Managing the Transition to Renewables

What is the issue?

The rise of renewables has implications for the finances of power distribution companies (Discoms).
It calls for managing the transition strategically to prevent the negative impacts on small and rural consumers.

What was the earlier approach?

For the most part of the 20th century, planning broadly involved estimating future electricity demand.
The focus was on adding larger conventional power generation and connecting these to load centres through transmission lines.
Electricity was supplied to consumers by a monopoly, a vertically integrated utility.
Pricing was based on the principle of cross subsidy.
So large industrial and commercial consumers paid higher tariffs to ensure affordable tariffs for agriculture and households.

What is the emerging trend?

Energy choices are rapidly changing, largely due to national policy initiatives and global techno-economic changes.
There is an increasing share of renewable energy in the supply mix due to -

In the long run, this is likely to drive electrification of other sectors such as transport, cooking, and industrial processes.
It would gain pace as an effort to addressing issues of local air pollution, energy security and rising energy import bill.
In all, these trends can effect a paradigm change in the energy sector.

What is the current limitation?

Currently, the government focus is very limited in critically evaluating and prioritising needs, anticipating risks and preparing for them.
This can lead to serious long-term implications in terms of resource-lock-in and dependency.
This is especially true considering the long life and capital intensive nature of the investments in the power sector.

What are the implications?

The emerging trends in renewables and storage create numerous opportunities for large consumers.
However, this could end the revenue that these high paying consumers were so far providing.
In turn, this could mark the end of the current business model of the electricity distribution companies (Discoms).
Given the uncertain demand, power purchase (accounts for more than 70% of the cost of supply) will become more complex and riskier.
Simultaneously, the loss of cross-subsidising consumers would sharply increase either the tariff for small, rural, and agricultural consumers, or the State subsidy.
If not managed appropriately, these changes can lead to -

What does it call for?

There is an urgent need for fundamental changes in the way Discoms plan and operate.
Increasingly, markets and competition would need to play a substantial role.
Allowing large consumers to choose their suppliers for the long term helps them reduce costs, and also enable rational capacity addition.
Solarising agricultural feeders can help in capping subsidy while providing day-time reliable supply to farmers.
These measures can allow Discoms to focus on improving supply and service to small and rural consumers.
Alongside, discoms should avoid adding new baseload capacity without rigorous demand-supply analysis.

How can the data deficiency be met?

The gaps and discrepancies in public availability of crucial data should be addressed.
To assist the government in policy and decision making, an analytical agency needs to be set up.
This agency, tentatively called the Energy Analysis Office (EAO), should involve multiple ministries.
It should be empowered to collect and reconcile data, analyse trends, publish reports and suggest policy interventions.
The agency would leverage as much as possible from existing technical agencies in the sector.
Two important prerequisites for it to be effective are policy relevance and independence from political influence.
For this, the EAO could be placed under the administrative control of the Executive.
But the Parliament should be made to approve its budget and review its work.

Source: Business Line