Powering up after the power crisis shock

A lesson is that demand growth projections and supply arrangements need to become central to the regulatory process

May 10, 2022 12:10 am | Updated 01:07 pm IST

In Jharkhand

In Jharkhand | Photo Credit: AFP

The power crisis has taken us by surprise. The question in everyone’s mind is: where did we go wrong? And who slipped up? Clearly, there was complacency as the power supply position was comfortable for some years; there was ‘surplus’ capacity. Then there were stranded coal- and gas-based power plants which had become non-performing assets. It was, however, not appreciated that electricity demand growth had been lower than expected, due to slower and less energy-intensive economic growth. The robust economic recovery after two waves of COVID-19 and the unexpected heat wave have brought back power cuts. The Government is undertaking emergency measures such as cancelling passenger trains so as to be able to get the Indian Railways to transport more coal to power plants, and issuing directives to use more imported coal to tide over the supply shortfall.

Nature of consumer demand

Taking a holistic view of responsibilities in the supply chain would be helpful in avoiding such recurrences. Under the Electricity Act, it is the responsibility of the Distribution Licensee/Company (Discom) to provide reliable quality and round-the-clock electricity to all consumers to meet full demand. To do so, they enter into contracts with a number of generating companies in order to ensure adequate supply. These Discoms work under the oversight of the State Electricity Regulatory Commissions.

With higher incomes and the consequent increase in the use of air-conditioners and other electrical appliances, the nature of electricity demand is undergoing a qualitative transformation with rising daily and seasonal peaks, and spikes on very hot or cold days. This will only increase in the years ahead.

Towards reliable supply

While demand prediction is inherently uncertain, the questions to ask are whether Discoms have been making and updating their demand growth projections and scenarios over the medium term with adequate supply arrangements in a robust manner. And whether State Regulatory Commissions have been demanding these and scrutinising them transparently. This needs to become central to the regulatory process. Ensuring reliable supply to meet unanticipated peaks, as have occurred now, requires making supply arrangements with reserve margins that are adequate. These would be expensive just as backup private captive diesel generation is. The Regulatory Commissions need to provide for such expensive peaking power arrangements in the tariffs they approve. It is also time to move towards separate peaking power procurement contracts in addition to the present system of long-term thermal power contracts. Once things have settled, it would also be useful to see in a granular manner where generators have defaulted contractually in supplying power to Discoms, and where Coal India or the Indian Railways have been in default. There may be a case for tightening their contractual terms with enforceable financial penalties.

Further, a transition to demand-based time of day rates of electricity for generators as well as consumers would help. These should be brought in by the Regulatory Commissions. Peak demand moderation and flattening of the demand curve through a change in consumer behaviour is feasible with smart meters. But this would take place only with a strong price signal, a large differential in peak and off-peak rates. This differential needs to be so wide that large consumers find it worthwhile to put in sensors and timers, and use cheap electricity at around 3 a.m. to switch on geysers and washing machines, and to raise air conditioner temperature settings by 2°-3° Celsius in the afternoon on hot days when the electricity is expensive. A very high level of reliability has higher costs, contracts for unexpected peak demand. The requirement of backup power will keep rising as the share of uncertain renewable generation grows. Specific options need to be transparently evaluated and decisions taken. The consumer, the political class and the Regulatory Commissions have the collective responsibility for optimal decisions for reliable supply rather than the short-term comfort of minimal or no tariff increases resulting in the consequences that we are now witnessing.

Subsidies and politics

Free supply of electricity to farmers and households up to a specified level is not a problem as long as State governments pay for it as provided in the Act, and the Regulatory Commissions do not at the same time act from a political point of view and shy away from determining cost-reflective tariffs. The problem is the absence of meaningful political discussion on the relative benefits from subsidies in different areas and their affordability.

While the problem of delayed payments by Discoms is getting highlighted and needs to be resolved with a sense of urgency, the coal supply problem is not due to this. Coal India is not short of cash to be able to increase production. It should do so faster. Coal India needs to create capacities to rapidly ramp up production; and the Railways need to carry larger quantities of coal when demand surges, as has happened now. Extreme weather events will increase in intensity and frequency due to climate change. These capacity cushions have to be created at the earliest and paid for.

Some solutions

There is idle but expensive generating capacity available — about 15-20 GW of gas-based power plants which can run on imported liquefied natural gas, and 6 GW-8 GW of thermal plants which can run on imported coal. The exercise of the option of buying electricity from these plants and having no power cuts would provide immediate relief. But where an across-the-board increase in rates may not appear feasible, consumers who are willing to pay more could be kept free of power cuts with purchase and supply of more expensive electricity generated from imported coal and gas. This willingness could be conveyed through resident welfare/ industries associations. They could pay for this through a peak demand surcharge in their bills. The Regulatory Commission could undertake subsequent scrutiny to see that the surcharge has been computed correctly.

To improve reliability, Discoms, with the approval of the Regulatory Commissions, need to go in for bids for storage. It may even turn out to be the cheaper option in the short run to meet peaking power needs. Large-scale grid storage is in any case essential to achieve the goals for 2030 — of creating 500 GW of non-fossil fuel capacity including 450 GW of renewables.

Ajay Shankar is a Distinguished Fellow at The Energy and Resources Institute (TERI). He has worked for many years in the Power Ministry, dealing with reforms and the Electricity Act 2003. The views expressed are personal

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