Power distribution sector reforms need of the hour

The issues plaguing the Power Sector are 1) fuel security, 2) fuel scarcity and 3) poor health of the distribution sector. Over the last 10 months, the government seems to have been addressed the concern of fuel security with a transparent mechanism for allocating coal blocks via e-auction. The aggressive bids for operational and near operational mines by the power and non-power players highlighted the urgency to secure fuel for the long term. Further, CARE Research believes that the subsequent coal block auction of non-operational mines is likely to solve the issue of fuel scarcity to large extent in the medium term. Additionally, addressing the fuel scarcity for the end users (i.e. ramping up of coal production) would require sustained efforts from various state governments, environment ministry (state and central), miners (PSU and captive) and transporters (mainly the railways). In our view, funding required for ramp up of coal production was never (and will never be) a challenge. The solution lies in smart co-ordination and execution among various stakeholders with time bound outcome. However, till date not much progress has been made in terms evacuation of coal (progress on the three critical railway lines1 which when operational can evacuate upto ~300MTPA of additional coal).


The third and the most critical issue is the poor health of distribution utilities (losses of ~Rs.700 bn in FY13). Aggregate bank funding to DISCOMs was ~Rs3.4tn as on 31st March, 2014. It is widely known that distribution segment is the weakest link in the entire power sector value chain. Unless structural reforms take place in this segment, long term prospects for the overall sector would be in jeopardy. High AT&C losses, unsustainable cross subsidy levels and pile up of regulatory assets have been a bane for the sector for a long time.


CARE Research is of the opinion that the introduction of competition in retail power supply could be limited to commercial and industrial consumers (HV/EHV).Currently these consumers have to pay open access charges for sourcing power directly from generators. Over a period of time, with reduction in cross subsidy, open access charges could be minimised to create a level playing field for all the consumers. At this stage, it is very critical to establish 1) adequate and matching transmission capacity to optimise flow of electricity across regions, 2) vibrant short term power market, 3) accurate baseline data for voltage-wise consumers and 4) regulatory compulsions for ownership separation of wire and retail supply business. The last step is transfer of PPAs to these supply Licensees (present DISCOMs). Subsequently, the state government would invite competitive bids/purchase power from the power market for various distribution circles to ensure healthy competition in retail power supply segment across the country.