India has 75 million households with no access to electricity. To generate power we import coal. We transmit electricity across the nation with 25% Aggregate Technical and Commercial (AT&C) losses while selling it at prices that are disconnected from market reality. With a widening gap between increasing demand and the low levels of supply, state electricity boards (SEBs) remain mostly bankrupt. India remains structurally short of electricity.

The government has sought to change this situation by easing the rules for power plant construction, arranging fuel supplies and reforming the way electricity is distributed and paid for. To provide 24×7 power to all sectors, at an affordable price that is resource-efficient and financially sustainable, four challenges need to be met — the limited coal supply, the restructuring of bankrupt discoms, the provision of non-discriminatory open access and introduction of market-relevant electricity tariffs.

India’s coal production, excluding the past year, has been 530-550MT annually, with the demand-supply gap forecasted to hit 200 MT by 2017. An estimated 300MT of coal production remains unlocked given limited railway links.
To increase coal supply, the production capacity should be bolstered through technology upgrading and utilising underground mining techniques. Despite a significant portion of India’s coal reserves lying at depths below 300m, the share of coal derived from underground mining has dropped to roughly 9.6% since FY12.
Underground mining should be encouraged, given its resilience to monsoon rain, lower land and environmental footprint and decreased need for last-mile connectivity.
A coal-importing platform, separate from the Coal India Limited, should be set up to ensure the availability of competitively priced imports to all consumers. The coal deficit can be closed through long-term contracts, instead of spot-price mechanisms.

India’s power sector has over Rs 5 lakh-crore in outstanding debt, which increases by Rs 60,000 crore annually. With low tariff increases, high pilferage rates, higher electricity purchase costs and crippling debt, the SEBs are due for another bailout. India’s discoms are in poor financial health, while acting as determinants of revenue to power producers, transmission companies and banks.

With ‘regulatory assets’ (RAs) growing to $11bn, discoms are increasingly resorting to commercial borrowing, while facing a liquidity crunch. In FY12, discoms lost Rs 80,000 cr in AT&C losses, with 8% lost due to collection inefficiency. Despite the launch of the Restructured Accelerated Power Development and Reforms Programme (R-APDRP), AT&C losses continue.

The debt burden on discoms should be shifted to lower interest debt, with the RAs liquidated on a priority basis by issuing tax-free bonds backed by state guarantees. The debt against RAs must be shifted to the respective state governments while new RAs should be disallowed under a revamped National Tariff Policy.
The distribution franchise model, as implemented in Maharashtra, Rajasthan, Uttar Pradesh and Madhya Pradesh, can be utilised to reduce high AT&C losses with a private player, the franchisee, undertaking various responsibilities for meter reading, billing and revenue collection, repair, maintenance and capital expenditure.

With a closed electricity system, newcomers have high barriers to cross. Open access to the grid enables the creation of a competitive market, allowing for spot-trading and earlier price discovery. India’s slow uptake of open access continues, with just 19 Indian states determining relevant charges. Transmission constraints also prevent the transaction with 15% of available tradable power at exchanges like the IEX and the PXIL. With electricity transactions still managed and controlled by state load dispatch centres, application clearances for open access and third-parties remain significantly curtailed.

We need to improve our transmission infrastructure, with a planned augmentation of capacity under the PPP model. Bulk consumers of power and large generators should be encouraged to implement smart metering technology, while live updates on grid transactions should be made public. The SERCs could prepare a roadmap to determine the cost of supply and rationalise open access charges.

Electricity pricing in India is done according to vote-banks. The cost of power purchase comprises 74% of the total expenditure of discoms, while electricity tariffs are kept significantly low. Half of India’s states have lower electricity tariffs than the cost of production, with UP and Rajasthan having a 25% spread. Cross-subsidisation across consumer groups leaves the true cost of supply for each consumer category unknown.

Data on expenditure and distribution losses needs to be collected, with tariff structures reflective of the cost of supply for particular consumer categories. If we have to cross-subsidise, the burden should be shared among more consumers. Fuel cost should be included as a direct component of the tariff, once enough customer choice is available in the electricity retail market.

India’s electricity supply must be available, accessible and affordable. Open access provision would allow major power consumers to choose among competing power companies over a common transmission and distribution grid. Greater investments in transmission networks and a rationalisation of differential open access tariff structures across states would encourage this shift. Addressing these concerns would lead to a 24×7 electricity scenario.