Energy transition will hit a roadblock unless power sector’s inefficient status quo is dismantled

Purchasing power is important as energy transition costs.

When compared to its global peers with access to cheap domestic coal, India has done remarkably well in energy transition over the last decade. From nowhere, the solar mix in electricity generation has shot up to five percent as against 4.7 percent in the US and China.

The country is now aiming for a 32 percent solar mix in 2032. The big question is: Can India sustain such a fast transition? Or, should it first mitigate the gaping hole in finances? The prevailing framework is failing both cost discovery and recovery across the value chain.

Electrification Success, Transition Challenge 

The seeds of the problem lie in the achievements. Globally, the energy transition followed universal access to electricity, with a wide time gap between the two.

The US (per capita $76,000 at current prices) was electrified in the 1950s and sourced the majority of power from coal till the 1990s. China (per-capita $13,000) reached 97 percent grid-coverage in the 1990s.

India achieved it all in one go and at a per-capita gross domestic product (GDP) of $2,500. Household electrification increased from 67 percent in 2011 to 99 percent. The average daily rural supply improved from 12 hours in 2014 to 20 hours.

Purchasing power is important as energy transition costs. There are layers of subsidies. Capital block is high in solar due to the low plant-load factor (PLF). Evacuation of infirm power requires extra investment.

Moreover, solar generation peaks in the mid-noon when the electricity demand is low in India. It, therefore, causes redundancy in the generation of (base) coal-power which adds up to the cost of electricity.

Remember, a three-fold increase in installed thermal power capacity between 2007 and 2017, made India power-surplus since 2016-17 with average PLF down from 85 percent to 55 percent and the evening peak deficit hovering around one percent.

A back-to-back energy transition added to the cost. The trouble will hit the distribution sector if solar power is generated on rooftops, which the government is now pushing through the Suryodaya Yojana and the February 22 amendment of the Electricity (Rights of Consumers) Rules, 2020.

Who Will Pay?

India is trying to solve part of the problem by changing the supply pattern. In a mandate issued on February 15, the Narendra Modi government asked state government-run distribution companies (DISCOM) to shift agriculture load to solar hours. Some states have already started doing this.

Agriculture consumes either free or cheap power and contributes 18 percent of total consumption. Its share has been declining over the years. The real headache for the country’s electricity sector is 24 percent domestic consumption.

Several studies point out that nearly 80 percent of Indian households consume less than 100 units a month and 20 percent consume only 30 units. Even a rich Karnataka consumes 60 units on average.

In other words, the majority of Indian households barely use a few lights, fans, TV etc. Delhi reports an average of 250 indicating the use of air-conditioners.

Delivering power to the retail consumer is costly as it involves a huge investment in infrastructure. The smaller the consumer, the higher the cost due to a mismatch in investment and utilisation.

This is why residential consumers are charged way higher than industry in the developed countries. Naturally, consumers in the US and Europe are showing greater intent to move to rooftop solar.

Such economic triggers are absent in India for the majority of the domestic consumers, due to the low consumption profile and distorted tariff structure and the politics of freebies.

Ideally, the subsidy should be calculated on actual cost of delivering electricity to the final consumer. For example, domestic supply requires step-down infra to reduce 400 kilovolt (KV) electricity to 11KV. Naturally it is costlier than industrial supply at 400KV. On top of that if someone is consuming only 30 units a month, under-utilisation of the infrastructure is too high and so is the cost of delivery. The subsidy, if any, should be paid directly to the consumer. But, the Electricity Act 2003 allowed up to 20 percent premium or subsidy on the average cost of supply (ACS).

The results are twofold. First, no one knows the customer-specific actual cost of power. Second, one-half of the consumers – including a fraction of residential consumers, industry (41 percent) and commercial (8 percent) – pay through the roof to subsidise the rest.

On top of that, states announce subsidies, which DISCOMs barely receive as is evident in the pile-up of ‘regulatory assets’ worth nearly Rs 1 lakh crore and over Rs 6 lakh crore of debt used in meeting cash loss.

In the end, the Indian power system is in a bind. The overcharged section of consumers has reason to switch to solar to cut costs. But, state monopoly in distribution (except in Gujarat) tries to prevent the move, to prevent loss of revenue.

The five kilowatt (KW) regulatory cap on rooftop solar was a perfect example of this ecosystem. The cap is now raised to 10 KW, which suits huge energy consumption in running lifts and pumps in high rises.

However, without improved recovery from the subsidised half, such measures will widen the financial gap.

Mess And More Mess

India has not seen any major power reform since the Electricity Act 2003, which was diluted in 2007. The Modi government attempted reforms twice in 2014 and 2022, without success.

The Manmohan Singh government added to the mess by pushing private gencos to operate under a competitive tariff regime while the state sector was left to sell power on a cost-plus basis.

The results are catastrophic. The state government-run inefficient gencos witness maximum capacity utilisation because DISCOMs can take them for a ride. The central sector comes second in PLF due to the take-or-pay clause.

Efficient private gencos witness the lowest utilisation. The loss is borne by the investors and banks. Plants built at Rs 7 crore a megawatt (MW), a few years ago, are now selling through bankruptcy court, at Rs 1 crore/MW.

There is no escape from this situation without thorough reforms that would ensure competition in both generation and distribution. Subsidy on the final consumer cannot be eliminated but the subsidy regime should be made transparent.

Pratim Ranjan Bose is an independent columnist, researcher, and consultant. His X handle is @pratimbose. Views are personal, and do not represent the stand of this publication.