The necessity of electricity distribution companies

Source- The post is based on the article “The necessity of electricity distribution companies” published in “The Hindu” on 10th June 2023.

Syllabus: GS3- Energy

Relevance- Issues related to electricity sector

News- The article explains the issue of reforms in the electricity sector.

What are the reforms introduced by the Electricity Act 2003?

It provided the framework for the dismantling of the State Electricity Boards. It provided for separation of generation, transmission and distribution into separate companies.

Electricity generation was delicensed, while transmission and distribution remained licenced and regulated activities.

Under the new regime, a competitive industry in generation has evolved. The share of private investment in the creation of new generating capacity has increased rapidly.

Competitive procurement through long-term power purchase agreements has grown. The prices discovered through the market are lower than anticipated under the earlier arrangement for determining tariffs.

The impressive growth in renewable power is the result of private investment. Further, India now has one of the cheapest rates for solar power supply in the world.

What is practice followed in the United Kingdom?

In the U.K, a mandatory power pool had been created. Here, all generators submitted bids for the next day, indicating the quantity they could supply along with the price. The demand and supply the pool price for electricity.

There is full retail competition. Consumers could choose from among several suppliers.

Why are these reform ideas unsuitable for India?

Power is supplied from individual power plants through long-term contracts at prices determined for each. As the plant depreciates, the fixed cost component in the tariff declines. So, the older the plant, the cheaper its electricity.

If India adopts the free market model, all electricity would be sold at the price of the electricity from the most expensive plant at which demand would be fully met.

What are issues related to open access and cross-subsidisation in the electricity sector?

The Electricity Act gives consumers with a load of 1 MW and above the right to open access. It enables them to buy electricity from anywhere and pay the Discom only for the use of their distribution network and a cross-subsidy surcharge.

The Electricity Act calls for progressively reducing cross-subsidies. However, it has remained unimplemented. Cross-subsidy surcharges are continuing and acting as a barrier.

Not many large consumers are meeting their electricity needs even now using open access.

Why is the idea of dispensing with the Discoms not an optimal solution to issues faced by the electricity sector?

Discoms are seen as the weak link in the supply chain of electricity. There are issues related to rising cumulative losses and an inability to pay generators on time.

The problems with Discoms lie in the domain of political economy. There is the inability of regulators in the States to determine cost reflective tariffs. State governments find it difficult to give timely subsidies as required by law.

There is the political economy issue of misgovernance and rent seeking in some States.

The Discom has the universal service obligation of supplying electricity to meet the full demand of every consumer in its licence area. It does this by entering long-term power purchase contracts.

Power-generating capacities have risen rapidly. Investment in generating capacity has been taking place primarily on the strength of long-term PPAs with Discoms.

The energy transition to renewables is accelerating and the reliability of power supply is increasing.

Without Discoms this edifice would collapse. Without new investment, India may face power shortages again.