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Managing the Transition to Renewables

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April 24, 2019

What is the issue?

  • The rise of renewables has implications for the finances of power distribution companies (Discoms).
  • It calls for managing the transition strategically to prevent the negative impacts on small and rural consumers.

What was the earlier approach?

  • For the most part of the 20th century, planning broadly involved estimating future electricity demand.
  • The focus was on adding larger conventional power generation and connecting these to load centres through transmission lines.
  • Electricity was supplied to consumers by a monopoly, a vertically integrated utility.
  • Pricing was based on the principle of cross subsidy.
  • So large industrial and commercial consumers paid higher tariffs to ensure affordable tariffs for agriculture and households.

What is the emerging trend?

  • Energy choices are rapidly changing, largely due to national policy initiatives and global techno-economic changes.
  • There is an increasing share of renewable energy in the supply mix due to -
  1. competitiveness of renewables
  2. reducing costs of battery storage
  3. rising costs of coal-based power
  • In the long run, this is likely to drive electrification of other sectors such as transport, cooking, and industrial processes.
  • It would gain pace as an effort to addressing issues of local air pollution, energy security and rising energy import bill.
  • In all, these trends can effect a paradigm change in the energy sector.

What is the current limitation?

  • Currently, the government focus is very limited in critically evaluating and prioritising needs, anticipating risks and preparing for them.
  • This can lead to serious long-term implications in terms of resource-lock-in and dependency.
  • This is especially true considering the long life and capital intensive nature of the investments in the power sector.

What are the implications?

  • The emerging trends in renewables and storage create numerous opportunities for large consumers.
  • However, this could end the revenue that these high paying consumers were so far providing.
  • In turn, this could mark the end of the current business model of the electricity distribution companies (Discoms).
  • Given the uncertain demand, power purchase (accounts for more than 70% of the cost of supply) will become more complex and riskier.
  • Simultaneously, the loss of cross-subsidising consumers would sharply increase either the tariff for small, rural, and agricultural consumers, or the State subsidy.
  • If not managed appropriately, these changes can lead to -
  1. severe financial stress for Discoms
  2. poor supply quality for small consumers
  3. stranded assets, and bailouts, with implications for the banking sector

What does it call for?

  • There is an urgent need for fundamental changes in the way Discoms plan and operate.
  • Increasingly, markets and competition would need to play a substantial role.
  • Allowing large consumers to choose their suppliers for the long term helps them reduce costs, and also enable rational capacity addition.
  • Solarising agricultural feeders can help in capping subsidy while providing day-time reliable supply to farmers.
  • These measures can allow Discoms to focus on improving supply and service to small and rural consumers.
  • Alongside, discoms should avoid adding new baseload capacity without rigorous demand-supply analysis.

How can the data deficiency be met?

  • The gaps and discrepancies in public availability of crucial data should be addressed.
  • To assist the government in policy and decision making, an analytical agency needs to be set up.
  • This agency, tentatively called the Energy Analysis Office (EAO), should involve multiple ministries.
  • It should be empowered to collect and reconcile data, analyse trends, publish reports and suggest policy interventions.
  • The agency would leverage as much as possible from existing technical agencies in the sector.
  • Two important prerequisites for it to be effective are policy relevance and independence from political influence.
  • For this, the EAO could be placed under the administrative control of the Executive.
  • But the Parliament should be made to approve its budget and review its work.

 

Source: Business Line

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