Distribution Sector Reforms – Time is no Longer a Luxury

Manu Maudgal and Akanksha Golchha, August 20, 2021

The Covid-19 pandemic brought the power distribution sector to a tipping point—reform or perish. On the demand side, the shifting of demand load patterns across consumer categories impacted the revenues of distribution companies (Discoms) because of reduced commercial and industrial demand. On the supply side, the increasing quantum of renewable energy from solar and wind tested the resilience of the distribution system. With 2020 being the hottest year over the last decade, the change in climatic patterns affected accurate scheduling generation and dispatch from renewables, especially wind.

Clearly for distribution companies, 2020 brought the double whammy of demand and supply side disruptions, making business as usual no longer an option.

Tackling slower post-COVID economic growth

The distribution sector is the backbone of the entire power sector value chain (generation-transmission-distribution). It is the window to the end customer. The health of the distribution sector has a cascading effect on the entire power sector value chain.

Before 2020, the clean energy transition in India was making steady progress. India targeted 24X7 reliable, quality and affordable power for all and crossed important supply side mile-stones—transitioning from power deficit to a surplus buoyed by accelerated capacity additions and the electricity grid reaching the entire country. On the demand front, the emergence of new demand segments such as electric vehicles (EVs) and smart appliances is promising.

However, Covid-19 has the potential to throw a spanner in these trends. In the last two decades, the rate of economic growth was closely linked with the rate of electricity demand growth. Slower post-COVID economic growth will lead to slower growth in electricity demand. Customer sentiment and most importantly the willingness and ability to pay for power has been impacted. Demand projections made by TERI show that in the ten largest electricity consuming states, the expected power demand for 2025 is 5-15% lower than what it would have been without the pandemic shock.

Clearly, policy makers, power generators, Discoms and investors need to prepare for a future in which the decline in electricity demand may persist. In particular, the financial health of Discoms and the sustainability of the prevailing cross-subsidy may be even more pressing issues due to the stagnant demand from commercial and industrial consumers.

Accelerating transformation through reforms

The distribution sector is viewed as the ‘Achilles heel’ of the power sector value chain due to systemic technical and operational inefficiencies. Electricity is a concurrent subject with its governance vested both with the Centre and States. Over the last two decades, the Central Government has announced policies backed with subsidies and incentives for States, beginning with the Accelerated Power Development and Reforms Programme, and more recently the Revamped Reforms Based and Results Linked Distribution Sector Scheme that provides conditional financial assistance to Discoms for strengthening supply infrastructure. The patchy success of these interventions has been historically linked to the success of roll-out of the planned interventions by discoms.

The distribution sector remains marred with infirmities such as poor financial health and inaccuracy of demand load forecasting. Over time, the inability to invest in network and infrastructure upgrades has led to a cycle of low efficiencies and revenue.

Currently, the distribution sector is facing high aggregate technical and commercial (AT&C) losses to the tune of ~24% and a persisting gap in the differential between average cost of supply (ACS) and the Average Revenue Realised (ARR). By 2022, ICRA estimates that accumulated gross debt level for the state-owned discoms is likely to cross INR  6 trillion.

This underscores the need to urgently address the three systemic issues plaguing discoms :

• Metering-Billing and Collection (MBC)
  The metering, billing and collection efficiencies of the distribution sector affects the financial sustainability of the entire power sector. The Forum of Regulators (FoR) has released comprehensive blueprints such as Scheduling, Accounting, Metering and Settlement of Transactions in Electricity (SAMAST), which detail the tooling necessary to meet MBC needs in the coming years.
• Accurate Demand Load Forecasting
  Accurate demand forecasting by Discoms allows for adequate power dispatch from the generation side. Continual investment to upgrade ageing distribution end infrastructure is key. Technologies such as smart meters, smart grids, decentralized renewable energy (DRE) systems and storage are becoming pivotal in helping discoms manage demand load better and reducing metering and billing losses. Demand-side management interventions can pave the way for the cost optimization of power procurement. Artificial Intelligence and machine learning can assist discoms to manage consumer grievances, theft and pilferage detection, predictive and preventive maintenance. Novel technologies such as peer-to-peer blockchain trading can make RE more accessible, concurrently providing a host of other benefits such as grid balancing and the provision of ancillary services.
• Access to Private Sector Financing
  Several state-of-the-art instruments have been designed to enhance finance for RE generation. But there are limited instruments for supporting clean power interventions by Discoms and for strengthening the distribution network. With the increased influx of RE, enhanced deployment of smart meters and the 24X7 electricity to all the households ambition, the need to mobilize funds will become even more pronounced. It becomes imperative to support Discoms to explore new financing instruments and mobilize investments, especially from the private sector, in order to expand and modernize.

Networks for Change: The Distribution Utilities Forum

The pandemic has created a crisis like no other, but also offers an opportunity to roll out innovative business models for technology and finance. As pointed out earlier, innovations undertaken in the sector have not been able to scale limiting the success of the Government-backed schemes.

The Distribution Utilities Forum an independent discussion forum that facilitates information sharing as well as cross learnings by and for the distribution companies can be an ideal vehicle to break such silos. The Forum is well placed to build change coalitions with Regulators (Sandbox for working closely with innovators and demonstrate ecosystem impact), with Technology providers (such as start-ups and tech accelerators) and Finance (Private Capital pools, Securities and Exchange Board of India).

Conclusion

Both disruptions and opportunities co-exist across the power sector value chain. Continued policy support, enhanced planning capacity within national and sub-national entities and access to mainstream finance to leverage technology and innovations can strengthen the distribution sector. More streamlined approaches and complementing strategies can become the harbinger of distribution sector reforms and provide the necessary nudges to bring in ecosystem level changes.