7. ELECTRICITY

Figure 7.16 Performance of India’s DISCOMs

Andhra Pradesh

Himachal Pradesh

Gujarat

Karnataka

Puducherry

Maharashtra

Assam

All India

Kerala

Telangana

Punjab

Uttarakhand

Tamil Nadu

Tirpura

Haryana

Madhya Pradesh

Manipur

Chhattisgarh

Goa

Bihar

Rajasthan

Jharkhand

Meghalaya

Uttar Pradesh

Jammu and Kashmir

Notes: ACS = average cost of supply; ATC = aggregate technical and commercial; ARR = average revenue realised. Source: UDAY (2019), Dashboard, https://www.uday.gov.in/home.php.

The retail markets in India

Retail market rules and regulations

The Electricity Act of 2003 introduced the unbundling of transmission, generation and distribution and provided for wholesale and retail competition, where distribution/retail companies have the choice to purchase power from several generators. By law, electricity users above 1 MW are already free to choose their supplier; however, in practice most consumers are supplied by their local DISCOM. Open access means that DISCOMs have uncertainty of their load, as open access customers frequently switch between procuring power from the exchange or the DISCOM. Unbundling of supply and transmission has been carried out in all states. The last state was Jharkhand. Small and north-eastern states have carried out unbundling based on company size and commercial viability after their unbundling. India’s DISCOMs combine generation and distribution activities. The 2014 amendment to the Electricity Act introduced the separation of carriage and content. International experience shows that the unbundling of retailing from generation and distribution (networks) is usually done at the functional or legal level, and less so at the ownership level. Notably, in small or rural supply areas the business case for the distribution system operator might be challenging without the retail business. Retail markets are mostly under the competence and regulation of state governments and the SERCs, notably with regard to the DISCOMs. The high level of non-payment and technical and commercial losses make it very challenging for DISCOMs to operate in a commercially viable manner.

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7. ELECTRICITY

Metering and smart meters

India’s electricity distribution system suffers from a lack of adequate metering equipment, but innovation and investment in smart meters is on the rise. The GoI has developed several policy initiatives and programmes to promote smart metering and ensure that DISCOMs invest in meter and control equipment to enforce payment discipline:

The National Smart Grid Mission was launched in March 2015 to create an institutional mechanism for planning, monitoring and implementing policies and programmes related to smart grid activities. The Bureau of Indian Standards published standards for smart metering (IS 16444 in August 2015 and IS 15959 Part 2 in February 2016). In August 2016 the CEA published the functional requirements for advanced metering infrastructure and technical specifications for smart meters.

The 2016 Tariff Policy and the UDAY scheme mandate the deployment of smart meters for all consumers with consumption of more than 200 kWh per month.

Energy Efficiency Services Limited has a Smart Meter National Programme that aims to replace 250 million conventional meters with smart meters across India by using bulk purchasing. The smart meters are to be installed over a period of three years. The programme is expected to improve billing efficiency by 75% to 100% while increasing the revenues of the utility companies (EESL, 2019).

Box 7.3 Principles of functioning retail markets

International experience suggests that empowering consumers and increasing their

participation is critical to building transparent and competitive retail electricity markets, including:

Cost-reflective pricing, with protection of vulnerable consumers addressed through targeted transfers that do not unduly distort efficient decisions.

A competitive, dynamic retail market to encourage the development of innovative products and services that can harness demand response effectively and at least cost.

Ready access to detailed real time customer information, while ensuring privacy, to help stimulate competition, facilitate competitive entry, support the emergence of innovative business responses and improve customer choice.

A knowledgeable and well informed customer base that has the capability and opportunity to take full advantage of available choices.

Market processes for metering, contracting, switching and billing that are as simple and seamless as possible to keep transaction costs to a minimum.

Legal and regulatory governance frameworks that reduce uncertainty, establish clearly specified rights, responsibilities and obligations on contracting parties, promote greater

harmonisation of standards and functionality specifications, and maximise scope for participation among potential service providers and customers.

Enabling technologies that provide cost effective real time metering information, verification and control capability to support the introduction of real time pricing, the development of a wider range of innovative demand response products and more effective customer choice.

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The financial health of the DISCOMs

DISCOMs in India have high rates of losses, with aggregate technical and commercial (AT&C) losses amounting to 20% on average and 40% or higher in some states. In 2015 the central government made major efforts towards improving the financial health of India’s DISCOMs under the UDAY scheme (Ujwal DISCOM Assurance Yojana). The UDAY is a financial restructuring plan or bailout scheme for DISCOMs by the GoI, which allows state governments (which own the DISCOMs) to take over 75% of their debt as of 30 September 2015 and pay back lenders by selling bonds. DISCOMs are expected to issue bonds for the remaining 25% of their debt. The Reserve Bank of India has issued guidelines for nonperforming assets, which caps the exposure of DISCOMs to debt.

UDAY mandated the installation of smart meters in rural and urban areas, feeder segregation (separation of agriculture and power generation feeders) and the metering of transformers with the objective of cutting down losses to an average of 15% by March 2019. Progress in feeder segregation and smart metering remains low. Feeder separation data is only available for 17 states, of which only 6 states – Gujarat, Haryana, Punjab, Andhra Pradesh, Madhya Pradesh and Karnataka – have been able to achieve the 100% target.

According to the UDAY dashboard, almost all states and union territories have signed individual memorandums of understanding with the MoP, which include the obligation to make tariff revisions. In August 2019 AC&T losses stood at around 26% on average, but at almost 50% in some states (see Table 7.3), still above the 15% target. Compared to 2017, losses in fact rose in 2018. The gap between average cost of supply (ACS) and the average revenue realised (ARR) continues to be high in most states.

The agreed marginal tariff increases may not have been able to compensate fully for the increase in the ACS (seen between 2013 and 2016). The small reduction in the ACS–ARR gap can largely be attributed to the financial restructuring between 2016/17 and 2017/18, according to the Centre for Science and Environment (CSE, 2019). Based on an estimated interest component in the tariff of 8% of the total expense, the ACS fell, with the state governments taking over the debt and reducing DISCOMs’ interest payments. CSE concludes that the gap closure is attributable to financial restructuring, not necessarily to the real progress of the UDAY scheme or the tariff policy (CSE, 2019). The new GoI announced further tightening of the UDAY scheme in 2020 through conditionality of grants and focusing on real loss reduction investments.

Table 7.3. Progress on DISCOM losses – UDAY scheme

Source: UDAY (2019), Dashboard, https://www.uday.gov.in/home.php.

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Tariff reforms

CERC regulates the tariffs for the central government-owned generators and the interstate generators. Generation tariffs are two-tier, including a capacity payment (availability-based tariff), which does not apply to renewable generators under PPAs.

Tariffs for retail supply and sale of electricity (both retail and wholesale) are determined by the SERCs. The latest tariff policy (competence of the MoP) was adopted in 2016, containing principles to guide the tariff-setting of SERCs:

The simplified tariff structure is based on cost of supply of electricity (depending on voltage of supply, connected load and energy consumed) with classification on the basis of different voltage levels – low voltage, high voltage and extra high voltage. It is recommended that a maximum of five load categories be created for sanctioned load and connected voltage level, such as 0-2 kW, >2-5 kW, >5-10 kW, >10-25kW, and >25 kW for each voltage level. For each load bracket, the consumption slab may be further classified by usage, such as 0-200 units, 201-400 units, 401-800 units, 801-1200 and >1 200 units with progressive rates.

Specific categories shall be maintained for domestic consumers below the poverty line and agricultural consumers so that the benefits of subsidy through Direct Benefit Transfer and cross-subsidy can be passed on to them in a focused manner.

Consumption data based on primary usage – namely domestic, commercial, agriculture, institutional and industry – shall continue to be maintained. This data shall be useful as the basis for load forecasting, to analyse sensitivity to proposed actions and to give effect to programmes and policies including subsidies.

No individual category/subcategory shall be prescribed for temporary supply. Such supply may be provided at a fixed multiple of cost of supply for that category.

For consumers with suitable meters, time-of-day and two-part tariffs shall be introduced not later than 1 April 2020. This scheme should automatically be extended to other consumers as and when they get meters suitable for time-of-day and two-part tariff or single-part consumption-based tariff (for weaker parts of society).

The fixed-charge tariff component should progressively over three years reflect the actual share of fixed costs in the revenue requirement of distribution licensees. SERCs may give an extension of up to two years for the reflection of fixed costs in the revenue requirement, for reasons to be recorded in writing. SERCs shall lay down a roadmap for this purpose.

The process of merging existing categories/ subcategories and slabs shall be carried out progressively so as to achieve the simplified categorisation within a period of three years.

The SERCs shall develop an appropriate framework to impel consumers to declare actual load, which comprises automatic revision of sanctioned load and imposition of penalty for exceeding the sanctioned load in the particular year. Thus the sanctioned load should at least be the maximum load registered during the previous 12 months.

The SERCs may create a separate category for EV charging stations.

The 2018 amendment to the tariff policy requires all future power purchases to be procured competitively by distribution licensees and that DISCOMs are penalised for power cuts (see below in security of supply section). However, it provides for a series of exceptions in practice for state government or central government generators. While the new tariff policy will allow the passing through of legacy costs, it also allows central government generators and DISCOMs to choose not to sell power through the bidding process, thus limiting

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