribution companies are able to sell excess generation in the market instead of ramping power plants. Are we observing reduced dependency on deviation settlement mechanism after the launch of the RTM? Has the RTM benefitted merchant generators in any way? How would RTM affect the role and potential of SCED optimization? I’m sure we will come up with many more questions and insights as the market matures. I look forward to hearing from the multiple stakeholders in the power sector community to better understand the explicit as well as implicit impacts that we experience from these wholesale market reforms.
More than 200 experts from load dispatch centers, regulatory commissions, distribution companies, generation companies, consumer advocacy groups, civil society organizations and academia already have participated in workshops using the resources. Because of high demand for the materials, including a lecture-based curriculum and interactive player-driven simulation game, we are making them available free online to anyone interested in using them.
Market Economics Curriculum
We developed a curriculum focused on the fundamental economic engineering concepts underlying competitive electricity markets. Power sector professionals can use the curriculum to deepen their understanding of wholesale electricity markets and evaluate how different market designs affect their operations.
The Economics for Wholesale Electricity Markets curriculum consists of 70 short videos organized into seven modules:
Each module includes a presentation download, and the short videos allow viewers to easily revisit specific topics anytime from the complete playlist.
India Electricity Simulation Tool
The innovative India Electricity Simulation tool models the real-world outcomes of wholesale power market transactions. It offers stakeholders and policymakers an opportunity to evaluate their decisions under different market designs.
This immersive learning experience is completely player driven. Participants (or teams) assume the roles of power sector entities — both distribution utilities (Discoms) and generating companies (Gencos) — and make electricity sector investment and operational decisions under different scenarios. Since the tool is online, participants need not be in the same physical place to play together, although a team may find it easiest to cooperate in person.
The participants have different objectives, depending on their assigned role. The Discoms seek to serve their customer load at the lowest cost, while the Gencos seek to run their generator portfolio as profitably as possible. As participants advance through the simulation, they must make decisions about procuring capacity, scheduling power and managing real-time imbalances.
The tool offers five market designs ranging from a completely decentralized bilateral contracts model to a centralized pool-based model. By playing multiple scenarios with different market structures and different assigned roles, participants can learn more about the nuances of different market designs as well as the decision-making behavior of the Discoms and Gencos.
Policy discussions and design questions that the tool can support include:
What is more effective in ensuring that least-cost electricity is being scheduled and dispatched: bilateral or centralized day-ahead scheduling of transactions?
What is the importance of flexible resources in the system, and how can we accurately reflect the value of these resources?
What kind of market design can optimally utilize flexible resources to manage system imbalances?
How best to make long-term decisions about procuring or building new capacity and the type of capacity to invest in?
CERC’s proposed market reforms have the potential to cost-effectively integrate the rapidly growing share of renewable energy into India’s grid. We hope the markets curriculum and the India Electricity Simulation tool give stakeholders the knowledge and experience to embrace the reforms and bring new insights to the policy discussion.
Comments Off on Karnataka’s power sector: History, politics of development have consequences
When Chief Minister HD Kumaraswamy announced crop loan waivers in his first budget after he came to power in May this year, there was widespread concern about how the state would finance these. Many who thought the loan waiver was a valid response to agrarian distress argued for managing costs by cutting the other biggest subsidy component in the budget – government subvention to the Electricity Supply Companies (ESCOMs).
This is estimated to be ~ 11,048 crores for FY2018-19 according to the most recent tariff order issued by Karnataka Electricity Regulatory Commission (KERC) and is owed by the government to the ESCOMs in the state so that they can provide free electricity to irrigation pump sets below 10 HP, a key plank in the government’s welfare policy.
Electricity subsidies are often attributed to the incompetence of ESCOMs and are rarely interpreted as welfare policy. This has led to a near-complete silence about the continuous cycle of evasion of responsibility in the sector: the government subvention owed to the ESCOMs is only partially-paid; the ESCOMs delay payment for power bought from state-owned generating stations hoping this would be set off against the subsidy owed to them; and in turn, municipal bodies do not pay the ESCOMs for the electricity they consume. In this way, the power sector has become the flexible and convenient current account for the government whenever it needs a bit more fiscal wiggleroom. What seems to make this cycle of evasion acceptable is the widespread belief that subsidy payments to utilities are somehow ill-justified.
This belief stands on a now-familiar storyline which turns the utilities into villains of fiscal problems of the state – inefficient public utilities that have no incentive to improve performance, compromise fiscal prudence and prevent much needed public expenditure on sectors such as health and education, all due to political pressures from rural constituencies. In this story, the solution is straight forward: there must be strong political will at the top of the hierarchy to implement tough measures to reform the sector.
Unfortunately, this kind of thinking that seeks to separate “petty” politics from what are considered technical matters of utility operations has contributed to the obfuscation of the very real political negotiations that have been happening in the sector. This thinking has also stifled what would be a useful debate in the sector on whether and how public-owned companies can be incentivised to become commercially viable and less prone to corruption.
This thinking has restricted the debates in the sector to ways and means to improve technical and commercial efficiency parameters in public utilities without acknowledging the central role that electricity departments and utilities played in agricultural development until the recent past and how to transition out of this regime and at what cost.
Political settlements therefore, have occurred under the guise of techno-economic adjustments. For example higher agricultural tariffs in the northern region are justified on the basis of deeper ground water levels in that region.
The real effect of this adjustment, however, is not on ground water consumption as that is completely free for users. Instead, ESCOMs in the regions with low paying consumers receive a higher allocation of the budgeted power sector subsidy in the State relative to their share of sales to consumers that do not pay for electricity (IP sets account for 97% of this sales revenue).
Historical factors such as structural differences across regions in Karnataka also affect seemingly technical issues such as tariff determination subsidy.
For example, Karnataka’s strategy of relying on a services-led growth around Bengaluru also left most paying consumers concentrated in one region.
The creation of regional ESCOMs as part of the reform in 2002 was meant to create autonomous companies that could operate on commercial principles according to cost of supply in each region.
In practice, however, tariff setting norms and subsidies in the state have evolved an equilibrium that can accommodate the vastly different consumer profiles in various regions of the state so that most of the budgeted power subsidy is allocated to the ESCOMs in the northern region.
The state’s historical context and its politics of development, including the debate on the inequalities between the northern and southern regions, has consequences for the balancing act that is required in the sector- often brokered by the energy department and the regulator. It is useful to be mindful of this political dynamic in the sector rather than relying on measurement and monitoring based on technical parameters alone.
Comments Off on A Tale of Two Reforms: The Power Sector in Andhra Pradesh
Andhra Pradesh’s power sector is going through a second phase of reforms. The first (1999-2004) was widely seen as focused on privatization of electricity distribution; this time the goal is to ensure affordable and reliable power supply for all. To do so, Chief Minister Chandrababu Naidu has pledged to keep retail tariffs unchanged in the coming years for all consumer categories, while improving the quality of supply and service.
At present, the central government is pushing strongly to raise retail tariffs to reflect the rising costs of supply, a target set for states under the UDAY scheme for discoms’ financial turnaround. This makes Andhra Pradesh’s plan—to improve electricity without any additional cost burden on the consumers—particularly intriguing. Can Naidu pull off this trick while avoiding negative consequences for the state’s electricity sector? What are the consequences of failure?
The context for this latest gambit is the reform effort of 1999-2004. Despite backing by the chief minister, supportive and skilled regulators and utilities, and the central government, the plan to improve discoms’ health through tariff and management reforms did not receive public support. Although discoms registered efficiency gains, the public focused on the accompanying tariff hikes, which caused mass agitation. Some have suggested this was central to Naidu’s defeat in the 2004 state assembly election.
In his return to power in 2014 in a smaller Andhra Pradesh, Naidu has devised a reframed reform strategy. First, consumers are at the centre of reforms and are promised high-quality service at affordable prices. Notably, however, this does not include promises of a 24/7 supply of free power to farmers, as in Telangana.
Second, the reform relies on disruptive technologies to bring down discoms’ power bills through a five-point strategy:
Improve supply through enhanced renewable energy (RE) generation, energy storage technologies, and full capacity utilisation of conventional power plants;
Implement energy efficiency measures;
Strengthen the transmission and distribution (T&D) network to bring down losses to below 6 percent;
Adopt information technology for better consumer services; and
Improve financial management of power projects, including loan swaps.
There are early signs of progress. The state has achieved 7 GWs of RE installed capacity, which is 10 percent of national RE capacity and 30 percent of the state’s total generation capacity. To complement RE capacity, Andhra Pradesh has inaugurated the first thermal battery plant of India and allocated more than 100 acres for energy storage projects. The state has set a target of 10 lakh (1 million) electric vehicles on the road by 2023, backed by a dedicated electric mobility policy and planned investment of Rs 30,000 crore (300 billion rupees). Andhra Pradesh has emerged as a national front-runner in the State Energy Efficiency Preparedness Index. To improve efficiency and reliability of the T&D network, the state initiated a $570 million project last year, with donor assistance.
What works in the state’s favour is that it has some breathing room to manoeuvre because of several reasons. After the bifurcation of the state, Andhra Pradesh gained from a slight reduction in subsidised load (domestic and agriculture) and aggregate technical and commercial (AT&C) losses. Since it is a relatively wealthy state, it has managed a persistent revenue gap by increased state subvention, from 12 percent of discoms’ revenue requirement in 2014-15 and 2015-16 to 19 percent in 2018-19, as illustrated below. This has prevented a decline in quality of service.
In September 2018, the per-unit revenue gap was 0.06 rupees, one-fifth the national average, and AT&C losses were 11 percent, half the national average, as reported by the UDAY portal. These developments make Andhra Pradesh a leader in UDAY target achievements while providing the fiscal space to manage the political demands for explicit subsidies.
However, for long-term gains, the state will need to use this breathing room to bring down the costs of supply and create enough demand for the additional power capacity it is adding through RE and augmented capacity utilisation. Naidu hopes his plans for industrialisation will absorb the surplus power. Whether this works will depend on growth in industrialisation as well as proper resource planning for the additional generation capacity.
Notably, Andhra Pradesh has sought to capture the gains of falling RE generation costs as technology improves. The counter, and more problematic, story is that industrial consumers would leave the grid to capture these gains through direct installation of RE, which would cut into the cross-subsidy available for poorer customers. Andhra Pradesh is seeking to manage this transition by proactively adopting these disruptive technologies in an effort to reduce the power bills for all, but also retaining industry through improved quality and a stable tariff.
In this tale of two reforms, Andhra Pradesh has moved from a price- and privatisation-focused effort to one that aims to put consumers up front. If it fails, the results would be dismal and all too familiar: low tariffs combined with growing stranded capacity as new generation finds no takers, and declines in cross-subsidies as industrial customers flee. But the reforms are designed specifically and deliberately to avoid these traps, which is what makes them interesting. If Andhra Pradesh succeeds, it will signal an alternative, consumer welfare-focused model of power reforms. While it is too early to predict success, this is an effort worth watching.
Comments Off on A Window for Power Sector Transformation in Uttar Pradesh
A rare window is open for power sector reform in Uttar Pradesh. The Bharatiya Janata Party (BJP), in office in both Lucknow and New Delhi, has a sweeping mandate to transform Uttar Pradesh’s troubled electricity situation. The party has made two important commitments on this front. First, to ensure every household in the state has an electricity connection and access to 24-hour reliable supply. Second, to turn around the state’s five loss-making public distribution companies, or discoms.
Progress in both areas is sorely needed. In 2017, more than 17 million rural households did not have a formal electricity connection. Supply remains unreliable in urban and rural areas, hampering economic growth.
Since the 1980s, the state’s public discoms have been accruing annual losses, the result of a large gap between the cost of supplying electricity and the revenue they recover from customers, coupled with underfunded subsidised tariffs for domestic and agricultural users.
The former Samajwadi Party government signed Uttar Pradesh up to the central government’s UDAY power sector reform scheme in 2016. This allowed 75 percent of discom debts to be cleared, and various initiatives to improve the companies’ financial performance were started. But discoms are continuing to report sizable losses.
Source: Government of India and Government of Uttar Pradesh. (2017). 24×7 Power for All Uttar Pradesh
Universal electricity access and discom performance are closely intertwined challenges in Uttar Pradesh. Increasing access and reliability of supply ultimately will depend on success in transforming the performance of discoms—in particular reducing the large losses they accrue in supplying domestic and agricultural consumers. Put simply, it will not be possible to provide reliable electricity to millions of additional rural households as long as discoms face high losses supplying rural and agricultural users.
Successive governments since the 1990s have in practice focused on access, without coupling this with serious action on improving discoms’ performance. Politics explains this. Decisive programs for household electrification and increasing the hours of supply are politically popular in the short term. Tackling the state’s loss-making discoms, in contrast, requires political parties in office to allow electricity tariffs for domestic and agricultural consumers to rise regularly, and to take stringent action on revenue collection and theft. In a politically competitive multiparty state, no party has been willing to make the bargain of jointly tackling both areas, for fear of electoral repercussions.
Challenges exist besides highly subsidised tariffs, high theft levels, and poor revenue recovery for Uttar Pradesh’s discoms. While many states can rely on industry consumers to pay high tariffs that cross-subsidise low tariffs for other users, Uttar Pradesh has only a small base of industrial consumers. Additionally, the cost at which discoms receive power from generators is high.
On household electrification and reliability of supply, the BJP has moved fast. Progress is already evident. By way of the central government’s Saubhagya scheme, millions of households have been provided with a regularised electricity connection, and millions more will be connected in the coming two years.
Although the BJP’s target of full household electrification by 2019 looks difficult, the goal may be reached soon thereafter. The BJP has drawn up a 24X7 Power For All plan for Uttar Pradesh, which promises 24-hour electricity supply to all rural and urban domestic and industrial consumers from late 2018. Currently, rural areas receive around 18 hours’ supply. This in itself represents a notable improvement above the supply situation of recent years.
Toward reforming the financial performance of the state’s discom, the BJP is also acting on various fronts. It has built upon programmes the previous Samajwadi Party government started to extend metering, improve billing and revenue collection, and cut down on theft. The BJP has expended significant political capital by pushing through substantial increases in electricity tariffs for domestic and agricultural users, helping to bring down the gap between cost of supply and revenue collected. However, losses at the state’s discoms remain high. With elections due in 2019, the BJP may find it politically unpalatable to take further steps to raise tariffs and cut down on losses in the coming year.
Electoral support has for decades been mobilised on the basis of promises of cheap or free electricity in Uttar Pradesh. In the 1970s and 1980s, farmers were promised cheap electricity. In the 2000s, it was weavers who were wooed with subsidised power. Losses are typically significantly higher in VIP districts.
A window of opportunity to change the status quo is open in Uttar Pradesh. If the BJP can deliver on reliable access for all, and link success on this front to public acceptance of regular tariff increases and timely bill payment, then the seeds of transformation in the power sector may be sown.
When the BJP last ruled in both Lucknow and New Delhi, between 1997 and 2002, the party pushed through extensive structural reforms of the power sector, against significant opposition. However, shortly after doing so, it backtracked on tariff increases required by the state’s discoms to support a financial turnaround, fearing electoral defeat. It remains to be seen whether a story of bold ambitions from the BJP giving way to electoral pressures is repeated.