How to shock-proof India’s power sector

Context: In October last year, India witnessed significant power shortages due to low inventory of coal at the power plants. After seven months, reports of coal-shortage induced power outages across states have surfaced.

States like Andhra Pradesh and Gujarat have asked industries to reduce consumption to manage the power deficit.

How can the Indian power sector become more resilient to future shocks?

What are the reasons behind the present coal shortage?

As economic activity resumed after the Covid-induced lockdowns, the demand-supply mismatch for commodities such as coal widened globally, leading to a surge in prices.

Geopolitical tensions have worsened the existing crisis.

Global supply disruptions due to the Russia-Ukraine conflict have sent coal prices touching historical highs. The cost of imported coal in India is expected to be 35 per cent higher in the fiscal year 2022-23 compared to the past year.

Rise in domestic energy demand: Even as coal stocks available with state thermal power plants fell, India also witnessed a sudden rise in energy demand in March — the hottest in its recorded history. The last week of March saw a 13% higher demand over past year trends, accompanied by high electricity prices on the power exchange.

– This has left distribution companies (discoms) with two options: a) Procure expensive power, but face uncertainty in revenue recovery, or b) resort to power rationing, as several states are doing.

What steps have already been taken by the Govt?

The Ministry of Power has taken a host of measures to alleviate the crisis. This includes

– giving directions to ensure maximum production of coal at captive mines,

– rationing of coal to non-power sectors, and

– a price cap of Rs 12 per unit on electricity traded on exchanges.

But the Govt needs to do more to enhance the sector’s resilience to such disruptions from external factors.

What further measures need to be taken to ensure future resilience of the power sector?

Create an enabling ecosystem to ensure power plants work efficiently.

– India has about 200 GW of coal-based generation capacity which accounts for nearly 70% of the total electricity generated in the country. However, according to a CEEW assessment, a disproportionate share of generation comes from older inefficient plants, while the newer and efficient ones remain idle for want of favourable coal supply contracts or power purchase agreements.

• Revisiting fuel allocation and supporting the priority dispatch of efficient plants could help India reduce coal demand by up to 6% of our annual requirement, and set aside more coal for emergency situations.

Enable discoms to undertake smart assessment and management of demand.

Advanced tools for medium- and short-term demand forecasting exist, but few discoms have adopted these to inform their procurement decisions. With more than 90% of power being procured through long-term contracts, discoms have little incentive to dynamically assess and manage demand.

• Introducing time-of-day pricing and promoting efficient consumption behaviour would help shave peak demand and avoid panic buying in the market.

Empower electricity regulators to help bring down discom losses.

Despite two decades of sectoral reforms, the aggregate losses of discoms stand at 21% (2019-20). These losses are also the reason for discoms not being able to pay the generators on time, resulting in payment delays to Coal India, which, in turn, is reluctant to supply coal on request.

• Besides the ongoing initiatives like introducing smart meters and network strengthening, empowering regulators would be critical to infuse payment discipline across the supply chain of the electricity sector.

Way forward

Given its development aspirations, India’s power demand is set to rise substantially and become more variable.

Increasing climatic and geopolitical uncertainties underscore the need to become more efficient in the way India generates, distributes and consumes energy.

Govt needs to act now for the long-term resilience of India’s power sector.

Source: This post is based on the article “How to shock-proof India’s power sector” published in The Indian Express on 29th Apr 22.