It is often said that sectoral reforms have a very non-linear path. Electricity in India is a good example. The central challenges identified were inadequate generation capacity, high distribution losses, and free (and, in case of many states, unmetered) farm power.
The first generation of power reforms, initiated at the turn of the century, involved unbundling integrated utilities by separating generation, transmission, and distribution. This, coupled with a series of regulations mandating competitive power purchases by distribution companies, attracted private investment into generation and installed capacity rose dramatically. Discoms had to purchase power from the market at competitive prices and also had to make immediate payments (and not run up dues) for those purchases. Often times, especially in the summers, the prices of spot purchases rose by multiples, leaving discoms with even bigger gap between cost of services and revenue recovery.
This disciplining constraints on the cost-side forced the discoms to get their acts together on the revenues side or figure out ways to bridge the gap. But addressing the revenues side meant lowering technical and commercial losses. Given pervasive theft of supply, billing and collection deficiencies, and unmetered (and free) agriculture supply the latter was 2-4 times the former. This required addressing challenges on state capacity (in billing and collection), political economy (free farm power), and a combination of both (theft of supply).
Now these challenges are not easily addressed. So discoms came to rely on a combination of strategies to bridge the deficit. Primarily, they resorted to large-scale rationing of supply and suppression of demand, through what are called load-shedding or power-cuts. In fact, in India, “peak demand” is deceptive since it only conveys demand of the discoms and not of the consumers. Across vast swathes of North India, consumers are off-grid more hours than they have supply. Rural areas bear the brunt of these power cuts.
Another strategy was to finance the deficit with government subsidies (to the extent of government policy mandated subsidised supply, mainly to farmers) and borrowings. In many states, the government subsidies while sanctioned were never disbursed, forcing the discoms to borrow even more and continuously rolling them over. The Government of India periodically undertook discom debt restructuring schemes with ostensibly strict conditions on loss reduction. They, including the latest one, have been like band-aid on gangrene, merely kicking the can down the road. It also did not help the discoms that the share of purchases from state government generators (Gencos), whose dues could often be rolled-over, declined and that from independent power producers rose.
Compounding the problem, political considerations meant that tariff increases were mostly off-table. In fact, in many states, household tariffs remained unchanged for years, sometimes nearly a decade. With raising tariffs for household and farm consumers a no-go, discoms relied on industrial and commercial consumers to bear the brunt of tariff increases. An inverted tariff structure emerged, whereby industrial tariffs rose to become much higher than household tariffs. Already struggling with power cuts and poor quality of supply, the tariff inversion only added to problem of industrial competitiveness.
As a result of all these, the objective of discoms degenerated into mere provision of power during the scheduled supply timings and avoid unscheduled interruptions. In the rural areas, it meant limiting to basic lighting supply during the night (which was also generally the time for farm supply). Since farm supply did not fetch any revenues and the supply on most rural feeders was very small (as a share of the total supply), the discom anyways had limited incentive to carry out maintenance works on rural distribution network and focus on the quality of supply. For the discoms, rural supply was nothing more than a necessary evil.
In fact, the need to limit farm usage beyond the period stipulated under the respective state’s free-farm power policy (typically 7-10 hours varying across states) meant that discoms restricted to single-phase supply after that period. This effectively meant that economic activities that required the use of motors etc became prohibitive. Such enterprises had to draw three-phase lines directly from the 33/11 kV substation, a very expensive proposition, often comparable to the capex required for the business itself. While states tried to overcome this by segregating agriculture feeders, its high capital investments and practical challenges (not to speak of higher technical losses due to additional network) meant that this has had limited coverage.
All these had the discoms incentives accordingly aligned. Struggling with a hand-to-mouth existence, the discoms had limited incentive or resources to invest in maintenance of the distribution network. In the absence of adequate maintenance, reclining poles, sagging conductors, recurrent transformer failures, burnt insulators and failed switches, unreplaced fixtures and so on became commonplace. The result was frequent interruptions, pervasive voltage fluctuations, high technical losses, and accidents with large-scale human casualties.
So what’s the way out?Clearly only the first challenge of enhancing capacity generation, by attracting private investment into generation, has been addressed. There too, the failures on the other parts of the sector threaten to undermine the successes. The issue of high distribution losses and free farm power have remained unresolved.
Privatisation of distribution has been the oft-repeated solution. But experience of private participation in power distribution has been mixed. The limited successes have been in areas with favourable load mix and disciplined consumers, and with none of the underlying problems addressed. Also, unlike generation, political economy factors are relevant at the consumer facing distribution sector.
There is no avoiding the reality that any sustainable solution has to involve addressing the underlying financing problem of the discoms. This requires tariff increases that allow for cost recovery, metering and pricing of farm power, and strict billing and collection. There are no short-term or one-time legislative or regulatory solutions for these. This needs political attention and that too urgently. The house is almost burnt down.
In the meantime, a good and practical bureaucratic starting point would be to appropriately leverage technology to measure and audit supply, and localise and highlight the source of losses. Automatic meter reading (AMR) devices and smart meters now make it possible to easily monitor these in real-time, bill and even control supply to consumers. But given the constraints and the complex challenge, this needs to be done gradually and with great attention.
Fortunately, the very configuration of electricity distribution offers an opportunity to monitor in a gradually cascading manner. Electricity is transmitted from the generators through a cascade of substations. Distribution side starts with the 11kV feeders emanating from each 33/11 KV sub-stations (typically 3-8 feeders with each substation), each feeder in turn servicing several smaller distribution transformers, each of which in turn has several consumers depending on their total load.
There is no dearth of efforts to leverage technology to address the distribution side problems. In fact, there have been programs for several years. The Government of India has had programs to install smart meters upto transformers. Some discoms have expanded it to certain types of consumers. Many have been implementing GIS mapping of feeders and some even supervisory control and data acquisition (SCADA) systems for a part or the entire distribution network.
Unfortunately, the scope of all these projects are excessively ambitious, beyond the capabilities of discoms to execute with any reasonable degree of satisfaction. Neither is such ambition necessary at this point in time. These technology solutions require significant efforts to just stabilise and generate practical and actionable information relevant to officials at different levels, much less the challenge of getting them to act on the information.
For example, just stabilising the installed AMR and smart meters is far from a non-trivial challenge. Even when data becomes available continuously, and at very high frequency and in massive volumes, meaningful analysis of the same, much less acting on the information is far from easy. One-time GIS mapping of the network without systems to capture the constant changes in downstream distribution network (due to new connections, load distribution shifts etc) and keep the map updated will only leave us with maps which become badly dated in just a few years. SCADA systems too face formidableinsurmountable challenges. In fact, a handful of the best discoms in the country, in the South, have struggled with all of these for years.
Instead a more manageable endeavour would be to have all the 11 KV feeders installed with AMR devices (or even smart meters), map the feeders physically, and then initiate a practical enough monthly energy audit. For example, prioritise attention on the feeders with the biggest cost-recovery deficits (which is unlikely to be the politically sensitive or theft pervasive slum or rural feeders, but those which service the not-so-poor areas). This has to be complemented on the revenue side with credible and appropriately incentivised technology-intermediated spot-billing of all consumers. The discoms will also have to get their act together in ensuring that meters are working and a system to replace burnt and defunct meters at the earliest. Most importantly, the most egregious discrepancies and exceptions that emerge from both supply and revenue sides will have to be investigated and deviations and violations enforced strictly.
An appropriate performance management system built on this has to be put in place for the discom officials. This whole initiative could be adapted, calibrated and phased-in as gradually as possible. But there is just no short-cut to this painstaking work.
Simultaneously the discom should introduce an initiative to publicise the monthly feeder-wise information about supply and revenue collection, and the associated cost-recovery gap. This could be accompanied with a program to incentivise feeders with higher payment compliance by both increasing their supply duration as well as ensuring greater quality. This could also perhaps trigger the hitherto absent demand-side pressures on quality and make this a salient political good.
On the free farm power side, the endeavour should be to first ensure all farm services are metered, even if unbilled. This is the first step to any meaningful engagement to address the problem.
Another intervention would be to introduce direct benefits transfer (DBT) cash subsidy for free-farm power. Farmers can be offered an equivalent (or higher) units of free supply in return for having all farm connections metered and agriculture tariffs fixed. Each farmer would pay his monthly electricity bill, whereupon he would be reimbursed the previous month’s bill to the extent of the free units consumable. Further, the farmer can be incentivized to reduce consumption by reimbursing an amount proportional to his unconsumed units (from the free power unit allotted each month). The introduction of meters will help measure and audit rural supply. The incentives will encourage farmers to optimize consumption. It will also ensure that farmers can now use three-phase supply beyond the 7-10 hours. Besides, it will also boost non-farm economic growth.
These two efforts, on the energy audit and billing as well as free-farm power sides, are practical starting points to engage meaningfully with the problem. It has to be noted that they are not just about some technology interventions or a cash transfer innovation, but about using technology interventions as practical and credible decision-support for discom officials which they then need to then act upon. These interventions can shine light on the problem, identify and quantify leakages, localise and apportion costs, and thereby align incentives for further action.
I have not talked about the political challenges that need to be addressed. They include annual tariff assessments and increases accordingly, allowing discom officials enforce on theft of supply and non-payment of bills, and gradually shift from free and unmetered farm supply to some basic pricing. Equally important is that the demand for continuous and good quality of supply should become an electoral good that would in turn make the aforesaid issues an imperative for the political leaders.