Monday, June 6, 2016

The Epiphany In Power Reforms

If this is real, get Digital India moving by extending this epiphany.

Shyam Ponappa    |   June 2, 2016

My column last month faulted misrepresentation and hype about infrastructure.  There’s a positive side of the electricity supply story, however, apart from the valid criticism.  It is of a breakthrough in governance premised on a real epiphany, in the approach to reforms in electricity generation and distribution, an area plagued with seemingly insurmountable difficulties since economic reforms began 25 years ago.  If it’s true, a strategy based on abundance and organization instead of on scarcity, shortages and a ration mentality, is yielding net benefits. 

On a cautionary note, this article is based on anecdotal evidence from the public domain.  Therefore, the statements need independent validation to be accepted as facts.
What’s remarkable about the present initiatives is the enlightened approach to provide affordable electricity.  The emphasis is on systems and flows, and not just jiggering numbers on subsidies and rebates.  The focus is on increasing asset utilization in systems to get lower unit-costs from generation and distribution, and increasing volumes for gains from scale in manufactured products such as light bulbs, fans and water pumps.  There are additional benefits because these products are energy-efficient, leading to lower electricity demand for equivalent use, as well as lower emissions.  Using these gains to attract manufacturing investment by supplying inexpensive, assured electricity is likely to delight prospective investors, provided the other aspects of infrastructure and inputs are also available.

On the face of it, a number of factors are being improved in the electricity supply and demand ecosystem to make this possible.  This is one aspect of satisfaction: that a coordinated strategy was adopted to drive systemic changes across multiple domains and aspects, leading to these gains.  An approach desperately required in other sectors, but that hasn’t yet been attempted.

For electricity, the first step was to sort out coal supply for generation, as India relies on coal for about 55 percent of its generation.  Fortuitously, a fall in global prices reinforced the steps taken by the Coal Ministry working in concert with Indian Railways.  Second, a combination of solutions were formulated and introduced in the Ujjwal Discom Assurance Yojna (UDAY) scheme in November last year.  These included improving the operating efficiency of distribution companies (the State Electricity Boards) through measures to increase utilization, reducing the cost of power by lowering the price of coal and the interest burden, and eliciting financial discipline.  On the demand/user side, an initiative to introduce efficient Light Emitting Diode (LED) bulbs in January 2015 by state-owned Energy Efficiency Services Limited (EESL) was apparently very effective, with more than 100 million LED bulbs distributed by April 2016, resulting in a considerable reduction in electricity demand.  The sheer scale of procurement and distribution have reportedly led to reductions of about 75 percent in LED bulb prices.  

The financial innovations have been equally impressive, with imaginative structuring resulting in states being persuaded to take over part of the liabilities of the SEBs over three years, thereby reducing the interest cost, while also agreeing to share future losses if any.  As a consequence, SEBs have lower debt obligations, and states have strong incentives to maintain financial discipline.  Details on the UDAY scheme are available at:

EESL has reportedly begun a similar effort to introduce energy efficient fans.  These fans use 30 watt-hours less on average than the 75-80 watt-hour rating of older fans, of which there are estimated to be 350 million.  Another initiative is being planned to replace over 20 million agricultural pumps with more efficient models. 

The approach to orchestrating these changes has apparently been exactly as one might script a good government process: through coordinating and facilitating meetings and consultations over many months between state and central officials.  The result is convergence on initiatives to reduce transmission and distribution (T&D) losses through steps such as upgrading transformers and equipment, introducing smart metering, and financial discipline.  T&D losses are inevitable up to a point depending on network conditions; the rest is inefficiency and theft.  Countries such as the USA and China report as low as 6 percent, while Canada has 9 percent.1  India’s losses, however, have been at well over 20 percent, and the effort is to reduce these to 15 percent or less. 

While the solutions are not perfect -- for instance, the Supreme Court order to auction coal mining rights may result in higher life-cycle costs -- these may be the most comprehensive, integrated and well-coordinated efforts at policy reforms.

Extension To Other Sectors

Could the approach and methods applied to address electricity supply and demand management be applied to other sectors of the economy?  Obviously not in a one-size-fits-all manner, because the solutions have to address the specific problems or needs of each sector.  A consideration of the elements suggests a potentially transferable process:
  •      An approach based on abundance instead of scarcity.
  •      Central leadership in goal-directed coordination and facilitation with expert inputs, to converge on planning and execution.

  •     Problem definition and analysis from a holistic perspective, with expert inputs from relevant domains, and inter-sectoral integration in solutions.
  •      Emphasis on high utilization of “plant and equipment”, i.e., capital equipment and networks.
  •      Scale and efficiency to reduce costs, combined with sophisticated financial structuring of solutions.
  •     Central and state areas of responsibility well covered.
  •     Distribution through markets and retail platforms.

These elements should be applicable, changing as necessary for specific attributes, domains, and expertise, to other sectors such as communications and broadband, primary health/water and sanitation, education, and transport.  Each of these would require addressing a complex set of questions and definitions with as much rigour, energy, expertise and panache as has been brought to bear in the electricity supply solutions.

Much depends on the veracity of these claims about process and results. If they’re true, this experience can be applied immediately to get the beached Digital India initiative going. If it is hype, both Digital India and Electricity for All are beached whales.


Shyam (no space) Ponappa at gmail dot com

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