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Power Sector in India – Performance analysis of UDAY & other Govt schemes

Power Sector in India – Performance analysis of UDAY & other Govt schemes


  • GS 3 || Economy || Infrastructure || Power & Energy

Why in the news?

  • The Centre had launched UDAY in FY16 to improve the financial stability and operational performance of discoms, which have traditionally been the weak link in India’s power sector.
  • According to the data released, Private sector power distribution companies (discoms) improved efficiency levels faster than state-owned counterparts under the Centre’s Ujjwal Discom Assurance Yojana (UDAY) scheme between FY16 and FY20, despite already being more efficient at the beginning of the period.

Performance of the Power Sector

  • India is the 5th largest producer of electricity in the world, with Maharashtra as the leading electricity generator among Indian states.
  • At an electricity-GDP elasticity ratio of 0.8, electricity will continue to remain a key input for India’s economic growth. Electricity demand is likely to reach 155 GW by 2016-17 & 217 GW by 2021-22 whereas peak demand will reach 202 GW & 295 GW over the same period respectively. In India, there has been a shift to renewable power as the same constitutes 27.25% of the total installed capacity.
  • India has a huge hydropower potential of 148 GW, out of which only 42 GW has been realized to date. Steps have been taken to attract investments into the hydro sector and increase the falling share of hydroelectricity in the country’s installed capacity mix. The government is planning Hydropower Purchase Obligation (HPO), which will obligate the power distribution companies to purchase power from hydropower plants.

Systemic Issues Faced by Power Sector in India

  • Power Generation Issues
    • Fossil fuel-derived energy generation:Thermal power based on fossil fuels such as coal, natural gas, and diesel accounts for 80% of the country’s generation.
    • Moreover, the majority of plants in India are old and inefficient.
  • Higher Cost of Fuel:Coal extraction from state-run Coal India (a near-monopoly), has stagnated due to delayed environmental clearances, land acquisition troubles, and little investment in advanced technologies.
    • Many power companies have to look for coal mines overseas and source more expensive imports (despite having abundant coal reserves).
  • Transmission and Distribution Issues
    • Tariffs haven’t risen enough for years to cover costs for subsidies in the agriculture sector. Also, high aggregate technical and commercial (AT&C) losses,have forced electricity distributors (discoms) into losses as high as 40% in some states, while the country-wide average is 27%.
  • The discoms suffer Aggregate Technical and Commercial (AT&C) Losses.
  • Technical Loss:It is due to the flow of power in transmission and distribution systems.
  • Commercial Loss: It is due to the theft of electricity, deficiencies in metering, etc.
  • Poor financial health and low investments
    • Discoms are not able to pay the power generators regularly simply because they have a cash flow problem, which stems from the low tariffs awarded by the regulatory commissions.
    • Such low tariffs result in a wide gap between the average per-unit cost of supply (ACS) and average revenue realized (ARR).
    • These issues have resulted in the outstanding dues of discoms, which has even increased after the implementation of UDAY (Ujwal Discom Assurance Yojana).
    • Owing to the poor financial health of the dicoms, there are fewer new investments in the electricity sector (particularly by the private sector).
  • High industrial/commercial tariffs and the cross-subsidy regimehave affected the competitiveness of the industrial and commercial sectors.
  • Aging Power Plants and Transmission network: Since most of the power plants and transmission lines have been installed immediately after independence; they have become old and inefficient.
  • This is the main reason for the low growth and transmission rate in electricity generation and transmission during recent years. Old and inefficient plants and lines need to be replaced or renovated and modernized to achieve electricity production and demand target.
  • Under-procurement of Power by States: Increasing power generation costs due to limited fuel availability, the poor financial health of State Discoms, high AT&C losses have contributed to suppressed demand projections by State Discoms.
  • Interstate Disputes: India is a federal democracy, and because rivers cross state boundaries, constructing efficient and equitable mechanisms for allocating river flows has long been an important legal and constitutional issue. Due to this, there is no availability of water all the time to operate hydro plants. Interstate disputes also restrict the excess power exchange between the states.

Government Initiatives

  • The Government of India has identified the power sector as a key sector of focus to promote sustained industrial growth. Some initiatives by the Government of India to boost the Indian power sector.
  • The Union Cabinet has approved the Ujwal DISCOM Assurance Yojana(UDAY) for financial turnaround and revival of power distribution companies (DISCOMs), which will ensure accessible, affordable, and available power for all.
  • UDAY Scheme: UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the problem. UDAY will rejig Rs 4.3 lakh crore debt of the utilities besides introducing measures to cut power thefts and align consumer tariffs with the cost of generating electricity.
  • The Ministry of Power has planned to provide electricity to 18,500 villages in three years under the Deendayal Upadhyaya Gram Jyoti Yojana (DUGJY). Out of these, 3,500 villages would receive electricity through off-grid or renewable energy solutions.
    • The earlier scheme for rural electrification, Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), has been subsumed in the new scheme as its rural electrification component.
    • The major components of the new scheme are feeder separation; strengthening of sub-transmission and distribution network; Metering at all levels (input points, feeders, and distribution transformers); Microgrid and off-grid distribution network & Rural electrification- already sanctioned projects under RGGVY to be completed.
  • The Ministry of New & Renewable Energy is implementing two national-level programs, namely Grid Connected Rooftop & Small Solar Power Plants Programme and Off-Grid & Decentralised Solar Applications, to promote the installation of solar rooftop systems.

‘One Sun One Earth One Grid’

  • The Government of India has recently invited bids to carry out the ‘One Sun One Earth One Grid’ (OSOWOG) scheme.
  • The plan focuses on a mechanism for promoting global cooperation, creating a seamless sharing of a global ecosystem of interconnected renewable energy resources (primarily solar energy).

Way forward

  • A universal service obligation, in which any private player is required to provide power to all consumers, including residential and agricultural consumers, may aid in addressing the issue of cross-subsidization. The minimum area to be covered by private sector competitors must be defined in such a way that it includes an urban-rural mix, a universal service obligation, and cross-subsidization elements in the ceiling tariff.
  • Electricity regulatory commissions: The commissions should be established as strong institutions, with their autonomy respected and maintained. Following the establishment of a solid framework for fair competition, the government should reduce its frequent interventions in the sector. Government interventions frequently distort the market and should be used only in the event of a market failure.
  • Reduction in tariffs-The proposed electricity amendment bill could have included a broad guideline to reduce tariffs.
  • Investment in infrastructure- Currently, the state’s discoms are faced with poor financial health, leading to negative effects on their ability to purchase power for supply and the ability to invest in improving the distribution infrastructure.
  • Strengthening regulators
    • Electricity Regulatory Commissions Act, 1998 mandated the setting up of Central Electricity Regulation Commission along with the State Electricity Regulation Commissions (SERCs).
    • The 2003 Act expanded the powers of the commissions by allowing them to grant licenses for inter-state transmission and trading of power and to amend, suspend and revoke licenses.
    • It was observed that the CERC employees’ pay structure, service conditions, and other facilities are dismal.
    • Personnel policy for CERC must be provided with its own cadre with adequate promotional prospects and better amenities to those working under the commission on par with their job profile.
  • Other reforms
    • The provision of coal and railway freight regulators.
    • Linkage of Aggregate Technical & Commercial losses as a key performance indicator for release of central funds to states by any ministry.
    • Provision of a risk management committee and corporate governance within discoms, irrespective of being a listed company.
    • To manage the power demand, it is necessary to introduce 100% metering-net metering, smart meters, and metering of electricity supplied to agriculture.
    • There is also a need to Introduce performance-based incentives in the tariff structure.

Mains model Question

  • Discuss the problems faced by the power sector in India and give suggestions on what needs to be done to better the situation?