How Clean Energy Can Bail Out Indian States With The Biggest Power Debts

Tamil Nadu, like many states in India, supplies free or subsidised power to certain categories of consumers, primarily domestic and agricultural users. Gujarat, Haryana, Himachal Pradesh, Karnataka, Punjab and Uttar Pradesh are the other states that offer variable subsidies to different categories of users.

While subsidised power is useful for Selvan and consumers like him, it inflicts massive losses on power distribution companies (discoms) and affects their ability to pay power producers. Most states have logged huge delays in payments to producers.

How can discoms be protected from substantial losses without impacting consumer interests? Removing power subsidies and tariff rationalisation has figured in policy discussions for many years, including during a prime ministerial review meeting in May 2020. But the most workable solution lies in a two-pronged approach--governments should invest in building community-sized renewable energy plants, while quickly shutting down old coal plants, experts tell IndiaSpend.

If discoms follow this strategy, they would make a one-time investment in setting up community solar and wind plants, which will supply power to a neighbourhood that will own and maintain the facility. Any surplus power generated would be sold back to the discom. Shutting down coal plants will yield different kinds of savings, as we explain later.

To understand how this approach could work, we take the case of Tamil Nadu, whose debt to power producers, Rs 13,404 crore as of April 30, 2021, is the highest in India. The state-owned discom, the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), which generates power and also buys it from other producers, offers subsidies in four slabs of bimonthly power use--up to 100 units, 101 to 200 units, 201 to 500, and more than 500 units.

TANGEDCO's payments to power generators have been overdue for more than a year. The amount has grown from Rs 4,114 crore on April 30, 2017, to Rs 20,842 crore by September 30, 2020--a rise of 407%. It came down to Rs 13,404 crore in April 2021 with the Centre's liquidity infusion to discoms to help them out of the lockdown crisis. As of October 2019, TANGEDCO's debt was Rs 1.01 lakh crore.

In 2019, the Tamil Nadu government invited the International Monetary Fund (IMF) to offer general fiscal recommendations for the state. In its June 2020 technical assistance report, the IMF noted that the state's discom has not revised tariffs since 2014, widening the gap between its expenses and revenue. It suggested higher tariffs and other mechanisms to help the poor.

The central government has also been planning to rationalise tariffs. But if the tariff is increased to equal the actual production cost, Tamil Nadu's domestic consumers who pay Rs 2.20 per kilowatt-hour (kWh or unit) will have to pay more than Rs 8 per kWh.

Here's where community renewable energy plants come in.

Few consumers pay full tariff

At 18% and 24%, respectively, India's agricultural and domestic users form a large consumer base for power though industrial consumption is the highest, nearly 42%. But agricultural and domestic users form a significant voter base, turning power tariff into a political issue.

The Tamil Nadu government introduced free electricity to small and marginal farmers in 1984, extending the facility to all farmers in 1989. Subsequently, the government subsidised power for the handloom and power loom industries. In the 2020 budget, the state government allocated Rs 360.33 crore as subsidy for TANGEDCO, against the free power supplied to the handloom and powerloom sector.

TANGEDCO deals with big losses because both categories of subsidised power users consume a lot of electricity. In 2019-20, the domestic segment used 30% (or 28,650 million units (MU) of the total consumption of 94,944 MU) and agriculture used 15% (13,811 MU).

In 2012-13, TANGEDCO listed its average cost of supply (ACoS) at Rs 5.98 per unit. At the time, its losses stood at Rs 2.19 per unit. Information on the current ACoS is not publicly available, but based on TANGEDCO's informal information of an ACos of Rs 8.04 two years ago, Martin Scherfler of Auroville Consulting, which works for ecologically and socially responsible development, estimates that it must be around Rs 8.20 per unit. This ACoS includes the cost of generation and transmission including transmission losses. ACoS also includes distribution costs and payments to the Tamil Nadu Transmission Corporation Limited (TANTRANSCO), which is in charge of transmission.

The only consumers who pay more than the ACoS are those in the commercial and industrial (C&I) segment, as per the category-wise revenue cited in the power ministry report.

To cover the losses, the Tamil Nadu government compensates TANGEDCO in the form of a direct subsidy. In 2020, this came to Rs 8,414 crore. Some of the compensation is in the form of a cross-subsidy, where C&I consumers pay a higher tariff. "Simply put, C&I consumers pay a portion of the domestic consumers' bill," said Vishnu Mohan Rao of the Citizen consumer and civic Action Group (CAG), an organisation working on governance issues.

Energy needs expand, alternatives too

However, under the open access scheme, consumers with a connected load of more than 1 MW can purchase power from the open market, primarily from renewable energy (RE) producers. This also helps these consumers fulfil the government-mandated renewable purchase obligation (RPO) wherein they have to buy a certain proportion of clean energy.

But big consumers have another reason for not choosing TANGEDCO: The cost of renewable power in the market--on the Indian Energy Exchange (IEX) and the Power Exchange India Limited (PXIL)--is much lower than TANGEDCO's charges. (This was Rs 2.84 per kWh for IEX and Rs 3.22 per kWh for PXIL in 2019-20 but at least Rs 8 per kWh for TANGEDCO.)

With the C&I consumers migrating to other sources, the discom's revenues would reduce further, leading to a reduction in the amount of money they use for cross-subsidy.

Meanwhile, energy needs are increasing--the number of electricity consumers in Tamil Nadu increased from 21.2 million in 2010 to 30.8 million in 2020, a 45% increase. The per capita consumption has also increased over the years. TANGEDCO's subsidies have thus soared, pushing it deeper into losses.

Community renewables

Energy experts believe that community solar and wind plants will benefit TANGEDCO because they need only a one-time investment, albeit large, in assets and infrastructure, under the capital expenditure (capex) model. (Subsidies that are recurring and growing follow the operational expenditure model or opex).

Installing renewable power plants will get TANGEDCO additional power. Once the community, which owns the power plant, starts earning from the sale of additional power, the subsidies can be removed gradually.

"We suggested community solar because the capital cost is 20-30% more for rooftop solar than for ground-mounted panels," said Scherfler of Auroville Consulting.

However, for community solar, the current low net 'feed-in' tariff--or the rate the discom pays producer-consumers for surplus power generated--of Rs 2.08 per kWh will need to be increased. "At Rs 8.04 per kWh ACoS, and a solar net feed-in tariff of Rs 4.80 per kWh, TANGEDCO will break even in about seven years," he said. "As prices have gone down, if the net feed-in tariff is reduced, TANGEDCO may break even earlier."

Identifying space for community solar plants could be a problem for urban lower income housing clusters that include slab 1 and 2 consumers. Two hundred houses, each with a need of five units of electricity per day, will need about an acre of land to mount a 250 kW panel, according to C. Palaniappan of SunBest, a company that provides solar solutions. But where resources permit, the model is feasible, as two working examples show.

Community solar would be more cost-effective than rooftop solar for those who consume less electricity.

Odanthurai and Dhundi--successful renewables stories

In 1996, R. Shanmugam, the then newly elected president of Odanthurai panchayat in Tamil Nadu's Coimbatore district, built common facilities such as water supply and street lamps. When the panchayat's electricity bill went up from Rs 2,000 to Rs 50,000 in three years, it decided to install a 350- kW wind turbine to meet the energy needs of the common facilities in 10 villages under its administration. It cost the panchayat Rs 1.55 crore.

"With the panchayat's savings of Rs 40 lakh and a bank loan of Rs 1.15 crore, we installed the turbine," said Shanmugam. "We generated more electricity than we needed. TANGEDCO paid us for the surplus electricity. With that money, we cleared the bank loan in 10 years." The turbine continues to run and earn the panchayat money.

Another example of community-based RE power generation is from Gujarat. A group of farmers set up a solar cooperative in Dhundi village in Kheda district. Two development organisations, the International Water Management Institute and Tata Trusts, bore the installation cost of Rs 90 lakh. Six farmers registered it as Dhundi Saur Urja Utpadak Sahakari Mandali and subsequently three more farmers joined.

Palaniappan of SunBest finds community solar plants technically feasible too. He suggested that the discom or any organisation could adopt a village as a part of its corporate social responsibility agenda. "The entity should not bear the entire cost. The community has to bear 10% to 25% of the cost so that they have a sense of ownership," he said, adding that it is important for all stakeholders to be receptive to the idea.

The community can choose whether to connect to the grid or invest in storage. "If it's off-grid, a battery will be needed to store the power produced during the day," he said. "The battery cost will be high and also the community might not have the resources to maintain or replace the battery once every five years or so. The second option would be for each house to invest in an inverter instead of a community battery, so that they can use the stored power at night," he said. But a grid-connected community panel is the best solution. "If the community produces a little more than what it needs and feeds the surplus to the grid, it can earn a sizeable amount."

Savings from shutting down old coal plants

Faster shutdown of old coal plants could save Rs 9,000 crore over five years, said 'TANGEDCO's Recipe for Recovery', a study by research consultancy Climate Risk Horizons. These savings come from phasing out coal plants that are more than 20 years old and are expensive to run, and buying cheaper power from RE sources or the power exchange.

This move would also freeze expenditures on TANGEDCO's ongoing early-stage projects to comply with pollution-control mandates. In 2017, to reduce sulphur dioxide emission from coal plants, the central government had mandated the installation of flue gas de-sulphurisers (FGDs). "TANGEDCO has floated bids for FGDs for even the old plants; that will be a waste of money," said Ashish Fernandes of Climate Risk Horizons, and one of the authors of the study. The expenditure needed to retrofit old coal plants will increase the cost of power and hence consumers' tariff. "Instead, older plants should be shut down in two or three years," he said.

TANGEDCO purchases power from the old plants at Rs 4 per kWh or more. Energy from renewables or the power exchange comes at Rs 3 per kWh, the study notes.

Apart from reduced pollution, there will also be savings for consumers. "By reducing the power purchase cost, there is less pressure on TANGEDCO to raise tariffs, cross subsidies, etc. for consumers," said Fernandes. "If TANGEDCO's losses are reduced, it requires less subsidy from the government. So it has more resources to focus on better service delivery."

But discoms are reluctant to do away with coal-fired plants because they guarantee assured power supply: Being 'intermittent', solar and wind sources cannot be relied upon at all times of the day and in all seasons, and fluctuations can impact 'grid stability'--grid operators' ability to maintain the required frequency of 50 Hertz.

Direct transfers for the poor

In a June 2020 tariff rationalisation scenario analysis, Auroville Consulting suggested community solar (or wind) plants as a solution to discoms' losses. Like petrol, electricity too should have a uniform price for all consumers, said Scherfler.

"It's fine that the government wants to subsidise power for a certain category of consumers. But it should not be done by providing electricity at a lower cost," he said. It suggested direct benefit transfers as an alternative, whereby the cost difference would be paid directly into deserving consumers' accounts.

"DBT will be good. Because now it takes longer for the government to reimburse TANGEDCO. But they have to reimburse consumers immediately," said Vishnu Mohan Rao of CAG. "The flip side is that the government may reduce or stop subsidies as happened with LPG." Below-poverty-line households get subsidised LPG cylinders under the Pradhan Mantri Ujjwala Yojana (PMUY). The government stopped this subsidy completely for non-PMUY consumers from May 2020.

Scherfler suggested gradually doing away with the subsidy of slab 3 and 4 customers, and introducing community solar for slab 1 and 2 consumers. It would result in a benefit of Rs 18,436 crore for the state government and Rs 2,79,920 crore for TANGEDCO in 25 years, the lifespan of a solar plant, he said.

(This story has been produced as part of Earth Journalism Network's Renewable Energy Media Fellowship 2020.)

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