A Comprehensive Power Sector Plan By Its First Reformer – Suresh Prabhu
The solution doesn’t lie in just telling discoms to pay up, it is in addressing the fundamental issues, says Suresh Prabhu.
As narrated to BQ Prime.
I remember the day when I became the Union Power Minister in the year 2000 when Atal Bihari Vajpayeeji asked me to take this challenging job. He told me that you have to do something which has not been done for a very, very long time and then I embarked upon something which was a long journey, a difficult one, but yet very satisfying. We had a peak level shortage of 18% at that time, all the discoms had become bankrupt, the capacity addition had virtually come to a standstill and the private sector was not allowed to generate, distribute, or transmit electricity because the government had nationalised everything in 1948.
What The First Wave Of Power Reform Addressed
We started working on a comprehensive reform process, which included generation, transmission, and distribution, all three at the same time. So, we introduced the Electricity Act and now you can see the results. At the time, our installed capacity was less than 1,00,000 megawatts and today it is at least four times that. That has happened thanks to only one legislation that we introduced which allowed the private sector to come into the power space. So, we brought them in and we also de-licensed generation. So, anybody could come and start producing power.
The only requirement was that you have to use technical transmission because ultimately power has to be instantaneously consumed as it is generated. Transmission plays a very important role so we had kept that as a technical issue only. Otherwise, we de-licensed it. The technical requirement was made for the simple reason that we didn't want the wrong practices that were happening at the time to go on, like allowing a generator to keep adding costs because those got passed through. Whatever padding that was taking place in the generation of power, ultimately the economy and the consumer had to pay the price for the entire duration of the lifespan of that plan. Then we prepared a National Transmission Plan for a national grid.
We also got the Energy Conservation Act passed by Parliament because we felt that it is not just the supply-side intervention that is going to help but what was also needed was demand-side management. So, we created the Bureau of Energy Efficiency and now you can clearly see the results that India’s energy efficiency levels have gone up.
Next, we brought in distribution reforms. This was essential to make power distribution more efficient and discoms stop losing money. In fact, discoms should never lose money. Electricity should always generate profit, there is no reason why it should lose money but that was happening because of transmission and distribution losses, theft, as well as poor governance. The thought we approached this reform with was that rather than bringing change in distribution in one piece and talking about it as a global issue, why not make every distribution circle in India commercially viable? If they still lose money, that is only because of tariffs so, for that, we created a different structure of a regulator for tariffs.
To make distribution circles profitable, the government mapped all the distribution circles and I got Infosys’ Nandan Nilekani to prepare an IT-based solution to track which distribution transformer is losing money. If all distribution transformers start being profitable, circles will obviously become profitable. If circles become profitable and the tariff is right then discoms cannot lose money.
To address past discom losses as a one-time action, I convened a meeting of all state chief ministers, chaired by then Prime Minister Vajpayee. They agreed on a settlement and we did that in the shortest possible time. The result of that is the following–NTPC’s collection rate had come down to less than 50% and today it is more than 90-98%. That improvement is because of not just that one-time reform, but also the tripartite agreements between the Reserve Bank of India, state governments and the central government. These agreements put in place a mechanism such that not only the power sector but all central utilities could collect money, and if the state defaulted other parties would be able to collect it from there.
We saved Rs 40,000 crore, but that was after a difficult fight with the Planning Commission. They asked why should we be giving money to distribution companies when those are owned by the states, and that’s their job. I pointed out that it was a national problem so we have to address it. We got our way thanks to Prime Minister Vajpayee’s support. That Rs 40,000 crore was not to be spent unless we saw improvement in transmission distribution at every distribution circle, evidenced by proper baseline studies for all circles.
That’s all the work that was done in the early 2000s in the power sector. The situation of the power sector today is because we did not follow up on these ideas.
Our idea was to make distribution transformers profit centres. If that’s done, the person who is heading the distribution transformer also ensures the quality of service to the consumer, because if there is no quality, consumers will not pay without which the distribution centre cannot make a profit. With this approach, we looked to change the sector administratively, technologically, as well as government policy-wise.
The Scope Of The Problem Today
Today, discoms are buying power and not paying the supplier. This is a bad habit akin to someone saying that they want to have as much booze as possible but will not pay for it. I don't know if there's any other buyer in the world which can do that. The consumption of power without paying for it is a real challenge today.
What we have to do now is the same way we approached it 20 years ago, make every distribution transformer as well as circle a profit centre. Then, those circles can be given to not just private companies but also to small local institutions–whether those are cooperatives or local self-government. There is a model in North-East India that I have personally seen, where a local community was given a small test to pay, and they collected almost 100%. If you do this, that’s how today’s situation will improve.
To do that, we have to make sure that we work on all the comprehensive issues, as reform is not a one-time effort, but an ongoing game. Do not take your eyes off the ball till the results are finally achieved. That can happen only when there is an improvement in the quality of electricity. Ultimately rates for power must come down, there is no reason why rates should go up.
New Possibilities That Didn’t Exist Earlier
There is another model that is possible now that was not the case when we started power reforms 20 years ago–that of ‘distributed generation’. With solar energy as well as other renewables becoming so cheap, in fact, cheaper than thermal energy, we should encourage every small community to start their own generation stations. They will collect their own money and discoms will be spared of creating grids and incurring the additional costs of power supply. Involving local communities also brings in accountability. This is something which we should put into place immediately.
With today’s technology, you can centrally monitor every load dispatch centre. All the dispatch centres should be connected to distribution transformers. That will show which distribution transformer is working well or not–technologically as well as commercially. The situation today creates a drain not just on the discoms but on state resources. It is something that is putting the banking system in peril and causing industrial production to suffer.
When we drafted the Electricity Act 20 years ago, several companies were putting up captive power plants. Back then, that approach was a waste of natural resources, and I suggested that they instead address their needs through grid connectivity.
Today, we should now encourage such a different approach and regime where reform in power distribution is accompanied by distributed generation.
Doing this will bring massive benefits, bringing the country closer to its Net Zero climate targets. There cannot be distributed generation from fossil fuels, but the potential is huge with solar, wind, or even locally-based biomass. Ground-up from a community level, the carbon footprint will go down, and millions of jobs can be created all across the country because these generation units have to be operated locally. Once we have locally generated electricity, other local enterprises will spring up, not just in relation to generation alone but as consumers of electricity many village industries will come up.
Changing Mindsets
To effect large-scale change, there needs to be a lot of stakeholder engagement. I undertook 1,500 roadshows countrywide to create awareness and had back-to-back meetings with trade unions, farmers’ organisations, state governments, political parties, and consumer organisations. If all of these stakeholders are not on board, you will never be able to do anything. To bring them in, we have to patiently talk to them and explain the benefits.
Someone could go for a franchisee model and say that they want to have a distribution company. A distribution union with all the local representatives can form a cooperative if they want, and run it. There would be no need to oppose unions. Come up with innovative solutions that address individual situations.
When addressing farm stress, we need to understand the nexus between water, energy, and climate. In Punjab, so much groundwater is being drawn that is then being deployed into a wrong cropping pattern. Farmers there are drawing water and making paddy. Rice cultivation from groundwater is something which is unheard of anywhere else, as paddy is mainly a rain-fed crop. Instead, the groundwater is drawn out persistently because the electricity being fed into the pumps is free. Not used carefully because it is free, farmers find themselves not getting enough electricity, water, or both.
Offer farmers a proper model where they can benefit and pay reasonable prices for it. They will be happy to pay for it because the Commission for Agricultural Costs and Prices captures all the input costs. If we pay the proper minimum support price based on the input costs, why should the farmer complain? The MSP mechanism too should be devised in such a way that farmers that are using water and energy from sustainable sources get some benefit. Once you do that, you will see a transformation that can happen.
The idea of having local communities handle their power supply is not a radical one. While self-help groups may not have the capacity to carry it out, cooperatives definitely can, as do local governments. In fact, before 1948, there were a large number of distribution companies in India that were not owned by one central authority. That legacy continues in some places like Mumbai where you had Bombay Suburban Electric Supply Ltd. which was acquired by Reliance and is now owned by Adani; and the Calcutta Electric Supply Corporation, now CESC Ltd. under the RP-Sanjiv Goenka Group, in Kolkata. If there is a problem in the public sector, the private sector is not the only solution. It is also possible to involve all non-state actors that have the capabilities to work closer to the community.
That’s how India’s village governance model has sustained. In well-run villages, common facilities are properly maintained because people realise that this is their own property.
A Holistic Solution
Such paradigm shifts in thinking can usher in a complete transformation of the power sector. Its problems cannot be resolved in a piecemeal fashion–saying some entity or the other not paying up. Look at the entire ecosystem, think about integrated power reform that will cover not the power sector alone but also the consumer and other ancillary ecosystems that go with it. This is an opportunity to bring in the next level and generation of reforms. These reforms will help not the power sector alone, but also the economy and the environment, help generate employment, and transform our rural landscape.
Today, industries are set up in areas that have centralised power available. With distributed power generation, small sectors can get developed in a number of regions. In the food processing industry, we are losing 30% of fresh fruits and vegetables because we don’t have proper processing or support in terms of cold chains. That can be addressed with distributed power generation. When we change a centralised model to distributed model, transmission problems will be addressed, payment issues will lessen, and the discoms’ role will completely change.
The solution to today’s problems doesn’t lie in just telling discoms to pay up, it is in addressing the fundamental issues.
The present structure of distribution companies is a challenge and unless we change the structure, and bring in the players that will operate on a different model, we won’t see the benefits. Today’s problem with discoms not paying is essentially arising out of something else. When someone goes to a doctor with say pain in one limb, the doctor could well diagnose the origin of the problem in another part of the body. If you ask only for that limb to be treated, you are likely to have more trouble later. Similarly, the power distribution companies’ problem today is because of a structural problem and needs a comprehensive, holistic, integrated approach. Only if we do that are we going to resolve the situation. If not, after some time, we will see the recurrence of this problem in some other form. At that point again, we will have to put good money after bad. That would be rather sad, to have good money wasted.
Suresh Prabhu served as Power Minister in the Government of India between 2000 and 2002. In that government led by Prime Minister Atal Bihari Vajpayee, Prabhu has also been Minister for Heavy Industries & Public Enterprises; Environment & Forests; and Chemicals & Fertilizers. In the first term of Prime Minister Narendra Modi, Prabhu was Minister for Railways; then Commerce & Industry; and Civil Aviation.
The views expressed here are those of the author’s and do not necessarily represent the views of BQ Prime or its editorial team.