Distributive policy

Sansad TV: Committee Report – Electricity Pricing Policy

Pricing rationalization:

    • The Committee observed that it would be very difficult to have a uniform rate across the country at present or at one time.
    • He noted that the cost of electricity supply varies due to the variation in generation, transmission and distribution costs. States were empowered to decide the tariff for different categories of consumers.
    • Many states have created a large number of tariff categories based on socio-economic considerations (up to 93).
    • The Committee noted that the current tariff structure is varied and complex, and that there is a need to rationalize various key elements of the electricity tariff. He recommended that the central government work with the states to simplify the tariff structure.

Power Purchase Agreements (PPA):

  • Electricity supply the cost constitutes an important part of the supply cost of the distribution companies (discoms).
  • About 90% of electricity demand is met by long-term bilateral contracts between producers and discoms, known as PPAs.
  • The Committee observed that discoms signed PPAs at a higher cost compared to prevailing market prices. This has negative consequences on their financial performance. He recommended rationalizing the cost of PPAs.
  • However, he also observed that renegotiation of PPAs, unless the parties mutually agree, is undesirable as it may send adverse signals for future investments.

Payment of fixed costs: Discoms remunerates generators in two parts:

  • First, fixed costs, reflecting capital investments, and second, variable costs, including the cost of fuel for production.
  • The Committee observed that the capacity utilization of coal and lignite power plants in 2020-2021 was around 53%.
  • Discoms have to pay a large amount as a fixed cost even when the facilities are not in use. This cost must ultimately be passed on to end consumers.
  • However, the fixed costs are not entirely recovered at the level of the distribution tariff. The Committee recommended that the government explore ways to reduce this burden on discoms.

Power swaps:

  • The Committee noted that power exchanges can help introduce uniform tariffs across the country. However, the electricity currently purchased via exchanges represents less than 5% of the total electricity produced, since most of the demand is met by long-term PPAs.
  • He recommended the central government to: (i) develop the electricity trading system, (ii) ensure the availability of multiple trading to avoid monopoly, and (iii) formulate regulations to prevent bad practices.

Cross-subsidy:

  • Cross-subsidies refer to a tariff arrangement in which one category of consumers pays a comparatively higher tariff to subsidize the consumption of another category of consumers.
  • The tariff policy requires that tariffs for all categories of consumers be reduced to ± 20% of the average cost of their supply.
  • The Committee recommended restricting cross-subsidization within a tranche. Also, a system can be adopted where the base tariff is the average supply cost for all categories and ±20% is applied for transparency in determining tariffs.
  • He also recommended direct transfer of subsidy benefits to consumers to make cross-subsidies more targeted and effective.

Reduction of AT&C losses:

  • In 2018-2019, overall technical and commercial losses (AT&C losses) were 22%. In some states, these losses were as high as 60%.
  • AT&C losses represent the proportion of power supplied by a discom for which it received no payment.
  • The Committee observed that these losses are mainly commercial in nature and can be reduced by administrative interventions. He further observed that if AT&C’s losses had been cut in half, discoms would have been financially viable.

Optimizing the energy mix:

  • The Committee noted that the installed capacity of all sources is about 389 GW, while the peak demand has been about 170 gigawatts.
  • The capacity utilization of coal and lignite power plants fell to around 53%. Renewable energy, including solar energy, has an unavoidable status, which forces discoms to abandon conventional energy to welcome renewable energy.
  • However, due to the intermittent nature of renewables, balancing power from other sources is necessary for grid stability. The Committee recommended the formation of a committee of experts to examine power pooling at the central level so that an ideal mix of power and supply of electricity to all states at a uniform rate can be assured.