How to reform Tamil Nadu’s ailing power sector

The mess that the State’s power sector has been plunged into cannot be solved without innovative financial remodelling

August 22, 2022 11:40 am | Updated August 23, 2022 08:40 pm IST

Tamil Nadu government’s decision to hike power tariff is being opposed by various quarters.

Tamil Nadu government’s decision to hike power tariff is being opposed by various quarters. | Photo Credit: B. Jothi Ramalingam

Energy is fundamental to meeting India's economic aspirations. However, the poor financial management of India’s discoms (distribution companies), particularly in the State of Tamil Nadu, calls for immediate reforms in the sector.

In July this year, the State government announced a hike in the power tariff for 3 crore consumers of the Tamil Nadu Generation and Distribution Corporation (Tangedco). Domestic consumers, MSMEs and power looms have strongly objected to what they call an ‘unsystematic’ hike, the first in nearly eight years.

Also Read | Decoding the proposed power tariff hike for domestic consumer

What ails Tamil Nadu’s power sector? A closer look at the State’s power utility, Tangedco, will answer this question. Tangedco has been rated “BBB” by India Ratings and Research, with an overall negative outlook – given its prolonged inability to raise revenue and mismanagement of funds. More concerningly, why should Tamil Nadu’s exchequer pay for the State’s failure?

A look at the numbers

Tamil Nadu tops the chart with the highest outstanding amount overdue to generation companies from distribution companies in India, as of August 2022. With a mounting debt of around ₹1.66 lakh crore in FY 2022, nearly 3.8 times what it was in FY 2012 (₹43,493 crore), Tangedco now constitutes 28% of Tamil Nadu’s total debt.

A report by Comptroller and Auditor General of India (CAG) in May this year attributes this increase in debt to various pitfalls – buying power at a higher rate when a lower rate is available, non-reduction in transmission losses, excessive capital expenditure, and more.

Also Read | Brace for power tariff hike in Tamil Nadu every July from next year

The Average Revenue Realised (ARR), which is the revenue generated on selling every unit (kWh) of electricity sold, was lower than the Average Cost of Supply (ACS), which is the expenditure incurred to supply every unit of electricity. According to the CAG’s report, the ACS-ARR deficit increased by 78.33% between 2015 and 2020, from ₹0.6 per unit to ₹1.07 per unit. The ACS-ARR deficit is the fifth highest in Tamil Nadu, at ₹1.04 per unit, according to the Ministry of Power’s UDAY Portal.

Tangedco’s capital loans for generation project also increased by 87% and working capital by 190% between 2015-16 and 2019-20, which has contributed to an increase in interest charges over the years, which stood at ₹11,409 crore in 2019-20.

The power reforms that Tamil Nadu needs

Tamil Nadu has over 1,700 wind turbines with less than 500 kWh installed capacity.

Tamil Nadu has over 1,700 wind turbines with less than 500 kWh installed capacity. | Photo Credit: A. Shaikmohideen

Upon reviewing these bleak statistics, I believe there is an urgent need to introduce reforms that will enable Tangedco to improve its financial health. I propose the following solutions to transform Tamil Nadu’s energy sector.

Tangedco may introduce an incentivised cash deposit scheme wherein deposits from domestic, industrial and commercial consumers of power (consuming more than 500 units) can be collected. These deposits can be raised at 2.5 times the consumers’ bi-monthly bill. A 9% rate of interest per month can be offered on the deposit. This rate of interest can be deducted from the consumers’ electricity bills every six months. This will be in addition to the security deposits charged by the State utility, on which it paid interest at 4.25% p.a. in FY 2022. The idea behind the cash deposit scheme is to enable Tangedco to create liquidity of nearly ₹5,000-6,000 crore, and incentivise consumers by offering greater returns on their deposit.

Tangedco has outstanding dues of ₹2,828 crore to renewable energy generators, as of June 2022. With a total installed capacity of 14 GW, contributing nearly 18.5% to renewable energy generation in India, Tamil Nadu is undoubtedly a leader in renewable energy development. The amount raised through cash deposits can be used to pay off these dues, and simultaneously for investment in renewable energy, mainly solar and wind.

While the Tamil Nadu government inaugurated a 25 MW floating solar power plant this year, strengthening this infrastructure can add up to 300-500 MW capacity in the State. The State is endowed with over 39,000 lakes and around 80 reservoirs, making it ideal for floating solar plants. As a case study, the State can look at Japan where the world’s first floating solar plant was built in 2007. Studies suggest that such plants are 16% more efficient than land-based systems, as the water’s cooling effect cuts down on thermal losses and prolongs life of the plants.

With the installed capacity of 9.87 GW of wind power (as on June 30, 2022), Tamil Nadu is one of the largest States in the world in terms of operational wind farms. In 2020, the total electricity generated by these wind farms contributed to 13% of Tamil Nadu’s total power needs, whereas they had the potential to have generated 31% of the State’s requirements. The reason for this gap? Tamil Nadu’s rusting wind turbines. Tamil Nadu has over 1,700 wind turbines with less than 500 kWh installed capacity. These can be repowered with modern 2-3 MW turbines.

To reduce transmission losses, detect outages, and improve collection and billing efficiency, smart meters can be a solution. Smart metering will enhance revenue collection and facilitate demand-side management. For instance, POWERGRID’s Puducherry Smart Grid Pilot Project shows encouraging results. After installation of the smart grid, metering efficiency increased by 14%, which led to a subsequent increase in billing efficiency.

Retiring coal plants that are 20 years and older in Tamil Nadu can generate savings of nearly ₹9,000 crore over five years. Shutting down 3.1 GW coal plants (28-40 years old) will save approximately ₹1,670 crore. Replacing energy needs met from these plants with renewable energy sources, at an average tariff of ₹3/kWh, the State can get additional net savings of at least ₹1,459 crore per annum based on current tariffs (about ₹4/kWh) (Climate Risk Horizons, 2022).

Tamil Nadu can introduce a ‘Green Tariff’, mainly for commercial and industrial consumers. A green power tariff allows consumers to meet their renewable energy needs directly through their DISCOMs, instead of seeking alternative procurement options, such as open-access or power exchanges.

Commercial and industrial consumers are concerned with reliability and quality of power. An open-access route is riddled with obstacles and is not a stable alternative to rely upon. A green tariff can also offer the DISCOM a source of additional revenue. Tangedco can look at Maharashtra as a case study, where the State electricity regulatory commission has offered consumers an option of sourcing 100% of their power requirements through renewable energy sources by paying a ‘Green Tariff’ of ₹0.66 per kWh, over and above the normal tariff. Over 400 users, mostly commercial, have already opted for this tariff in Maharashtra.

During 2017-20, the average cost of power purchased per unit was in the range of ₹4.87 to ₹4.94, with the rate touching ₹5.07 in 2018-19, according to the CAG report. This, despite the fact that power purchase agreements (PPAs) with a lower rate (₹3.50 per unit) were available to the State utility. Tangedco should exit long-term PPAs that are inefficient from a cost optimisation perspective. For reference, a study by CEEW suggests that Delhi’s DISCOMs could have saved ₹650-690 crore in FY2020 by exiting a long-term PPA with Dadri I plant.

Comprehensive administrative reforms in Tangedco have the potential to tackle hassles of nonpayment and unwillingness to make payments before the due date. A “power lottery” can be introduced. Each month, consumers who pay their electricity bills within a stipulated time, say within seven days from the date of the issue of the bill, will be offered lottery tickets up to ₹100, with each ticket priced at ₹10. After the lottery is drawn, the winning consumer(s) will be entitled to a cash prize, which will be deducted in the next billing cycle from their electricity bill. This will influence positive consumer behaviour and also ensure that the State utility is able to generate revenue in time.

Enhancing the consumer-friendliness of electricity bills in Tamil Nadu to improve the utility’s revenue is also necessary. In a study by CEEW, 80% of the State’s residents noted that informative electricity bills would increase consumer participation in the electricity sector. It recommended an increase of information disclosure in bills and improvement in the grievance redressal mechanism.

The mess that Tamil Nadu’s power sector has been plunged into cannot be solved without innovative financial remodelling. Reforms, like the ones I have proposed, must include concrete measures to raise revenue and seamless transition to renewable energy, in a time-bound and cost-effective manner. Ultimately, it requires political and bureaucratic will.

Karti Chidambaram is a member of the Indian National Congress, and is the Member of Parliament for Sivaganga in the Lok Sabha

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