Q&A with Ms. Mohua Mukherjee, independent observer of the energy sector with devp. project exp. in 44 countries, on a 360º view of the Indian Power Sector in 2020

Q. A lot is being written about digital technologies bringing in efficiencies to the energy sector. What does India need right now, so that any influx of digitalisation in energy processes yields the intended efficiency?

A. The main priority for efficiency in the Indian energy sector is to reduce the losses of the distribution companies, or discoms. Customer revenue enters the electricity value chain only through the discom, and that’s how the upstream suppliers also get paid. If the discoms can’t manage that correctly, the whole sector suffers from financial shortfalls. Let us first understand why efficiency is needed. Traditional discoms buy bulk energy from thermal generators, move it across long distances on transmission lines until it reaches the load centres, step down the high/medium voltage at last mile neighbourhood distribution transformers, and sell it to the customer whilst ensuring the MBC processes (metering, billing and collection). Currently, discoms are incurring heavy Aggregate Technical and Commercial (AT&C) losses of ~30% (the government’s target is to bring this down to 15% which is still high by international standards). The technical loss is due to dilapidated networks, but the larger culprit is commercial loss, i.e. inefficiency and theft. Inefficiency means the discoms don’t have good records of the customers, lack proper metering arrangements to know the client’s exact consumption, and also lack timely billing systems and flexible payment options or collection systems. Technology, software and digitalization can help solve this issue of ~30% AT&C losses.

To ramp up efficiency, we need sensors on the grid (smart grid) to get real-time visibility of what is occurring along the network. We need communications technology and algorithms to automate decision-making on how the network should be managed. It should detect cases of meter-tampering or when power is drawn from a location with no recorded connection. We need advanced metering infrastructure (AMI) on customer premises, with two-way communication so that the network has real-time information about load patterns. Typically, 20% clients bring in 80% of the revenues, so let’s focus on those large customers first.

With the right kind of information and digitization, the discoms can transition to “time of use” pricing rather than a flat rate. At certain times of the day, the network can benefit from “peak load shaving” through “surge pricing”, so flexible customers can refrain from using electricity for a few hours and shift the peak. This helps discoms save money. With digitization and peak load shaving, we can have third parties who sign up customers that agree to participate in voluntarily reducing their load to reduce peak demand. This means that those customers’ appliances are connected to the Internet of Things (IoT) and controlled by an Aggregator who assures the discom that the peak won’t exceed a certain amount. The discom pays the Aggregator for this virtual delivery of energy (through savings by Demand Side Management), and the Aggregator shares part of this value by giving electricity rebates to people who had signed up and agreed to get out of the way during peak times.

We have only scratched the surface by talking of discom loss reduction and demand side management so far. But one can see the intended benefits and the role played by digital technologies in bringing efficiency into the system. However, a pre-condition is a desire for transparency by all stakeholders, particularly on discom loss reduction. Network automation and real time visibility won’t work unless the state level politicians are agreeable to stop using electricity as a tool of patronage and they agree to start treating it like a commercial item. They need to stop ordering the discoms to give free electricity to their industrial cronies, and then hide it under the quota of free electricity to farmers, thus deliberately muddling up customer indexation etc. They need to let the discoms operate as a commercial entity, else the desired efficiency cannot occur.

Q. Given the current state of public finances and the private sector with regards to energy project outlays, what are the innovative financing mechanisms the country can tap to fund future expansion?

A. The average per capita consumption of electricity in India is 1,100 units p.a. The global per capita average is 8,000 units p.a., and China and the USA consume 6,000 and 12,000 units respectively.  We need expansion outlays that can scale up our per capita consumption to at least 4,000 units per year within the next five years.

This would require three kinds of expansion investments, i.e. in generation, transmission and distribution. Learnings from global players show each of these three is a different business, with different risks and different investor appetite, and therefore merits its own kind of innovative financing mechanisms.

In generation, we can rule out private commercial investor funding for thermal plants now, due to pressure from climate change advocates. Coal is still part of India’s expansion plans along with renewables. Private insurance companies and banks are seeking to divest all exposure to coal plants. And without insurance, lenders won’t lend to coal projects. Therefore, we are only looking at public funding and owner’s equity for coal plants under generation. The other part of generation is in renewables, which is seeing a lot of private investment. Green bonds are a suitable tool here, which allows you to cast a much wider net for investors.

India’s transmission network at the state-level is entirely owned by the state. Its expansion is done from the state budget, so nothing innovative. At the country-level, the interstate transmission network is owned and managed by PowerGrid Corporation, PGCIL. Some transmission lines were opened for competitive bidding, where the contract is not necessarily handed to PGCIL and private infra companies have a chance to compete. But this is an exception rather than the rule. A private investor who won a tender would pretty much rely on own equity and bank debt. So, there’s not much innovation in transmission financing either. Moreover, there are not too many keen investors, given the issues with land acquisition, environmental clearances, etc.

The main scope for innovative finance is in the distribution sector. The government recently added 26 mn. new customers through the government-funded Saubhagya scheme, which has increased the footprint of the network and connected households and businesses in the previously unserved areas at the grid-edge.  But these segments are yet to get enough supply. Therefore, the private sector will need to locally generate and deliver power to these Saubhagya clients (from renewables plus a battery located close to where these new customers live). This is where I see the main scope for innovative financing, including de-risking schemes. But until the discom issues are fixed, there won’t be much innovative funding, since leaving the discoms as they are would only scare away potential investors.

A low hanging fruit in terms of innovative mechanisms is the “energy saved” or avoided consumption, i.e. one stops wasting energy and uses the available amount more efficiently. For this, the financing mechanism is the ESCO (energy service company). They place energy saving equipment at the customer premises at their own cost, thereby reducing the electricity bill. For 2-3 years, you pay them your regular bill amount. They only need to pay the reduced bill amount to the discom, and they keep the difference between your old and new bill, i.e. the value of energy saved. After 3-5 years, once they recover the cost of their investment and leave, the customer starts enjoying the lower bills due to the energy saving investments. Thus, the financing model in this case is through “savings”.

Q. Is privatisation of discoms the best solution? To be the best solution, what more is needed to be done?

A. Politically, it may not be possible to privatize most Indian discoms. Many state politicians won’t give up ownership in a strategic asset like the discom, and the discom employees would also agitate against it.

Therefore, a realistic option is a public private partnership model like the Delhi discoms (and the Odisha discom, CESU, which made a similar announcement just two weeks ago). In Delhi, a Special Purpose Vehicle was created into which the shares of the discom were deposited. They were then allocated to the winning private bidder and the state, on a 51-49 basis respectively. The private discom took over the responsibility of management and investment, with the state as a silent partner. The new owners invested in automated metering, loss reduction techniques, network strengthening, and ensured round the clock power for all.

The other solution is to cut the service territory into smaller pieces and sub-contract the responsibility for one or several of those circles to a private company, which is the Distribution Franchisee. The distribution franchisee is given targets for loss reduction in its footprint area, over a certain number of years.

I think the Delhi discom model is the best, given Indian circumstances. Let the private company be a full licensee and run the discom on commercial lines. Only then is the private party most incentivized to maximize the value and emphasize good customer service, while the state as a fellow owner helps deflect criticism that it has sold out to the highest bidder.

Q. What is your view on the challenges the rooftop solar and large-scale solar projects have seen in India? Which segment holds the maximum headroom for growth?

A. I believe that decision-makers automatically prefer to deal with large-scale solar projects (called “utility scale”) because there are fewer stakeholders, larger contracts and fewer touchpoints (and in case one wants to engage in corruption, then less visibility).  You need large tracts of land, and you pay to get the necessary clearances. You need to build a large transmission evacuation system to get the solar energy out of the solar park, and connect into the main, existing transmission network. You also need to get land clearances for that transmission evacuation line. You need a power purchase agreement with a discom who will be the off-taker, thereby allowing you to go to a lender and show you have an assured customer and revenue stream out of which you will repay their loan that is supposed to cover 70-80% of your project costs. These are discrete, identifiable parts of the equation in a large-scale solar project everyone is familiar with. Certain unavoidable “costs of doing business” in India are all factored into the costs.

The rooftop sector becomes messy because there are thousands of small customers to deal with, various business models, and no single large transactions. Either the rooftop owner will invest in his individual system and own it from day one (capex model), or a third party will invest, put it on your roof and sell you the electricity generated. If you are a commercial/industrial customer who always wants to buy from the third party, then you will be in the BOOM model (Third party is responsible for build own operate maintain. You pay them for whatever you generate on the roof and use. You buy from the discom for whatever else you require, say at night when the rooftop system is not working).  In the BOOT model (build own operate transfer), the third party runs the system for some years and sells you the electricity at an agreed rate. When they have made an adequate return, they transfer the ownership to you. From then on you just use the electricity with no payment (except annual maintenance).  If you are a state employee looking for under the table payments, you don’t have a lot of leverage in this segment. The only touchpoint when these people need to deal with you is when they come and get the rooftop system connected to the grid. They need a certificate from the Chief Electrical Inspector that the system is safe and constructed well and then they can connect it to where the mains electricity enters your premises. Just one opportunity to collect!

Based on the state policy, if there is net metering, you export your surplus generation. So, the discom must change its billing systems for rooftop PV customers. If there are a lot of rooftop PV customers under any distribution transformer, that too would require augmentation and reinforcement through additional equipment like tap changers. In short, the discom sees less joy in rooftop than in utility scale.

However, there are challenges on the other side as well. We don’t have enough spare land in India to do as many utility-scale projects as we want. So, rooftop is the way to go, because we have enormous potential rooftop space. We also have a “40GW  by 2022” rooftop PV target and we have only achieved ~4GW till now. (On the utility-scale side, we have achieved ~32GW out of the 60GW target). That’s why I feel the main action will have to be on rooftops now, whether the key players like it or not. Either that or change the targets!

Q. Social peer pressure to force late-dues payment made news in Uttar Pradesh. Since a large chunk of late-due are from the household sector, do you feel this social peer pressure model can work?

A. Yes, I think it can work. This is how the Self-Help Group based microlending model also works, using social peer pressure. Getting household people, especially in rural areas, to pay their bills by using their on-ground social networks in this way is very similar.

However, it also makes me uncomfortable to see such pressure being applied to the poorest and most vulnerable populations, whose bills are small, in any case. I am not saying those bills should be ignored. All of us who use electricity should pay according to our respective tariffs. But there are two reasons why I am uncomfortable. One, I don’t see any similar efforts being applied to force payment by the big industrial crony electricity thieves who are friends of the politicians and therefore often escape paying their dues. Second, the discom often doesn’t do a good job of sending regular and accurate bills to rural households. A recent survey by SmartPower India and Johns Hopkins University showed the discoms sometimes send a six-month bill of a very high amount which is outside the household’s ability to pay in a single instalment.  Also, rural services are not good due to daily outages and limited power supply, often as a deliberate policy of the discom. So, the poor rural customers who are already frustrated by the patchy and unreliable quality of their electricity supply would get additionally stressed through peer pressure and social “shame”.

In my opinion, the discom would do better to first focus on getting the dues out of the 20% large customers who give 80% of the revenues. Get that right, and only afterwards place the focus on the “small fry”!

Q. The migration from fossil to renewable energy would necessitate some new skills and manpower, and the redundancy of some erstwhile fossil fuel sector workers? How can policymakers cushion this social cost?

A. This is a huge issue. The transition to clean energy could cause job loss for those who are involved in all stages of the thermal power sector. This stretches from manual workers to privileged white collar managers. However, in India, the thermal power value chain is not likely to shut down any time soon. The government has said in order to give every Indian five or six times more electricity than they consume today, we need to grow all the slices of our electricity mix, instead of substituting one fuel for another. We aim to grow the renewables piece, from very little before 2014 to 175GW by 2022.  But we will also grow the coal piece, and this is likely to remain about two-thirds of our electricity mix even as the overall pie expands.

I think the real training and skilling would be required for learning to deal with digitization, automation of processes and transparent information sharing. This applies regardless of which stage in the value chain, and which fuel is being talked of. Unless the workforce of discoms, gencos and transcos is up to the task, we will be unable to implement the smart grid initiatives that we urgently need, and we will be only discussing the same issues five years from now.

Q. Will universalising the Direct Benefit Transfer method for electricity subsidies across India work? What are the gaps that must be closed for this to succeed, and ensure miscreants do not game the system?

A. Yes, the DBT method for electricity subsidies across India has to work, if we are to have any hope of ever fixing the sector. This is because the cross-subsidies of today have introduced so many distortions, that it often looks like a welfare scheme and not the functioning electricity system it is supposed to be.

We can take learnings from the DBT system used for the cooking gas cylinder Ujjwala Yojana. Those who signed up must buy at market prices, and the central government then reimburses the eligible subsidy into the bank account against proof of payment. One learning was that the Rs 650 for a 14 kg cylinder was too expensive for a low-income woman to buy upfront. Most women could afford only one or two of these per year and were resorting to unhealthy fuels for the rest of the time. Now, the authorities are looking into a special 5 kg cylinder that is more affordable. So, it is important to match the upfront payment with the cash flows of low-income customers. Or maybe we need daily or weekly billing or a pre-payment system. Digitization that cannot be altered by the customer or a discom employee (maybe using some blockchain technology) will be helpful to prevent miscreants from getting a free ride on subsidy category customers.

The other thing we saw with the Ujjwala Yojana was some leakage of subsidized cylinders into the non-subsidized sector. How do we know? Because some women sharply increased the number of their cylinder uptake, to the extent of taking more than one cylinder per day! This means they are taking it for someone else, using another person’s money to buy it upfront, but then claiming the subsidy and probably sharing it so that the latter’s cost is lower than the market price, even though they may not be entitled to the subsidy.

The good thing is that, unlike a cylinder where you take physical possession and bring it to my house to make a private deal with me, electricity is different. However, I cannot emphasize enough that one needs digital enhancements on the grid so that all electricity is visible and the discom can see exactly where, and how much, is being consumed in real time. So, if a subsidized person who gets 30kWh p.m. free, is suddenly consuming or claiming 210kWh p.m., the system would flag it and the discom must investigate. If it refuses to investigate, there would still be a digital record that an auditor can question in future. The DBT can then be temporarily suspended. This can bring about greater honesty in the system, while taking away the distortions of today.

Q. What are the funding methods that are working for India’s transition to renewable energy? And what are some of the methods you feel can work in the future so that this transition sustains?

A. The government has done the right thing and kick-started the solar sector with large multilateral loans from the World Bank, ADB, KfW and others. These lenders have also mobilized concessional climate funding along with their own resources, and thereby lowered the cost of the money and extended the maturity of the loans. They have insisted on high quality project preparation standards in terms of environmental, social and governance (ESG) criteria, which has also contributed to triggering an ecosystem of associated skills where there was no market for this expertise before. Lenders were avoiding this sector because they saw it as too risky, and there were not enough skilled workers across the levels from manual to project manager who knew how to handle solar projects. Now, that has all changed for the better!

India is now regularly mentioned in international publications and reports as a rare example of a country where there is a sizeable involvement of domestic funders in its renewable energy transition. These are the domestic developers who put their own equity (of ~20-30%) into the solar projects and the domestic lenders who fund the balance ~70-80%. We are yet to mobilize domestic institutional investors such as pension funds and insurance companies, since the risks are still too high for those investors. The risks are partly self-created, with all sorts of policy reversals and lack of coordination within government. But this is a learning curve and I feel things will improve. The last two years have been difficult, and lessons have been learned.

The biggest thing which needs to improve is communication and awareness raising about how our energy system, and specifically solar energy, works.

Despite the national ambitions for solar PV, the sector is not at all well understood by the public, and not even by some of the senior employees of the discoms, who are all key stakeholders.  People need to be familiar with what a rooftop solar PV system can do, how it works, what off-grid solar can do, how you can live in a rural area with no electricity network and still run a fan and a TV, what a large scale grid connected project does, and why that electricity is clean. If we can convey this information effectively to the public, people will understand the value of solar and would pay for it willingly. Then I think it will be much easier for solar investors to raise funds for new projects, which would ensure that the transition remains sustainable.

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