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Nothing short of drastic measures can shake up India´s beleaguered electricity distribution companies. The good news is the government seems to be taking the necessary steps.
The government is finally taking note. While it is too early to say that a solution to the woes of distribution companies (DISCOMs) is just around the corner, the wheels are in motion.
A three-year financial restructuring package introduced in 2012 is ending and the need to act was compelling. In September, therefore, Prime Minister Narendra Modi broadly addressed the issue as he announced a Rs.45,000 crore, integrated power develop¡ment scheme (IPDS) to strengthen distribution net¡works and ensure 24*7 power supply to all by 2022.
Specifically, the PM also held meetings with finance ministry officials and heads of independent DISCOMs. Options under discussion include allowing states to take over debts of DISCOMs to ease their financial hardships, in return for a renewed clampdown on electricity losses. However, the states, whose utilities need to be bailed out, are worried about taking on such debts and issuing bonds to service them. Piyush Goyal, Minister of State (Independent Charge) of Power, Coal and New & Renewable Energy, has said that the final package will be brought out only after all states are agreeable with the plan. Speaking to reporters at an event earlier in October, Goyal had said he expects a decision soon. ´I have already had several rounds of discussions with Jharkhand, Tamil Nadu, Andhra Pradesh and Telangana. I am meeting the officials of Tamil Nadu again,´ Goyal said. Tamil Nadu is yet to accept the Centre´s package. As the power sector awaits these developments, it is worthwhile to note the scale of the problem and possible solutions opined by industry observers.
SCALE OF THE PROBLEM
According to some estimates, a fifth of the country´s electricity bill goes unpaid. It is no secret India is a country where vast swathes of its rural communities and most urban slum dwellers contrive to receive free power by hook or by crook. Turning a blind eye to this rampant theft as well as selling power at prices below the cost of production, utilities have raked up a mountainous pile of debt over the decades.
Their weak finances mean that they can neither buy more power nor invest in transmission lines that are urgently needed if Modi is to realise his objectives of getting power flowing to the 300 million Indians living without electricity. In fact, so dire is the situation, DISCOMs have even cancelled their power purchase agreements in some cases.
An Essar Power spokesperson told Infrastructure Today, ´We are not able to sell majority of the generation capacity mainly due to no new bids for procurement under medium and long term agreements. We understand DISCOMs are shying away from procurement of power mainly due to the large difference in cost of power versus the cost of recovery. This has resulted in their weak financial health. Moreover, due to the large generation capacity that is lying idle and no off-take, rates have also been subdued.´
At its 1,200 MW plant, Essar Power Gujarat has a plant load factor of merely 48 per cent due to lower off-take by utility provider Gujarat Urja Vikas Nigam (GUVNL). To put it simply, all payments from the customer come only through the distribution company. Therefore, the viability of the rest of the value chain is critically dependent on the viability of the distribution companies.
As India has doubled its capacity in energy generation in the last decade, the transmission and distribution infrastructure has not kept pace and regular blackouts are the order of the day. Moreover, the debt-laden DISCOMs are now a threat to the health of the banking system.
Private sector expertise has helped in the past. The cities of Bhiwandi and the national capital New Delhi are shining examples.
Consider the fact that when the Maharashtra State Electricity Board (MSEB) took over the distribution licence for Bhiwandi on October 1, 1978, in 28 years (up to 2006), the city had come to acquire a certain notoriety. Bhiwandi was the worst managed circle in the state and singled out for return to the private sector. By that time, transmission and distribution (T&D) losses were 49 per cent, collection efficiency 63 per cent and together, resulted in aggregate technical and commercial (AT&C) losses reaching a staggering 68 per cent.
Handed over to Torrent Power on January 26, 2007, the turnaround in Bhiwandi has been remarkable. Within a year and a half, T&D losses were down to 21 per cent and are around the 15 per cent levels today.
Ditto with Delhi. Losses were as low as 7 per cent in 1953. Then DESU (like Mumbai´s BEST) was formed. In 1997, DESU became Delhi Vidyut Board (DVB), the SEB for Delhi. By 2000, the loss level was over 50 per cent. Commercial losses were an unsustainable Rs.1,103 crore.
After privatisation in 2002, losses are down to less than 20 per cent.
The case for privatisation assumes greater resonance if one considers the example of power generation. The moment the government created an open and competitive framework, a huge amount of investments poured into the segment. The incremental capacity addition in power generation in the private sector has since been pretty strong. ´If you have a framework which works in generation, there is no reason not to have a framework which works in distribution,´ says Umesh Agrawal, who tracks the power sector and is Associate Director, Advisory, at PricewaterhouseCoopers. He is right. It isn´t as if the problem is difficult or cannot be solved. For instance, proper attention, an investment commitment both in terms of capital and manpower as well as a professional management mandate have all combined to turn around the fortunes at Andhra Pradesh Eastern Power Distribution Company Ltd (APEPDCL). More on this later.
THE ISSUE ABOUT TARIFF INCREASES
´I do not believe what many reformists tend to say that you have to increase the tariffs to resolve the problems of the DISCOMs...it is a completely flawed logic. Increasing tariffs will never set your DISCOMs right,´ Goyal said in October. However, he reasoned, this did not mean that the government was endorsing a ´suppressed tariff´. Qualifying his comments, he added, ´If there are states where tariff has not been corrected, sometimes because of political interference, then they will have to be corrected, going forward´.
Therein is the crux of the problem. Due to political meddling, tariffs in many states were not increased for up to five to seven years or even for a decade as the state governments pushed the regulators to delay price increases. When the hikes did come, they were a steep 30 per cent in some cases, to account for the changed realities of increased production costs. This is what Goyal had in mind as he finally concluded, ´We are trying to introduce an innovative way to increase these tariffs gradually so that they don´t burden the people immediately with massive jumps´. Arvind Mahajan, Partner and Head of Infrastructure and Government Services at KPMG in India, concurs. He says, ´A lot has been written about prices, not enough about costs. It is not only about T&D but how you get projects completed on time as well as the costs at which you buy that have to be more economical´.
India, being a relatively energy-poor country, not everybody has the same level of affordability. Therefore, DISCOMs need to manage their infrastructure better. For instance, a mechanism for channelising power to the affordable sections like agriculture by separation of feeders as has been done in the state of Gujarat is a technology investment that DISCOMs need to make.
While a handful of DISCOMs account for the major chunk of the debts in the sector, nevertheless, there are successful examples of DISCOMs who have met the challenge well.
APEPDCL: A CASE IN POINT For instance, APEPDCL is striving for reduction of AT&C losses of less than 5 per cent. AT&C losses in 2014-15 for the utility was 6.88 per cent while in 2015-16 (up to July), it was 6.80 per cent. To bring it down further, a scheme to strengthen sub-transmission and distribution networks in urban areas is being taken up at a cost of Rs.352.40 crore.
Yet another scheme has been proposed for Rs.410 crore that will extend 24*7 supply for non-agricultural customers and ensure adequate supply for agricultural customers, reduce AT&C losses and provide access to all rural households.
Besides, the utility is pro-actively pursuing a project for laying underground cables in the city of Visakhapatnam following severe damage to the over¡head distribution network after Hudhud, a cyclonic storm that made landfall on October 12, 2014. Moreover, steps such as creating a centralised payment system for vendors, a grievance cell for employees or a ´Dial your CMD´ programme once weekly for the public, are all modern measures that underline a professional approach to management.
´In the post electricity reforms era, the mindset has changed in order to meet the expectations for the delight of the consumers,´ says Revu Mutyala Raju, Chairman & Managing Director, APEPDCL.
Ashok Sethi, CEO, Tata Power, agrees. Expressing enthusiasm for digital initiatives by utilities, however, he says, ´certain technologies are still expensive and need to come down. The cost of a smart meter, for instance, needs to come down from about Rs.10,000 at the moment to about Rs.2000 to Rs.3000 to enable widespread adoption´.
An important political commodity, the distribution of electricity doesn´t seem to have a single and simple solution.
The Electricity Act provides for parallel licensee but this model is by no means a runaway success.
A distribution franchise model or public private participation model are other options but even for these, it isn´t a simple process. It is a strategic call and will likely raise concerns from a variety of stakeholders. For instance, a large utility like MSEB is estimated to have up to a lakh employees on its rolls with a similar number of contracted staff. Privatising such large state-run bodies is no small matter.
However, experts are convinced the next logical step would indeed be to create a strategy to reduce the government´s role in the distribution business and bring in private sector entities within a framework of strong regulation.
Technology adoption for distribution is also an option that can improve overall financial health of the DISCOMs. To manage the whole distribution system, making them digital, whether metering, billing collection, maintenance, asset management, different kinds of metering technologies or improving the customer experience are all things that can be done to make operations more efficient.
Agrawal says there is even a potential business opportunity as adopting technology can actually allow an independently managed, commercially driven entity to leverage other businesses on the back of electricity distribution, such as delivering multiple utility businesses together. ´One can have the distribution business, bring in water supply, cable services and other utility services,´ says Agrawal. He adds, ´This will not only improve efficiencies if provided on a common technology platform, but as a consumer, I don´t have to pay to five different people. The utility can also cut the connections off easily if someone does not pay. Considering all these aspects, it is the right time to have something radical for the sector.´
While that may be looking too far ahead too quickly, it is clear what is required is a combination of capital investment, management bandwidth, having an organisation structure to incentivise performance and a more robust board. Perhaps, a change in ownership, but certainly, more independence to run the business is going to be crucial.
´There is a strong social impetus to have the utility provide more than just a bill´
Opower has notched up an impressive list of 100 power utility customers in nine countries and 400 billion meter reads under management. Infrastructure Today caught up with David Moore, the company´s Senior Manager, Regulatory Affairs & Market Development, to understand its plans in India.
What exactly does Opower do?
Opower is one of the companies that´s leading the transformation for the utility industry in how it engages with its customers. We are essentially a customer engagement platform software technology that takes in meter data and converts it into information that can be used to deliver personalised reports and communications to the individual customer. We then combine those data sets with energy data and provide the ability to take what would otherwise just be billing information, and make it contextual to help people take control of their energy use.
Are you working with any of the utilities in India today?
We are not doing business in India today.
Do you see any interest from utilities here?
There´s broad interest. Realistically, if you are having a hard time financing fundamental technology - whether getting a transmission line out to a village without power or paying a non-performing loan - these concerns weigh heavily on the minds of those managing electricity boards today.
There are few that are in a position to be more proactive in taking the next steps forward in terms of incorporating individual consumers into their overall strategy for energy resource planning. I think that it is natural the private companies will be in a lot of these things, not just because they´re private companies, but because they happen to be in the service territory.
What we need to do is run one of these experiments and determine what the performance of the software will be so that we can report back to the rest of India. I think people are waiting for that to happen. There are a few that are interested in being the test case and others, I think will wait and see how it goes.
What time-frame do you have in mind?
Within a year to three years, I would be surprised if there wasn´t a company that uses Opower or like what Opower is doing in customer engagement.
What you have is not only a leap in service standards but also in the evolution of the power distribution segment in the country.
We see the challenge of leaping forward as one that the national leadership has now really taken on. The top-line announcements by the Modi administration on the new, more ambitious solar and renewable energy goals, as well as the idea of 24*7 reliable power for all residential consumers - these are goals that are putting India on the map from a commercial standpoint, not necessarily different from where it was before, but more credibly placed.
Clearly, that will require not only the private distribution companies, those who are seen as being closer to the edge of where technology is leading, but also eventually, the state electricity boards.
How has demand-side management helped elsewhere where you have implemented this?
Demand-side management, energy efficiency is one of the things that make utilities more efficient. Everywhere, regulators want utilities to be more cost-efficient. If you look at places like Philippines or Malaysia, they recently adopted performance-based rate-making schemes. I think that´s a trend that will happen more in developing countries where you start to think about, not the old way of doing integrated resource planning over a 10-20 year time-line, but really starting to pin the utility down saying in the next five years, how are you going to become more efficient, and how can we incentivise you?
So, there are a number of different ways that power utilities benefit from using Opower. At the very basic level, applying big data pattern analysis to a large set of data that sometimes hasn´t been seen all at one time emerges as different values for different kinds of customers. The things that we typically think about as being valuable include not just demand-side management including savings, but also just digital engagement. E-billing is not a new concept. However, it´s one we find is more likely to happen for customers who only get a paper bill today and learn about tools they can use on their smart-phone or computer, encouraging a move toward a two-way interactive communication.
When people voluntarily take up e-billing and digital engagements, it reduces costs for the utilities. It also increases participation in other kinds of programmes, whether they be rebate schemes or more socially engaging things.
How do you see the distribution segment in India?
At the end of the day, there has to be a mechanism by which the utility can remain solvent. If you´re going to have subsidised tariffs, then you´re going to have to find a way to cross-subsidise effectively. This is a part of what Prime Minister Modi is talking about, the technological idea of even trying to segregate domestic customers from agricultural ones. If you need to do load-shedding and you need to do it for agricultural customers, you don´t also shut off a bunch of homes. The value of electricity to homes where you have kids who want to do their homework at night is enough that they will pay `5 per KW hour, if they can afford it, if that´s the difference between their kids having an education and not having one.
A farmer may not have the same economic incentive to pay for power at night. Those are the kinds of technical changes that are small but are important to make and will help the regulation to become more rational. I think as you move towards higher-value customers, I do think that we should be calling on people who can take action, who do use more power to be socially more responsible. I don´t think that people don´t want to do that. I just think that right now, the utilities don´t see themselves as energy advisers in this way.
Where I think Opower will have the most impact at first is in helping engage not the people who are not on the grid today or the people who are using 20KW hours a month - but people who are in the middle - the middle class of people who are using 100-300 KW hours a month who are part of the growth of India. These are the people who are the engine of growth here who will be using more power in future as they get more appliances, become more socially mobile. I think there is a strong social impetus to have the utility provide more than just a bill. The technology, whether it´s Opower or something else, information technology has advanced to the point where it´s not that expensive to reach everybody with personalised communication. The data is already there. That´s usually the biggest problem, that there´s no data to do development work, but the data is there. So, let´s use it and unlock the value of that data.
´The Indian smart metering market is essentially starting from ground zero´
Electronic meters, also called smart meters, offer several benefits. In addition to demand-side management, they are also more tamper-proof than electromechanical meters and highly reliable. Analog Devices, a key player in the transition to smart meters in other markets, is excited about India. Somshubro Pal Choudhury, Managing Director of Analog Devices (India), shares his insights on the smart metering market here.
What are the capabilities a smart meter has over normal meters?
A smart meter provides information about the energy used, directly to the consumer and utility supplier, on a real-time basis. The advantages of smart meter deployment is eliminating meter reading at the end of the month or estimation of bills and reducing energy consumption, as the consumer is appraised on consumption on a daily or hourly basis. The most important aspect that can be enabled by smart meter is time of use (ToU) pricing which enables the utility company to charge higher pricing at the peak demand times. This automatically reduces consumption during these peak times, thus eliminating the need for utility companies to buy electricity at high spot rates or cranking up the diesel/oil based generators for peak demand management.
Have you found many utilities enthusiastic about it?
Globally, smart meters are getting deployed at a rapid pace. According to the latest research reports, close to 50 million households in the US, about 44 per cent of households are already with smart meters. Europe has made a strong push towards prepaid and smart meters and set a goal of 80 per cent penetration by 2020. India is yet to take off for smart meters in a big way.
There has been one key deployment of smart meters to the tune of three million meters at Maharashtra State Electricity Board (MSEB). Many pilots are ongoing and we expect the next big deployment to happen in 2017-2018 time-frame.
What is the potential for smart meters in India? What are the challenges to adoption?
The Indian smart metering market is essentially starting from ground zero. While there are currently 200 million static electricity meters installed in India, smart meters account for less than a per cent of all deployed meters. This means that the potential for the Indian smart metering market is enormous, but the solutions underpinning it must be designed specifically to deal with the economic and environmental conditions in which they will be deployed.
The industry expects a lot of changes in smart grid space in the coming years, in terms of investment and deployment. Along with improvements in grid infrastructure, smarter substations and adoption of smart homes or buildings, the smart meters market holds strong potential in India. The reasons for such deployment would be more to increase the collection percentage and detecting theft as opposed to the manpower cost of metering in other developed nations. We will also see a strong case for prepaid metering in India like we saw in a few European and South East Asian nations.
The limitations are that this is a new initiative and there is no sufficient information or data to justify the end benefit of this high-cost metering. It is also a time-consuming process which requires significant capital expenditure. Utilities have already spent a sizeable amount for upgrading their existing electromechanical or old static meters to electronic meters in the last 10 years.