Seeking a policy fix for discoms

While power generation and transmission are attracting huge investments, the Indian government needs to reanalyse its policies to make the sector viable.

According to industry estimates, the sector will grow at a CAGR of 12 %, led by contribution from independent power producers, and supported by central and state level projects. The Twelfth Plan envisages capacity expansion of about 100 GW from conventional power plants and about 20 GW from non-conventional plants. It has also projected that 1.36 lakh CKM transmission lines and 2,95,000 MVA transformation capacities would be added. In the distribution segment, the plan projects an addition of about 2.1 times of the generation capacity.

These numbers are alluring and haven’t missed the keen eye of the investor looking at options in India’s infrastructure growth story. Add increased flexibility in terms of availability of funding options and improved fuel supply to this mix, and you have what is seen as a winning business for the private sector. But this euphoria is largely restricted to the power generation and transmission business. The third and important key to this business—power distribution—is yet to become financially viable. This segment is faced with certain bottlenecks that we highlight here.

It is estimated that an investment of Rs 3.75 trillion would be required to increase distribution capacity by the proposed 250 GW. While 70% of this amount would be raised through debt, 30% would have to be raised through equity. But distribution companies (discoms) find it difficult to raise this amount because fewer people are attracted to investments in this segment as the return on equity is fixed at 14%. Uncertain revenue because of a direct connect with the end consumer and slim margins have resulted in shrinking balance sheets. Yet, discoms require increased private participation to achieve the desired targets.

The government needs to shore up the discoms’ balance sheets through suitable regulatory and policy initiatives. Discoms also depend on fund-based and non-fund-based assistance. So the government can float a dedicated common distribution infrastructure fund and give easy access to funds such as JNNURM, R-APDRP and RGGVY to discoms for achieving desired capacity addition. Special funds at concessional rates for the discoms are urgently required to sustain growth.

With GDP expected to grow by 8.5% in FY11, our demand is likely to double in the next decade, making it imperative to triple distribution capacity. Unless we restructure the technology and systems currently used in power distribution by collaborating with research and engineering companies, the pressure on land, capex, manpower and O&M due to the demand increase would make it very difficult to achieve targets.

For instance, today in Delhi there are over 15,000 11-KV sub-stations and nearly 200 EHV grids at 33/11 KV or 66/11 KV level to meet the demand of around 5,000 MW. If we have to meet a demand of 12,000 MW by 2021, as per the Delhi Master Plan, we would need about 35,000 11-KV sub-stations and about 500 EHV grids at 66 or 33 KV level, adopting the existing configuration. We need to relook at technological arrangements and configurations so that the demand can be met without the requirement of additional land.

As the capacity to distribute power increases according to the 12th Plan, the requirement for manpower is also slated to rise. Even by conservative estimates, approximately five people would be required to distribute 1 MW of power in urban areas. This number could go up to 10-15 people per MW in rural areas, depending on the geographical spread. With an average of about five people needed per MW, the segment would need an additional 6,00,000 people, 70% of whom would be skilled manpower—a key challenge as India suffers from lack of skilled labour.

A two-pronged approach would be needed to fill this gap. First, we need to provide vocational training to workers through special courses. Second, we need to improve existing skill sets by creating the right kind of culture and knowledge through suitable programmes.

The distribution sector is going to become more and more customer-centric. Quality and reliability of power supply is the growing need for all stakeholders. Also, there are other challenges like reduction in AT&C losses, technology upgradation, etc. The sector has to formulate strategies to meet these growing challenges not only at the discom but also at the sectoral level. We require suitable institutional arrangements for evolving suitable business strategies to achieve sectoral objectives like electricity for all by 2012, open and flexible energy markets, improving the quality and reliability of supply, and creating product and service differentiation for different types of customer.

Source – Financial Express



Executive at India Electron Exchange

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