Private Investment for Power Sector: Now More than Ever

This unprecedented crisis will have a massive impact on most economies. Countries will need to re-prioritize public expenditure towards humanitarian aid, social & health sectors, and to cater to those immediately affected by the Coronavirus. The challenge for an economy like India is to still - and somehow - manage to keep investment levels in infrastructure up.

In the power sector, and focusing on distribution and access to electricity, the Government of India and states provided Rs. 3 lakh crore in the last 3-4 years. More investments are needed to install 25 crore smart meters to raise billing efficiency from 83% to 100%, solarise and make off-grid agriculture consumption with 300 GW solar capacity at decentralized levels to reduce the growing subsidy burden that stands at Rs. 70,000 crores and integrating energy efficiency in resource planning. The annual financial benefits to DISCOMs through these interventions are huge: new revenues through smart meters can go up to Rs.50,000 crore; off-grid solar fed agricultural feeders can save subsidies of Rs.70,000 crore, and actually implementing a 2010 regulation on energy efficiency through “demand-side” measures can enable close to 15% energy savings estimated at Rs.75,000 crore. The three put together can make almost Rs.1.95 lakh crore to DISCOMs.

These three interventions will need very high levels of investment: smart meters about 2 lakh crores, solarisation 12 lakh crores, and energy efficiency and demand-side management another 1.5 lakh crores.  There is good news and bad news here. The good news is that all these investments lead to additional revenues to DISCOMs. This means that the returns to private investment have a natural lever: payments can come from savings and/or the additional revenues. Investments can be serviced from these additional revenues alone without the need for public monies. The bad news is DISCOMs have a history of not paying, and to attract private investment payment security mechanisms will be needed to get them on a path to reform.

EESL experience based on the installation of 12 lakh smart meters has demonstrated an average increase of revenues of Rs. 200/month/meter in UP, Haryana, Bihar and Delhi while DISCOMs pay Rs. 90/month/meter. DISCOMs simply rent these meters rather than buy; the current upfront investment is borne by EESL.  Moving forward this can easily be done by private investors but on the condition that counterparty risk is mitigated. A risk guarantee fund (RGF) with the first right of the investor to recover in case of payment default, housed in any institution capable of handling financial transactions, can be structured to reduce risk by pooling DISCOMs. The RGF can be backed by a contingent liability from the Central or State budgets without actual cash transfers ab-initio. A 50% risk guarantee will need RGF of Rs. 9000 crore and could catalyze private investments of Rs. 3 trillion with DISCOMs gaining additional annual revenues of Rs. 50,000 crore.

If the entire estimated 4 crore pumps are solarised or are connected to solar plants, the subsidy burden on states will reduce. For the private sector to participate and help realize these efficiencies, decentralized solar plants near the agriculture load on unused government land will need to be transparently allocated in an aggregated manner to install small plants (0.5 MW -10 MW) and feed power directly to 11/33 KV grid. Experience in Maharashtra has shown that an aggregated development is able to provide power at Rs. 3-3.5 per unit and reduce line losses by half (and thereby cross-subsidy). This can be replicated across states provided lands are identified, aggregated, and the transaction is managed efficiently and transparently. The recently announced payment security mechanism for generators needs to be extended to nudge solar developers in decentralized 300GW solar generation.       

And finally, the most underutilized resource of DSM needs a fresh impetus. DSM regulations have been notified by almost all states but apart from the Ujala program of EESL, they have not been used to reduce and effectively manage load. A shot in the arm is needed from regulators and policymakers to spur DISCOMs into identifying investments to reduce energy usage. Innovative regulatory instruments like a DSM charge socialized across all consumers could provide much needed payment security measures.

Enabling the markets and designing solutions that involve the private sector necessarily then creates opportunities for the financial sector, including the insurance industry. Risk management expertise will be needed to design products for payment security and credit enhancement instruments to cover annual revenues of Rs. 1.95 lakh crore that will usher in new revenue streams for the financial sector.

Challenges always present opportunities – the current one is no different. The need is to reorient the public sector’s role in distribution, agriculture and DSM to enable private sector investments rather than rely on traditional budgetary allocations. Institutional guidance to DISCOMs is needed, and the need is right now – not later.

Saurabh Kumar

Guest Author The author is Managing Director, EESL