Security January 2020 - Knowledge Partner - World Utility Summit
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security
January 2020
Knowledge Partner
Founding Partners
Analytical contacts Mr. Suman Ghorai Director - Energy & Natural Resources CRISIL Infrastructure Advisory suman.ghorai@crisil.com
The theme
The theme of the World Utility Summit (WUS) 2020 is Three, today’s electricity consumers are far more
“Utility Next”. informed about power quality, utility services, and their
costs, than ever before - thanks to rapid digitization
A massive digital transformation is sweeping the
and ease of access to information.
electricity business, touching every stakeholder in the
value chain. Electricity utilities will soon need to work Owing to these transformations, utilities need to
with smart grids, artificial intelligence, Internet of urgently adapt to technological disruptions and
Things (IoT), supervisory control and data acquisition consumer expectations.
(SCADA) systems, and more.
The WUS™ 2020, to be held over 20-21 January,
Two, climate change is driving another wave of 2020, will provide a meeting place for electricity, water,
transformation. To meet the Paris Agreement climate and gas utility professionals, and industry
goal of keeping the rise in temperature to well below 2 representatives, consultants, service providers,
degrees above pre-industrial levels, greenhouse gas researchers, and regulators. It will attempt to re-define
emissions need to be reduced by at least 40% by 2030 the “utility of utilities,” in the changing business
from 1990 levels. India is seeing the proliferation of environment. The summit will bring in leaders from
large scale renewables, penetration of electric across the globe to share their views on various
vehicles (EVs), etc., in a move to eventually reduce its challenging and exciting scenarios that will help shape
dependence on fossil fuels. the future path of utilities.
3
The WUS will focus on the following topics:
Market enablers Enabling technologies for data privacy and
cybersecurity
With the emergence of distributed generation
resources and availability of multiple electricity With abundance of critical data in power systems and
providers today, consumers have a range of options remote access, securing operations without
to meet their changing energy demand. Moreover, the compromising system availability and data privacy is
future of the electricity ecosystem will include higher a major concern. Cyber security threats are on the rise
penetration of next generation technologies such as and there is a continued need to develop mitigation
renewables, EVs, energy storage, and digitization. technologies and solutions to make power equipment
and control systems more secure. Data encryption,
The role of utilities, thus, has to be re-engineered to
communication robustness, malware protection, etc.,
prepare for the future.
are currently being used by stakeholders to address
Revenue security cyber security issues. They will have increasingly
have to play a major role.
Utilities generate revenue primarily through billing
their customers for demand and energy usage. New Policy and standards
ecosystems, with multiple options for consumers to
With the changing dynamics of the electricity
meet electricity demand, are expected to pose stiff
ecosystem, policies and standards have become
competition to utilities. Hence, it is all the more
extremely critical to ensure technical, financial, and
important now to safeguard their investments. For
business viability for all stakeholders. There is need
that, it is important to ensure utilities are resilient to
for robust policy, especially in the areas of distributed
transformational changes.
generation, renewables, EVs, and storage.
Grid transformation Consumers must be made aware of changing
scenarios and engaged in the decision-making
Renewables and EVs are being promoted across the process.
globe for various reasons. These technologies will
transform power grids in unprecedented ways. Energy storage
Renewables introduce high variability and
Energy storage has a versatile role to play in operating
intermittency issues in the grid. High intermittency
grids and providing value to all stakeholders. This
leads to underutilization of transmission infrastructure,
includes: balancing demand and supply, regulating
increased impact on grid operations, and greater need
frequency, managing renewables, and providing
for flexible generation sources.
autonomy for consumers. In the future, storage will
play an ever-significant role in achieving full potential
of new and upcoming technologies.
4
Foreword
Mr. Suman Ghorai
Director - Energy & Natural Resources
CRISIL Infrastructure Advisory
World Utility Summit has a pertinent context in the transmission and generation arm in the value
creating a heterogeneous forum, with utilities at the chain.
centre stage, to deliberate together on the challenges,
While the advent of Indian Electricity Act 2003 has
ideas and the wider transformations that await in the
brought in competition and much needed structural
near future. This year especially, the summit has its
changes in the power sector, but it has also increased
core theme as ‘Utility Next’ which indeed focuses on
the complexity and challenges of the utility business.
the role of various stakeholders ranging from central
The Act embarks upon of liberalization, competition
government, state government, regulators and most
and commercial aspects of the utilities and at the
importantly the utilities’ role to adapt with the dynamic
same time gives due importance to consumer
transformations yet remain consumer friendly.
interests and concerns. The responsibility of balancing
CRISIL Infrastructure Advisory is pleased to be all the stakeholders thus became the key to ensure
associated with the prestigious World Utility Summit sustainable operation of power utilities. Hence long
(WUS) 2020 as a Knowledge Partner for the theme term prosperity of the power sector is dependent on
‘Revenue Security’. The WUS has been a strong ‘revenue security’ of the power distribution utilities for
platform to share utility experiences from across the its journey from consumers to prosumers.
globe and also debate on innovative as well as critical
Wish all success to the WUS 2020 and look forward to
aspects of the sector. The theme ‘Revenue Security’
an enriching discussion with the esteemed panel.
is particularly important as the revenue of the power
distribution utilities directly impacts the sustainability of
5
Abbreviations Acronym Definition ACS Average Cost Of Supply AMI Advances Metering Infrastructure AMR Automatic Meter Reading R-APDRP Restructured Accelerated Power Development And Reforms Programme ARR Aggregate Revenue Requirement BESCOM Bangalore Electricity Supply Company Limited BOOT Build Own Operate Transfer BPL Below Poverty Level CEA Central Electricity Authority CERC Central Electricity Regulatory Commission CESC Calcutta Electric Supply Corporation CRIS Crisil Risk And Infrastructure Solutions CSS Cross Subsidy Surcharge DBFOT Design-Build-Operate-Transfer DBT Direct Benefit Transfer DDUGJY Deendayal Upadhyaya Gram Jyoti Yojana DMS Distribution Management System FRP Financial Restructuring Plan GDP Gross Domestic Product HHD Hand Held Device HVDS High Voltage Distribution System IPDS Integrated Power Development Scheme JBVNL Jharkhand Bijli Vitran Nigam Limited MBC Meter Reading Billing And Collection MIS Management Information System MSEDCL Maharashtra State Electricity Distribution Company Limited NPA Non-Performing Asset NTP National Tariff Policy OMS Outage Management System PPA Power Purchase Agreement PPP Public And Private Partnership RGGVY Rajiv Gandhi Gramin Vidyutkaran Yojana SCADA Supervisory Control And Data Acquisition SERC State Electricity Regulatory Commission SPV Special Purpose Vehicle UDAY Ujwal DISCOM Assurance Yojana USO Universal Service Obligation WUS World Utility Summit 6
Contents
The theme .................................................................................................................................. 3
Foreword.................................................................................................................................... 5
Introduction ............................................................................................................................... 8
WUS objectives 9
Revenue security as a key priority 9
Understanding the utility business model ........................................................................... 10
The power sector value chain 11
Importance of revenue security in the value chain 11
Issues at large 13
The reforms record 14
Ensuring revenue security: Time to plug the gaps ............................................................. 16
Centre must lead the way 17
State governments: The game changers 24
SERCs need to play a bigger role 26
Utilities to set the bar 26
National and international experiences: Are we learning? ................................................ 28
Lessons from addressing sector financial issues through development policy operations 31
Way forward ........................................................................................................................... 33
7
Introduction 8
WUS objectives expense heads detailed in the annual accounts.
Therefore, it needs to be ensured that all the major
The WUS was conceptualised to foreground a wider heads are covered under regulatory treatment of
forum to deliberate upon upcoming changes in the expenses by regulatory commissions, along with
utilities space and to exchange ideas and solutions to return on equity as mandated in the related
deal with these changes. The WUS returns in 2020 regulations
with the theme ‘Utility Next.’ Power distribution is a capital intensive business
and utilities need to invest in network
The electricity ecosystem is undergoing an strengthening capex projects at regular intervals.
unprecedented transformation with the proliferation of In a regulated market, all these expenses, along
renewables, distributed generation of resources and with cost of capital and other operational costs,
EVs, on one side, along with consumer activism and need to adequately reflect in the consumer tariff
regulatory pressures, on other. The forum aims to help Utilities are also required to adapt to emerging
utilities navigate the complexities of the network and technologies such as solar rooftop, EVs, etc.,
to prepare them to drive future decisions based on which often give rise to a complex business
probabilities and real-time data. structure requiring policy and regulatory oversight
India has multiple policy makers and regulatory
The summit’s objectives are to create integrated and
bodies at the central and state level, with varying
sustainable utilities in the future, for the benefit of all,
levels of legal authority and jurisdiction. Any failure
by:
to ensure revenue security may drive inefficient
Bringing together world utility leaders on one operations, leading to power cuts, fatigued
platform and stimulating interactions between infrastructure, and demotivated employees,
them on a global scale eventually impacting all consumer segments and
the economy in general. It is hence necessary to
Providing networking opportunities to collaborate
accommodate the changing needs of regulated
and learn among themselves, and with the forum’s
and unregulated markets
committee members
Keeping in view the above mentioned aspects,
Setting the agenda for the future by sharing and
there is a strong case for all stakeholders in the
debating innovative solutions and new ideas to the
power sector, including the utilities, to work
world’s most pressing challenges faced by utilities
towards ensuring revenue security. Policy
Creating value by providing the global leaders with makers, regulators, power generators, and
knowledge and insights that engender a better consumers, need to be part of the relevant policies
understanding of the global and regional and practices that act as safeguards for revenue
challenges security of the utilities
This knowledge paper points to the possible ways
Revenue security as a key priority of navigating relevant institutions to ensure
Given the evolving market dynamics, it becomes revenue security for sustainable operations
imperative for government, regulators, and other The paper has been organised into six broad chapters
stakeholders, to ensure revenue security of the to address the concerns:
electricity distribution utilities.
Chapter 1: Introduction
Power distribution 24x7 is a legal obligation in Chapter 2: Understanding the utility business
India. Hence, adequate power procurement model
through long term power purchase agreements
(PPAs) and short term contracts are an absolute Chapter 3: Recommendations ensuring revenue
necessity for the utilities. Apart from power security
procurement expenditure, the cost of power Chapter 4: National and international experiences
transmission (interstate and intra-state) is also Chapter 5: Way Forward
borne by the utilities. Besides, there are other
9Understanding the utility business model 10
The power sector value chain Studies and data show that a radical reduction in the
aggregate technical and commercial (AT&C) losses
The power sector value chain can primarily be divided and a re-orientation of the operational procedures of
into three segments: generation, transmission, and these utilities is crucial for achieving the goal of
distribution. The fundamental structure is shown adequate power supply to all.
below.
Promoting competition and efficiency is seen as one
The value chain for power way. A step in this direction was the enactment of the
Electricity Act, 2003. However, as electricity is a
concurrent subject, the Ministry of Power, Government
of India, is primarily responsible for creating the overall
policy framework for the power sector in the country,
while the respective state governments have to take it
forward by formulating state level policies and
addressing issues. All states and union territories have
set up regulatory commissions to regulate and
determine tariffs for distribution and transmission as
well as generating companies, which sell power to the
Source: CRIS
distribution companies. The Central Electricity
Power distribution is the last leg of the electricity value Regulatory Commission (CERC) fulfils this
chain. The main function of the system is to provide responsibility for inter-state generation and
power right up to the individual consumer’s premises. transmission, and also for central power utilities. The
In India, responsibility for distribution and supply of Appellate Tribunal for Electricity was established to
power to end-consumers rests with the states and is hear appeals against the orders of adjudicating
dominated by state-owned utilities, though a few authorities (State Electricity Regulatory Commissions
private entities are also present. Traders and (SERCs), Joint Electricity Regulatory Commissions
exchanges facilitate trading of power between (JERCs), and CERC.
generation and distribution utilities. Further, open
access (OA) allows large consumers to procure power
Importance of revenue security in
through traders or exchanges, subject to transmission
corridor availability. the value chain
The viability of the entire power sector depends upon India has come a long way in managing its power
the financial health and the operational efficiency of demand-supply position effectively. Out of the total
the distribution utilities (or discoms). Therefore, it is energy requirement of 1274 Billion Units 1 in fiscal
necessary to focus on improving performance of this 2019, 99.4% of demand was met during the year. The
segment especially that of government owned utilities. net deficit is projected to have narrowed from 10.1%
in fiscal 2010 to 0.5% in fiscal 20202. The power
demand-supply trend is depicted below:
1
Source : CEA
2
As per latest available data with MoP
111400 12.0%
10.1%
1200 10.0%
8.5% 8.5% 8.7%
1000
8.0%
800
6.0%
600
4.2%
3.6% 4.0%
400
2.1% 2.0%
200
0.7% 0.7% 0.5%0.6%
0 0.0%
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Requirement(BU) Availability(BU) Deficit (%)
Source: CEA
India has addressed supply side issues to a large To be fair, distribution utilities, or discoms, have
extent: It is evident from the above chart that India has adequately tied up with generators in the form of long
significantly addressed its supply side constraints in term contracts, along with short term agreements
the last five years. This has been primarily due to through exchanges or traders. This has resulted in
integration of large scale renewable energy into the minimal economic load shedding across the country.
system, which rose 146% from 33.79 GW as of However, various consumer clusters, led by industry,
December 2014 to 83.37 GW as of October, 2019. opt for OA contracts, thereby leaving the utilities with
The peak demand-supply deficit too, reduced from surplus stranded capacity. In 2018-19, industrial
12.7% in fiscal 2010 to 0.7% ( as per latest available consumers consumed 11.24 BU of electricity through
data with MoP) in fiscal 2020. open access, which formed 22% of the total day ahead
volume transacted through the power exchanges
In transmission, the regional grids (northern, eastern,
during the year. At the end of 2018-19 there were 4362
western, north-eastern, and southern) are integrated
open access consumers registered in IEX and
into one national grid. By 2017, India had total inter-
procured 11.21 BU3 of electricity. Overall open access
regional transmission capacity to transfer nearly
transaction has grown at a CAGR of 6.3%4 from FY
75,050 MW. This is expected to increase to about
10-11 to FY 17-18. Most of the open access
1,18,050 MW by the end of the 13th Plan (2017-2022).
consumers are located in Tamil Nadu, Andhra
This would be adequate to meet the energy flow
Pradesh, Punjab, Chhattisgarh etc.
requirements across the regions within India.
Although there are regulatory safeguards in the form
But weak distribution threatens sustainability of
of cross subsidy surcharge (CSS) and additional
the value chain: Distribution - the most important link
surcharge in various states, an immediate revenue
in the value chain - is also the weakest in terms of
threat looms over the discoms. Besides, the CSS or
financial and operational sustainability. The revenue
additional surcharge components are often mired in
accruing to the distribution utilities ensures the
litigations in various courts, which delay the much
sustainability of the value chain components
required revenue accruals.
preceding it. As of end September 2019, 95 power
generators reported an overdue outstanding amount Such revenue shortfall can seriously thwart reform
of Rs 65,132 crore from various distribution utilities. efforts of various utilities. Hence, at the outset, the
3
CERC
4
Niti Ayog
12financial health of utilities need to be strong to adapt intervals in such a way that it reflects utilities’ cost
to the changing market dynamics. While India is of supply. In most instances, tariff are not revised
looking to become a low carbon economy, it needs to for long periods. While average cost of electricity
keep its base strong and its long term approach supply (ACS) has increased due to rising fuel
balanced. Electricity demand is set to grow for all costs and inflation, growth in aggregate revenue
realised (ARR) by discoms has been much lower
consumer segments but technological disruptions in
because of irregular/inadequate tariff hikes. As a
transport (which contributes to 14% in India’s primary
result, the gap between ACS and ARR has
energy demand) would make this segment a
widened and subsequent cash constraints have
significant growth driver. Penetration of other digital led to declining capital expenditure, negligible
technologies to achieve better efficiencies with technology interventions, and issues relating to
sensors and IoT platforms would eventually facilitate capacity-building and training of manpower,
consumption optimisation for energy usage. culminating in high financial and transmission and
distribution (T&D) losses. Even on a conservative
However, despite access to resources, capital, note, the ACS would be around Rs 7/unit. On the
technology, investment in new infrastructure, other hand, while cost recovery has improved, the
strengthening and automation projects are perceived ACS-ARR gap is still close to Rs 0.40/unit as of
to be risky, affecting the agility in decision making of September 2019. The gap is significantly higher
utilities. This needs to be addressed through for some states (Rajasthan – Rs 1.25/unit, Bihar –
institutional and organisational realignment, cultural Rs 0.93/unit, Andhra Pradesh - Rs 0.67/unit, Tamil
shifts, and a strategy which focusses on revenue Nadu – Rs 0.78/unit, and Uttar Pradesh - Rs
enhancement and long term financial sustainability of 1.1/unit). Country wide, the overall gap translates
the utilities. to around Rs 62,482 crore of financial loss
annually. Besides, the distribution utilities are
already reeling under burden of around Rs
Issues at large 135,000 crore worth of ‘regulatory assets’.6
High levels of AT&C losses has also remained a
The distribution sector has been reeling under
cause for concern for long. It includes inherent
financial losses with a consolidated outstanding debt
technical line losses, as well as commercial losses
pegged at Rs 4.3 lakh crore5, as of March 2015. Piling comprising electricity theft, meter faults, and
financial burden, along with ailing operational errors in meter reading and estimating un-metered
parameters, have caused significant stress in the supply of energy. Commercial losses are also
business. attributable to under recovery or non-recovery of
billed amounts. In fiscal 2019, India’s AT&C losses
Despite various structural changes with the advent of
were 21.08%7 as against world average of 10-
Electricity Act 2003, financial health remains a 12%8. As many as 18 states still suffer losses
concern. Why? beyond the 15% target threshold; seven of them
Government often provides subsidies to have registered over 30% losses. Many states
compensate losses of utilities on account of such as Andhra Pradesh, Delhi, Gujarat, Kerala,
discounted billing rate for agriculture and low slab Uttarakhand and Maharashtra have reduced their
domestic consumers. However, several times, the losses significantly in recent years. States like
state government does not pay up in time leading Rajasthan, Madhya Pradesh, and Maharashtra
the utilities to carry the loss in their books. have depicted remarkable improvement but still
fall short of revenue targets of utilities owing to
Regulatory commissions are expected to revise large area of operations and high number of
the tariff (based on petitions submitted) at regular consumers handled. High level of AT&C losses,
5
Niti Ayog
6
Regulatory assets imply previously-incurred losses that are in the nature of deferred expenditure and that can be recovered from consumers in
future provided allowed by regulatory authorities.
7
UDAY portal
8
Power Finance Corporation (PFC)’s Performance Report of State Power Utilities 2015
13indicating operational inefficiencies, has operation, leading to better billing and collection
financially stressed state-owned discoms over the efficiencies, This, in turn, optimises the revenue of
years. utilities.
Financial reforms, by far, has remained the most vital
The reforms record for the last few decades. These reforms include
The government has been quite pro-active in measures directly helpful for utilities to mitigate their
undertaking various reforms in power distribution financial losses. Some of the important ones
sector. Some of these are structural in nature, some introduced are:
operational, and most are important financial reforms. 2001: Bailout package
Many structural reforms such as the Electricity Act, A bailout package was announced for SEBs in fiscal
2003, unbundling of state electricity boards (SEBs), 2001, with the assumption that this one-time package
enabling private sector participation, power trading, would enable them to clean up their balance sheets
etc. gave the much required push to the state utilities and improve their operational efficiency in order to
in terms of administrative independence and ensure timely payments, going forward. The bailout
optimization of viable commercial propositions. converted Rs 35,000 crore ($7.4 billion) of debt
While structural reforms focused on institutional (outstanding arrears of the erstwhile SEBs) into state
overhauling, the operational reforms aimed at government bonds and waived 50% of the interest
improving power supply and boosting system outstanding. Thus, a number of states began fiscal
performance. Many programmes such as RGGVY9 2003 with accumulated losses that were lower than in
and DDUGJY10 led to last mile power connectivity, the previous fiscal.
separation of agriculture feeder 11, and strengthening 2012: Financial restructuring package (FRP)
of 33 KV and below network infrastructure. Through
the schemes, the central government has been able In order to meet their working capital requirement,
to achieve its target of 100% village electrification in discoms contracted a huge chunk of short term loans.
2018. It has also taken up major programmes such as Lenders’ short-term exposure to discoms reached an
R-APDRP and IPDS to reduce AT&C losses and estimated Rs 1.5 trillion in 2012. Any slippage on the
improve power supply quality in urban and semi urban part of the discoms to repay these loans could have
areas. The IPDS was introduced in 2014 with a capital created huge non-performing assets (NPA) for the
outlay of Rs 33,000 crore12.The information banking sectorin order to ease the stress of the
technology (IT) and automation component that was discoms and financial institutions, the Centre
initially planned under the R-APDRP scheme, also got introduced an FRP in fiscal 2012. States took over
included in the IPDS scheme, with an additional outlay 50% of outstanding short-term loans, including
of Rs 44,011 crore. payables for power purchase, as on March 31, 2012.
These were converted into bonds backed by
Improvements in network strengthening can be government guarantees and a moratorium of 3-5
observed in urban areas. However, AT&C loss levels years, with a repayment period of 10 years. The
are still on the higher side. The implementation of R- balance 50% was restructured into long-term loans by
APDRP and IPDS scheme is very important as it lenders, with a moratorium on principal repayments up
brings IT and automation to centrestage for efficient
9
Rajiv Gandhi Gramin Vidyutkaran Yojana
10
Deen Dayal Upadhay Gram Jyoti Yojana
11
Agriculture feeder separation is a progressive step taken by various state governments, and also well incentivised by the central government
through certain programmes. For pure agriculture connections, farmers require 8-10 hours supply every day for irrigation activities. However, the
domestic consumers and other commercial consumers are supposed to get 24x7 uninterrupted electricity supply. Feeder separation resolves
this issue to a large extent. This not just helps in better load management but also contributes to higher revenue due to higher sales in domestic
and commercial segments.
12
Ministry of Power
14to three years, lenient repayment terms, and waiver of (customer profile, per capita income, tariff subsidy,
penal interest. population density, etc.) in division/ circle, with
complete clarity on tariff pass through and provision of
2015: Ujwal Discom Assurance Yojana (UDAY)
subsidy.
Even after FRP, the discoms continued to reel under
financial losses. As of March 2015, their accumulated Summing up
losses stood at ~Rs 3.8 lakh crore and outstanding
While the distribution sector has seen reforms on all
debt, at ~Rs 4.3 lakh crore. Such high debt burdens
three fronts – structural, operational, and financial –
seriously limited utilities’ capability to invest in system
the following weak spots still remain:
strengthening infrastructure projects. Against this
backdrop, the Ministry of Power launched UDAY on Poor quality of baseline data as well as
November 5, 2015. Under the scheme, states took inadequate capturing of real-time data
over 75% of discoms’ total debt as on September 30, Schemes such as UDAY and R-APDRP
2015 over the following two years – that is, 50% in envisaged a reduction in the AT&C losses, but
fiscal 2016 and 25% in fiscal 2017. failed to address the issues in totality. AT&C
loss level increased owing to intensive
This has helped discoms reduce their interest cost electrification efforts of last-mile connectivity
burden substantially (to 8-9%, from as high as 14- (addition of rural consumers)
15%) and improve their payments to generators. Tariff structure does not properly reflect the
However, UDAY comes to a close in 2019, and the costs and leads to under recovery of fixed cost
ACS-ARR gap is far from the target of Rs 0/unit. AT&C through fixed charges in tariffs
loss level is at 21.09%13 against the targeted 15%. The Electricity Act and the National Tariff Policy
Hence it can be said, the UDAY scheme was only envisaged a reduction in cross-subsidy;
partially successful in meeting its objective. however, most state discoms have not been
able to bring this within prescribed limits
The key reasons for the failure are baseline data
While unelectrified households are being
quality and slow operational improvement.
electrified, Universal Service Obligation (USO)
Some of the states continue to reel under losses (i.e., both access and 24x7 supply) and direct
(despite UDAY scheme). For these states, private benefit transfer, or DBT, remain areas of
sector participation could be considered through concern
public private partnership (PPP) models and risk
sharing mechanisms based on market conditions
Learnings from UDAY
13
Uday Portal
15Ensuring revenue security: Time to plug the gaps 16
We have seen how progressive programmes such as Electricity Act does not have any explicit provisions to
RGGVY, DDUGJY, and SAUBHAGYA have led to treat them as such, in its present form.
100% village and household electrification, on the one
It is suggested that the electricity network
hand, but owing to widening ACS-ARR gap, financial
infrastructure business must be optimised to avoid
stress of utilities hasn’t eased, on the other. Over 90%
duplication of assets in the same area, whereas retail
of the new connection additions come from Uttar
supply can be open to competition.
Pradesh, Madhya Pradesh, Haryana, and
Maharashtra. Considering 70 units of One could visualise the various stages of transition in
consumption/household, we estimate an additional retail competition as:
revenue gap of ~Rs 3000 crore annually. This
I. Vertically integrated monopoly
additional requirement has to come from either
government subsidy or commensurate tariff hike, or a II. Competition in generation
mix of both, to avoid any tariff shock. III. Partial wholesale competition
IV. Partial retail competition
The figure below depicts the financial impact of rural
consumer addition under SAUBHAGYA scheme. V. Full retail competition
India started off as a vertically integrated monopoly
and has evolved up to the third stage, i.e., partial
wholesale competition. As a sector in transition, it
could move towards achieving full retail competition.
In this pursuit, there is a need to separate wires and
supply business, which is the final stage of the
structural reform process.
Need for separation of content and carriage
The separation of carriage and content will provide:
Source: CRIS analysis
Transparency and accountability of AT&C losses
Various agencies need to play an additional role to
suffered by the distribution sector. If the content
ensure revenue security of the utilities. Different steps
and carriage are separated and given to two
that could be taken by different stakeholders are separate entities, theft of electricity cannot be
outlined below. hidden under the head of overall distribution
losses
Centre must lead the way Upon separation, carriage or wire would be
typically subject to non-discriminatory open
access for allowing competition in the content
Separate carriage (wire) and content segment. This cuts down monopolistic practices
(supply) business and increases competition, thereby giving users
greater opportunity to improve efficiency
The Electricity Act, 2003 supports private participation
in electricity distribution by providing for multiple Competition would lead retailers, generators, and
distribution licensees and non-discriminatory open distributors to develop technologies to increase
efficiency, lower costs, and increase reliability of
access for consumers. Power supply and distribution
supply. Specialization resulting from competition
are two separate business activities. However, the
would further lower costs and raise consumer
welfare
17Key steps
The separation of content and carriage would require the following key steps:
Segregation of ownership
of distribution and retail
• Development of market supply business • Improve conduciveness of
institutions the market
• Reduction in dominant • Creation of new functional • Competitive market
market power in generation entities
• Trading platforms • Defining roles and
• Development of ancillary responsibilities of new entities
market for reliable operations • Treatment of existing losses,
PPAs, upgrading existing
metering Opening up the market for
Development of a robust
competition in retail supply
wholesale market
business
Distribution business: This would still be
Development of robust wholesale market
operated by existing discoms and would continue
As a prerequisite to separation of carriage and to have the following features –
content, it is critical to develop a conducive wholesale ‒ Loss assessment:
market which would provide a level-playing field for
‒ System strengthening
competition in the retail supply business. The key
‒ Regulated business
measures for a wholesale market would include:
Retail supply business: This could be created
Establishing market institutions: To make in the following manner:
wholesale trading of power/contracts for sale of
‒ Creation of new functional entities: New
power effective and efficient
competitive entities which can trade in the
Reducing dominant generators: To ensure that wholesale market would be registered on the
a few generators cannot manipulate the market, platform for trading power to service the
thereby reducing the risk of gaming consumers
Creating platform for trading for: ‒ Roles and responsibilities: The retail supply
‒ Generators and retail supply parties to make business would be responsible for demand
power purchases forecasts, efficient power procurement,
‒ Retail supply parties and consumers to make revenue collection, fulfilling regulatory
power trades obligations, etc.
‒ Commercial loss reduction: The retail
Developing an ancillary market: To ensure
reliable operations of the grid, power quality, and supply entities would be responsible for
grid security improvement in collection efficiency and
reduction in commercial losses
Segregation of ownership of distribution and A few critical aspects at this stage would be:
retail supply business
Metering Services :
The next step would be to segregate the distribution
Metering services consist of two kind of work.
from the supply business. The key measures would
be:
18‒ Meter reading (record meter reading manually The commercial loss could be attributed to retail
or preferably using communication devices. supply licensee while the technical loss should be
‒ Other meter related activities (Meter on Distribution Company.
installation, replacement, meter operations
and testing. Opening up the market for competition in retail
supply
These two activities can be taken up separately by
retail supply company, Distribution Company or any The final step would be to open the market for
third party. However, considering that the retail supply retail supply competition. This would require the
company would be responsible to improve collection following measures:
efficiency, hence the supply company can be Allocation of technical and commercial
entrusted with meter reading and other meter related losses:
services.
As has been briefed earlier, the technical and theft
Treatment of existing financial loss losses could be allocated to Distribution business,
The existing losses could be transferred to the as these losses are related to physical
intermediary company. The intermediary infrastructure.
company would amortize the losses through a In license areas where the current level of losses is
regulated charge to be levied on consumers or high, entire commercial losses could be allocated to
through state government funding support. Other the retail supply business to attract investment,
unrecognized financial losses would either be improve metering and faster reduction of losses.
allocated to either existing companies or
government support for cleaning up balance Cross-subsidy reduction: This could be done
through -
sheets.
‒ USO: During the initial phase of open
Consumer interface competition, the retail supply business can be
A common consumer interface could be set up by restrained from adding only high-tariff
both retail Supply Company and the distribution consumers
company. ‒ DBT: Direct payments to the targeted
consumers through state government annual
Consumer grievance redressal mechanism budget, can allow better energy accounting.
A single consumer grievance redressal forum But before rolling out DBT, the government
(CGRF) can be set up for distribution and retail must ensure complete pre-paid metering
model for consumer segments. Consumers of
Supply Company.
selected categories, like agriculture, after they
Segregation of standard of performance have consumed (to the extent they have paid),
would be reimbursed the subsidy amount
Before segregation separate SOPs should be
through direct transfer in their respective
formed by state commissions for retail supply and accounts. This would improve the
Distribution Company. segmentation of needy consumers on the
Allocation of existing PPAs basis of units rather than on the basis of
category. Also, the subsidised consumers
The existing PPAs would be transferred to would utilise electricity efficiently or move out
intermediary company. State Governments to of the subsidised slabs.
explore possibilities in respective transfer ‒ Gradual reduction in cross-subsidy
schemes to shift PPAs completely or partially to charges
wholesale market.
Most industrial and commercial pay more than their
Addressing regulatory issues and existing cost of supply. Year on year tariff hike may lead to tariff
losses: shock for other consumer categories, hence it is
19recommended to have a ‘uniform charge’ as issued by The above would lead to maximization of revenue
respective SERC or may be mitigated by direct accruals due to better management, capital infusion,
subsidy from state government. and greater accountability.
Consumer database: It would be important for
the utilities to develop a consumer database which Incentivize innovative PPP models in
would allow for competition electricity distribution
Competitive market: A fully competitive market
Any infrastructure deficit is considered a major factor
would require -
that holds back the country’s economic growth. Since
‒ Licensing area: For supply of power most power distributution utilities are owned by state
‒ Consumers switching mechanism: A well- governments, there is no competition in terms of
defined mechanism for consumers to switch improving financials, customer service, or power
their retail supplier supply quality. That ultimately results in inefficient
‒ Redressal mechanism: Framework for operations and unsustainable financial burden.
consumer grievances, etc. Despite all its inefficiencies, governments still have an
Procurement of PPAs: PPA mechanism for edge when it comes to power supply in semi urban and
power procurement through generators rural areas, which comprise most of the licence areas.
Hence, the role of government cannot be completely
ignored.
Summing up On the other hand, the private players have done
The following aspects need to be dealt with carefully reasonably well in the power distribution business.
for separation of wire and supply business. Although their role has mostly been limited to urban
areas, which might have catalysed their success
Treatment of existing outstanding debt stories, yet, better project management capability, use
Treatment of financial losses in books of techniology, and strong balance sheets enable
Transfer of existing PPAs private participation to be profitable and effective.
Customer interface framework Hence, we could say it is a joint venture of the two
Tariff setting norms which can ensure affordable and accessible energy
Balance sheet segregation supply to all.
Allocation of AT&C loss
Performance matrix of private players across India
20Hence, the government needs to bring in clear policies State government support: Operational,
and frameworks to encourage more private administrative support should be provided through
participation in the ailing power distribution segment. the SERCs and state governments.
Manage tariff cross subsidy: Transparent tariff
Some effective ways of attracting private investments with DBT to subsidised consumers can attract
are illustrated below: investments.
PPP models with risk sharing: The models Bidding criteria: Bidding criteria should be based
should address market concerns and have on investment requirement, which should be
contract structures with equitable risk sharing and reflective of global experience.
clearly laid out terms and conditions.
Quality baseline data: Third-party audit of
operational parameters must be undertaken prior
to award to private players.
Some salient features of PPPs that would attract PPP models reduces the risk of cherry picking of
private investments even in semi-urban areas, are urban areas by private players.
illustrated using two models below. Such innovative
Illustration 1: City/town-based licence (to be awarded through bidding)
Key aspects Implication
Proposed model/legal Section 13 of Electricity Act
framework
Exclusive licence to serve designated area for 25 years
Capital Investment Investment in required areas
Transfer of existing/new PPAs
Tariff Tariff to be set by SERC
Asset ownership Existing asset to be transferred to new licence at appropriate valuation
New capex to be funded by the new licensee
Benefits to government Reduced capex burden, loss reduction, free from capital subsidies, premium earned through sale
utilised for other social schemes
Political acceptance Funds freed up for social schemes, opportunity for more industrialisation
21Illustration 2: Substation & distribution network augmentation (to be awarded through bidding)
Key aspects Implication
Proposed model/ legal DBFOT/BOOT basis
framework
Developing & operating 33/11 kV s/s and other network strengthening projects
Capital investment Concessionaire
Tariff Monthly rental to be paid by discom
Asset ownership Asset to be on the books of the concessionaire for facilitating charge creation
Benefits to government Reduced capex burden, concessionaire helps meet funding gaps, loss reduction, quality power
Political acceptance Funds freed up for social schemes, opportunity for more industrialisation
incentives can be in terms of low-cost loans, or priority
Summary: In order to strengthen the power utilities, it
in coal linkages or even direct subsidy.
is imperative to improve utilities’ operational efficiency
and ensure full-cost recovery through attracting The central government should also initiate an award
private investments. programme for utilities with regard to operational and
financial loss reduction achievements. Besides,
Delhi's experience with privatisation clearly highlights
investments in latest technologies like AMI, smart
the positives in terms of power supply quality,
meters should also be acknowledged and
operational performance indicators and customer
incentivised.
satisfaction.
Recent media reports suggest the central government
Further, the performance of privately owned utilities
is about to come up with a new scheme with a capital
can always be improved through strong incentives and
outlay of Rs 2 trillion, aimed towards incentivising
governance systems, duly supported by the
better infrastructure, proliferation of smart meters, and
government.
private sector participation.
Incentivise utilities to reduce AT&C
Mandate state regulators for tariff
losses
rationalisation
AT&C loss is linked to poor billing and collection
Time and again, it has been observed that the average
efficiency. It not just digs a hole in the finances of
tariff levied on consumers does not reflect the average
utilities, but also meddles with efficient operation of
cost of supply. There is a slack in the part of SERCs
utilities.
with regard to rationalisation of tariff. A brief analysis
As electricity is a concurrent subject, the central of existing tariff orders for various states, suggests that
government cannot directly amend working principles the consumer categories and consumption slabs,
of distribution utilities, most of which are owned by based on which tariff is designed, are too complex to
state governments. However, the central government look out for a uniform solution. The number of
can put up a corpus and regularly incentivise better categories varies from as low as eight (Rajasthan) to
management of operations by utilities. It can come out as high as 18 (Gujarat) among the sample states. The
with a programme giving state-wise utility-specific number of sub-categories/slabs within these
AT&C loss reduction targets, meeting which those categories varies from as low as 14 (Delhi) to as high
utilities would be eligible for certain incentives. The as 72 (West Bengal). There is a huge variation among
the sub-categories/slabs across states as well.
22The SERCs should work towards a common goal of (3) The charges for electricity supplied by a distribution
simplifying consumer categories and consumption licensee may include a fixed charge in addition to the
slabs. charge for the actual electricity supplied”
Under-recovery of fixed costs NTP 2016 also emphasises on the two-part tariff
The retail supply tariff comprises two parts: NTP 2016 and NTP 2006 focus on introduction of a
fixed/demand charge and energy/variable charge. two-part tariff. Clause 8.4 (1) of NTP 2016 defines the
Fixed/demand charge is designed to recover utility tariff components and their applicability as follows:
costs that are fixed in nature, such as capacity
"Two-part tariff featuring separate fixed and variable
charges payable to power generators, operation and
charges, and time differentiated tariff shall be
maintenance expenses (includes employee expense,
introduced on priority for large rammer consumers
administrative expenses and repair & maintenance),
(say, consumers with demand exceeding one
depreciation, interest on loans, and return on equity.
megawatt within one year)…"
The fixed cost is recovered on the basis of sanctioned
load/connected load / contract demand or maximum However, there is major difference between the actual
demand of consumers. Energy/variable charge is fixed cost incurred and the proportion of cost
designed to recover utility costs that are variable in recovered through fixed charge. The retail tariff
nature, such as the variable cost component of power structure as on date includes most fixed cost
purchase. This cost is recovered on the basis of the components in the energy charge. This kind of tariff
actual consumption during the billing period (per kWh structure leads to a skewed cash flow, which make
or kVAh basis). things difficult as distribution utilities have certain fixed
charge obligations to generators that does not depend
The relevant sections of the Electricity Act, 2003, and
on the actual quantum procured. Working capital
NTP 2016 that also emphasise on two-part tariff, are
management and any abrupt change in consumption
as follows:
pattern, due to economic factors or seasonal change,
Section 45, Electricity Act, 2003 (Power to recover can impact the cash flow of discoms. Even though
charges) there would always be a mismatch between the real
fixed cost liabilities and the amount collected thereof
(1) Subject to the provisions of this section, the prices
through tariff, reliance on the variable component can
to be charged by a distribution licensee for the supply
impact discoms’ viability significantly. An analysis of
of electricity by him in pursuance of Section 43 shall
Delhi discoms revealed while the fixed cost forms
be in accordance with such tariffs fixed from time to
around 45% of the ARR, the revenue accrued from
time and conditions of his licence
fixed charge is only 15% of the total. Also, the energy
(2) The charges for electricity supplied by a distribution cost forms 55% of the ARR, but the revenue accrued
licensee shall be: is to the tune of 85% of the total.
(a) Fixed in accordance with the methods and the The central government is expected to bring out a
principles as may be specified by the concerned state policy paper or mandate the SERCs (through
commission; amendment of the electricity act) to carry out tariff
rationalisation within a stipulated timeframe.
(b) Published in such manner so as to give adequate
publicity for such charges and prices
23State governments: The game procurement cost. However, the payments by states
are not regular, adding to the financial burden of
changers discoms. For proper implementation of DBT, states
Most power distribution utilities are owned by state would need to identify and earmark separate
governments. Electricity being a concurrent subject, budgetary allocation for subsidised consumers.
the primary responsibility of reforming utilities lies with
Challenges in DBT implementation
states. State governments must initiate steps to
ensure long-term financial sustainability of utilities. While DBT is successful in subsidy pilferage and
hence cutting down government expenditure
Introduce compulsory Direct Benefit significantly, but DBT also brings in its own set of
challenges in implementation.
Transfer (DBT) schemes
DBT – Utilities are obligated to provide connection to DBT implementation directly depends on the banking
new consumers whenever an application is made. network of the consumer cluster it targets. Hence, if
Subsequently, they are also supposed to supply the consumer does not have a bank account, it would
quality power to such consumers as mandated by not be able to be a part of the scheme. With Jan Dhan
regulations. Unlike private distribution utilities, which Yojana Programme notwithstanding, banking
have urban domestic, commercial and industrial penetration is still poor amongst the economically
customers, state utilities have to supply power to backward consumers in the rural areas.
various BPL households, rural residential consumers, It is not commercially feasible to have a bank in every
and most importantly, agricultural consumers. Many of village, however, all villages can be served through
these consumers, especially agricultural consumers, payment banks and banking correspondents.
are offered a flat rate tariff (unmetered consumers),
which is significantly lower than the cost of supplying Besides, the documentation requirement also has to
electricity. Besides, the tariff designed for metered be minimal to avoid unwarranted delays or hurdles in
agricultural consumers is discounted for affordability. opening up a bank account. The banks should have
Many a time, even the billed amounts are not paid. In proper capacity building of its employees to remain
order to compensate distribution utilities for the loss of well-mannered with the target consumers and treat
revenue, state governments, under Section 65 of the even ‘zero balance’ accounts as a professional aspect
Electricity Act, give subsidies to minimise the loss of operation.
impact. Besides, the regulatory commission charge Measures for DBT implementation
the commercial and industrial consumers high to
compensate the revenue loss for supplying electricity Ministry/department to set up a DBT cell
to the agriculture consumers. High cross-subsidy DBT cell to identify DBT schemes or DBT
leads to revenue loss for state utilities, as it components and study process/fund flow
incentivises industries to scale up captive power DBT cell to develop IT-based system/MIS, create
generation. There is a need to reduce cross-subsidy a grievance redressal unit and train officials
and at the same time, keep rural tariffs low, hence DBT Ministry/department/state
is one of the solutions. department/implementing agency to identify
beneficiaries
Under DBT, the subsidy (with payments through state
budget) can be transferred directly to the beneficiary’s Ministry/department/state
department/implementing agency to digitise
bank account. If the DBT scheme is implemented, only
beneficiary database after verification
the actual consumption will be subsidised, and not
power pilferage or loss. Public Financial Management System to send
bank/postal account and Aadhaar details of
State governments give subsidy payments to discoms beneficiaries to banks and the National Payments
for selling electricity to consumers below the Corporation of India for validation
24The DBT scheme, if implemented efficiently, will cut utilities completely automating database management
down the losses of discoms. In fact, it will help control systems. The same has to be in place both for project
delays in transferring benefits and reduce structural management tools as well as data capture and
expenses in distributing subsidies. analytics formation.
The undistorted data can be used to provide
Mandate data quality improvement: Fund information to consumers, relevant government
initiatives (fully/partially) authorities, lenders, commission etc. All utilities should
Reduction in manual intervention for data handling is undertake capacity building regarding data quality
the need of the hour, for accurate flow of information. review.
When data as reported from the field reaches the head The following table summarises the key issues and
office without any moderation, it yields the desired mitigation measures using data quality tools.
result. The more it gets distorted in the process,
decision making gets erroneous. Hence, as a
mandatory measure, state governments must insist on
Ensure government departments pay bill Regulatory assets as created by regulatory
in time commissions also slow down the reform initiatives
of any utility
State governments must make it loud and clear that A massive regulatory asset of Rs 135,000 crore
power distribution utilities work under provisions of the has been created so far due to inadequate tariff
existing Companies Act. Hence, all state departments revisions over the years. (MSEDCL - Rs 12,382
must treat the electricity bill payment accordingly and crore spread for fiscals 2019 and 2020, Jharkhand
meet its dues in the stipulated timeframe. (JBVNL) - Rs 11,813 core spread across five
years till fiscal 2019, UP – Rs 40,541 crore)
Outstanding dues to the tune of Rs 41,386 crore
from various state government departments add
to the financial burden of utilities (states with the
highest dues are shown in the chart)
25Outstanding dues of state government bodies Fixed monthly fees per consumer to be paid
Outstanding dues of state departments to utilities
in advance annually
as of FY19 (Rs crore) iii. Energy charges towards genco – to be built
16000 in energy charges
13361
14000
12000
Minimise regulatory assets
10000
8000 6737 Close to Rs 1 trillion crore worth regulatory assets
6000 4913 are stuck with regulatory commissions.
3332
4000 Commissions should work in an efficient manner
201118351620
13131120 969 908 852
2000 such that such regulatory assets do not create
0 additional capital requirement, and thereby driving
UP
Bihar
Rajasthan
MP
Tamil Nadu
AP
Punjab
Maharashtra
Kerala
Haryana
Telengana
Chhattisgarh
the utilities to go for additional debt from banks.
Introduce ToD tariff for domestic users
ToD is not just efficient for better load
management, but also contributes to revenue.
Other factors Considering domestic consumption is almost 30%
States need to introduce specific legislations that in India, the revenue from ToD would be quite
change in government should not stall ongoing significant.
infrastructure projects by utilities. Any awarded
Ensure timely issuance of tariff orders
contract should be awarded at all costs. The
insulation of power distribution utilities from If the utilities delay in filing tariff petition within
political risk is a must in order to reflect the actual stipulated timelines, the state commissions may
expenses in tariff and also to ensure requisite take suo muto cognisance of the matter and with
infrastructure is in place to cater to existing enabling provisions in the tariff Regulations,
customers and future load growth SERCs must initiate issuance of tariff orders on its
Make policy for mandatory usage of smart pre- own. In the due process, it may direct the utilities
paid meter: The state government need to fund to comply with required data sets.
initiatives (fully/partially)
Utilities to set the bar
SERCs need to play a bigger role Utilities are the main protagonist in this whole
Ensure tariff rationalisation discussion and should take the centre stage when it
comes to implementing reforms. The government
While the need to rationalise tariff has been
would introduce laws, policies, regulations, etc, but the
briefed under role of central government, but there
are few aspects which need to be taken up by the onus to implement them successfully lies with the
state regulators on priority. The Commission utilities.
should design the tariff in such a way that it not
Following are the action points of utilities.
only reflects the correct cost of supply but also
properly reflect in the revenue recovery thereof.
The Commission may opt to redesign the tariff Develop pre-paid metering framework
with the provision of recovery of charges as
follows: Begin with selective pre-paid metering for C&I
consumers and high-end domestic clusters
i. Fixed cost obligation to Genco and Transco
– To be built in Rs /kw or Rs/ KVA charges Utilities need to ensure that all commercial and
ii. Other Fixed obligation towards industrial consumers are billed through pre-paid
establishment, manpower, network etc – meters. This fundamentally implies, power supply
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