Strategies like early closure of inefficient coal power plants, increased competition, annual tariff revision and smart meter deployment can help the Indian power distribution sector turn around and become profitable—according to a new report by the Institute for Energy Economics and Financial Analysis (Ieefa).
As of May 2020, the Indian power distribution sector had accumulated overdue amount of Rs116,340 crore to generation companies, while already carrying total outstanding debt of Rs478,000 crore (in FY2018-19).
Discoms have been unable to improve their operational performance despite multiple bailout packages from the government.
The Ieefa report recommends that the Indian power distribution sector needs a systemic improvement to reduce financial and operational inefficiencies and cut losses.
The Ieefa report recommends that discoms work with state governments to retire their old, inefficient and expensive coal-based power plants as a key pathway to reducing their average cost of power procurement.
“We suggest state-based discoms sit down with state generation utilities and review what old thermal power plants they can retire, given the state of surplus capacity,” said author Vibhuti Garg.
“Many thermal power stations are old and operating at well under half their capacity, yet the states are bound by contracts to continue to pay hefty capacity charges.
“We understand that retiring power plants won’t be easy as the proponents want to make money for the life of the contract period. But to move forward and start to reduce the massive discom debt while enabling the states and the nation to transition to a cleaner, cheaper energy economy, the states will have to jump this hurdle.”
The report also recommends reducing cross-subsidies to decrease the burden on commercial and industrial customers and increase healthy competition. The implementation of Direct Benefit Transfer, solar irrigation pumps, and the adoption of policies favouring the uptake of solar rooftop systems will help to reduce cross-subsidies.
Further, installing smart and prepaid meters will help discoms manage their load better while reducing metering and billing losses and theft, it stated.
Discoms could procure new renewable energy capacity by devising a new tariff structure in which the developers bid for levelized tariffs. The initial tariff could start from a lower base in the first year and allow inflation indexation over the contract’s length.
Increased private competition and transition to a National Pool Market are among other recommended strategies.
“The government of India should consider implementing these recommendations, and if state government lending and guarantees and discom subsidies are still required, they should be tied to the performance of the states in implementing reform in their distribution sectors,” said report co-author Kashish Shah.
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