India’s lightbulb moment: Not using this crisis for meaningful energy sector reform would be a waste

, May 2020

 

Co-authored by Vibhav Nuwal, Himraj Dang, and Mahua Acharya

The trend of low power demand, now furthered in the post-COVID economy, and increased RE generation, will continue to put a ceiling on the PLF of the thermal fleet.

The 9-minute lights-off on the 5th of April was an interesting event in many ways – the power of the call given by Prime Minister Modi, the extent of participation by the public, and the expert management of the national electricity grid. It was also perhaps the first time in nearly a decade that the national grid, or its potential collapse, entered into mainstream conversations and public consciousness.

The event gave rise to many discussions, mostly technical, amongst power sector experts – and was nothing short of a tremendous engineering and coordination accomplishment. Switching off a massive 32,000 MW of power, or the size of Denmark’s electricity supply, and then bringing the power back in a few minutes, is no easy feat: most power plants take longer than 9 minutes to reduce or increase electricity generation.

This accomplishment, though, shouldn’t hide the fact that even pre-COVID-19 India’s power sector has been facing may problems, chief amongst them financial sustainability and payment reliability. It would be easy to push these problems down the road in light of the current crisis. However, the 9-minute event could also be seen as a lightbulb moment, with a real opportunity to take a step back and evaluate a course of action going forward now, when energy demand is low and likely to remain that way for at least a few months, if not much longer.

What types of lessons might we learn?

First, as India continues to integrate renewable energy in keeping with its energy security and climate change goals, a market based automatic mechanism for integration of infirm renewable power into the grid is needed. All countries struggle with this, as so does India presently. The 9 minute lights-off event demonstrated the technical capacity for managing grid flexibility, at least in one direction. But one must also remember that this was a planned event – grids had time to slowly back down supply in preparation and reduce damage from a sudden shock. With renewable power, this luxury isn’t available – weather patterns change and forecasting will never be 100% accurate. The management of the 9-minute event has reassured us that the Indian grid is robust; which means it is also robust enough to integrate more renewable energy – and this is timely given growth forecasts for renewables.

If we can design a market that competitively discovers costs and penalties to dispatching renewable power across a nationwide grid, the “must-run” status of renewable energy will be earned without a regulatory push. Further capacity to manage power spikes associated with 175GW of renewable energy can be built with a push for lithium-ion battery storage availability in each grid, c. 25MW storage for each 1,000MW of generation capacity. The Central Electricity Authority has researched this issue extensively and concluded that with minimal backdowns, the surge of renewable power expected in the future can be fully dispatched.

Second, what to do with idle, old, and inefficient coal plants. With a reduction in power demand across the country, the adjustment has been made by reducing output from coal and lignite plants. This is a good time to recognize that the last ten years have seen a steady decline in energy generation from fossil fuels – plant load factors for the 2019-20 period are at 56%, down from 78% a decade ago. Coincidently, many of these same plants were to install flue gas desulphurization (FGD) systems as part of the country’s commitment to COP21, but the commitment to retrofit 440 units amounting to 166.5GW by December 2022 is way behind schedule. As an example, only 2 out of 33 plants in the polluted NCR have met their FGD targets, and this tardiness can no longer be permitted given our renewed concerns for public health.

With an increase in the generation of renewable energy, assuming India continues to prioritize this sector given climate pressures, the operation of coal-based power plants will remain reduced, and now corrected downwards additionally with the new, post-COVID economic situation. Utilities will continue to lose money through locked-in fixed payment contracts unless a replacement program is devised. Rather than have low performing, old, and polluting thermal plants across the board, some of these old units could be incentivized to shut down, based on generation costs, remaining plant life, and the economics of installing pollution control equipment. This will increase the PLFs of larger, newer, more efficient plants, including those of NTPC, and also help mitigate the country’s now permanent problems with air pollution.

Third, we have one more chance for ‘Make in India,’ an opportunity to bring in fresh COVID-influenced industrial investment from Korea and Japan which is diversifying away from China. Industrial power in Vietnam is, for example, 40% cheaper than in India. Thailand incentivizes manufacturing industry to work through the night by offering vastly discounted power.

We know fuel oil prices have been totally decontrolled in India, and the refineries have even been upgraded to pay for low sulphur fuel, so tariff change for fossil fuels is eminently possible, even politically. India’s cross-subsidy scheme has uneven impacts on the competitiveness of sectors; to specifically target manufacturing, industrial power tariffs need to be competitively-priced. For this to happen, agricultural tariffs have to be dealt with squarely. The political consensus seems to be veering towards a DBT subsidy provided under PM-KISAN, and freeing up all tariffs thereafter, with no scope for unfunded subsidies.

And finally, all this requires that the perennial and oldest issue of the financial health of the DISCOMs gets solved, not just given a lifeline. DISCOMs now owe over INR 8.8 billion to generators. The current lockdown period has hit finances even harder – as industrial and commercial buyers will likely not recover to pre-COVID levels in a hurry. DISCOMS are left catering to low paying categories (households), and loss-making categories such as agriculture.

The proposed Electricity Amendment Bill, 2020, is an ambitious step in the right direction – with bold moves to institute cost-reflective tariffs, remove subsidies, and strengthen the sanctity of contracts through greater enforcement and provision of payment security to generators. Each state can be asked to endorse the legislation with its variant, which could become a condition to accept the centre’s band-aid assistance in this time of crisis.

However, the proposed Bill could have gone further to introduce the radical reforms that are needed. In the current draft, many of the reforms proposed earlier – carriage and content separation, more effective Renewable Purchase Obligations, and default open access to renewable energy – have either been dropped or watered down. Nevertheless, a bold reform move would be the complete abolition of cross-subsidy at a defined future date. The DISCOMs should be required to implement “Direct Benefit Transfer” for paying any subsidy on electricity (rather than it being borne by the Discom, as is the case presently). Removing the cross-subsidy will create the urgency to solve the subsidy problem, and at the same time make power tariffs more competitive – something we critically need if we wish to attract factories relocating from China.

It is said that India reforms only when there is a crisis. We have a monster of a crisis now, and to not use this crisis for meaningful reform would be a waste of talent, leadership, and this rare lightbulb moment at every level.

This blog originally appeared in Financial Express 

 

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