Power in India: Lost in Transmission

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Summary

The power sector in India has been failing to meet the country’s demand for electricity. Despite the recent claims of having become a power surplus nation, most Indians continue to face power cuts. Thanks to entries by private sector operators in recent years, generation capacity is no longer a core problem. However, the supply is still hindered by the constraints in transmission and distribution system. Nearly, 20% of power generated is still lost while being distributed, but power distributors are unable or unwilling to make adequate investment to their facilities due to their poor financial performance. While the government tried to address the problem by launching UDAY, a policy package enabling state governments to help power distributors, but it has so far failed to turn around the power sector. In our assessment, it will still be some time before the people in India can enjoy uninterrupted power.

Power deficit problem has been largely resolved in the last 5 years

Power supply position in India is expressed in terms of energy deficit (energy availability – energy requirement) and peak deficit (Peak met – Peak demand). Demand for power has chronically overshot power supply in India. During the 1990s, both energy deficit and peak deficit were high, averaging 8% and 17% respectively. Due to the insufficient generation capacity, inadequate coal supply and high transmission and distribution losses, energy deficit was constant ailment in India until FY2013.

However, there has been a significant improvement in the power demand-supply mismatch after FY2013. The energy deficit declined from 8.7% in FY2013 to 0.7% in FY2017 and peak deficit from 9% in FY2013 to 1.6% in FY2017. This allowed India to become a net exporter of power for the first time in FY2017. India exported 6.7 BU (Billion Unit) to Nepal, Bangladesh, and Myanmar in FY2017.

India’s power deficit has shown significant improvement since 2014

Note1: Peak met- It is the highest electric power available against the peak demand during a specific period of time. For more information please click here.

Note2: The years in the graph represent the fiscal year, for instance, the year 2013 represents the period April 2012-March 2013

Two major factors helped in reducing the demand-supply gap. First, India succeeded in adding ample generation capacity in the last few years. India overachieved its 12th five-year plan (FY2013-FY2017) target by 112%, mainly due to increased participation of private players. In the five-year plan period, India added 99.2 GW (Gigawatt) against the target of 88.5 GW. The total installed capacity increased by more than 40%, much faster than the 18% growth in the peak demand in the same period.

Installed generating capacity grew by more than 40% during 12th five-year plan

Note: The years in the graph represent the fiscal year, for instance, the year 2013 represents the period April 2012-March 2013. The above data has been sourced from the  Energy Statistics, MOSPI. To know more about this, visit the official government website.

Second, the power sector in India now has adequate coal stock. Rationalization of coal linkages, quick decision, and clearances for mine expansion since 2014 have contributed to increased availability of coal at power plants. Generation loss due to coal shortages improved from 15.8 BU in FY2013 to 0.48 BU in FY2017. One BU of electricity is enough to power 10 million households (one household using an average of about 3 units per day) for a month. Also, the number of coal-based power plants with critically insufficient coal stock came down from 21 in FY2013 to just 1 in FY2017. (National Electricity Plan-2018)

Source: National Electricity Plan-2018

Note: BU- Billion Units, 1 Unit= 1 kilowatt-hour (kWh)

The country still faces the challenge of reducing the gap completely though. The Central Electricity Authority’s (CEA) load generation balance report (FY2019) projects that India will have an energy surplus and peak surplus of 4.6% and 2.5% in FY2019. But this seems to contradict with the reality on the ground as many parts of the country continue to face long hours of power cut.

Furthermore, as India strives to achieve a higher economic growth led by infrastructure-building and manufacturing, the electricity demand is expected to grow substantially in the future. We are shifting towards an electric intensive lifestyle where all our energy needs will be met by the use of electricity. Recently, the CEA released its 19th Electric Power Survey (EPS) which projects that both electricity energy requirement and peak demand will increase nearly two-fold between FY2017 and FY2027.

19th Electric Power Survey Projections

Source: National Electricity Plan- 2018

Note: BU- Billion Units, 1 Unit= 1 kilowatt-hour (kWh)

The projected growth in the electricity demand implies that chronic power shortages could follow unless a radical efficiency increase is made in the power sector infrastructure.

Why India can’t consume what it produces?

The country has a surplus installed capacity of 344 GW against the peak demand of 169 GW as of March 2018. The growth in electricity generation has been higher than the growth in electricity demand since 2014. This suggests that the problem is no longer at the production of power, but it comes from its distribution.

Now that the generation capacity problem is being resolved, the attention is shifting towards the power transmission process. The growth in the transmission capacity caught up with the growth in generating capacity, increasing by more than 40% during 12th five-year plan (FY2013-FY2017). However, the transmission and distribution losses (T&D losses) as a percentage of total output, a measure of technical loss in the process of power supply, stood at around 21% in FY17. T&D loss is measured by the difference between the units injected into the system and the units which are sold. Technical losses arise from poor maintenance on quality, type of conductors, transformer capacity and other equipment.

There has been a continuous decline in the T&D losses since it peaked to 34% in FY2002 (see chart below). But, the rate of decline had so far been slow and the target of 15% by FY2019 set under Ujjwal DISCOM Assurance Yojana (UDAY,2015) has not been met yet. The world average of T&D losses was 8% in 2014, implying a significant room for improvement in India.

India’s transmission and distribution losses still remain high as a % of total output.

Note: The years in the graph represent the fiscal year, for instance, the year 2013 represents the period April 2012-March 2013. For more information please click here.

Power distribution comes at the end of the supply chain and mainly controlled by state-run governments. These state-owned distribution companies (DISCOMs) are the weakest link in the entire power sector value chain. The reason for this lies in the deteriorating finances of the state-owned power distribution companies. They are reeling under losses as they hardly ever pass on the cost of their operation to consumers. The average cost of supply (ACS) of electricity is higher than the average revenue realised (ARR) on it, making them financially unviable. Lower tariffs are mainly set to serve the poor domestic and agricultural sector. They have high aggregate technical and commercial losses (AT&C), that is, losses due to electricity theft and deficiencies in billing and revenue collection. A high AT&C means lower operational efficiency and higher cost of doing business. It stood at 20.23% in FY17.

Gap between costs and realizations

Note: PFC- Power Finance Corporation Ltd. The average revenue realised are on subsidy received basis. 1 Unit= 1 kilowatt-hour (kWh).

Note2: The years in the graph represent the fiscal year, for instance, the year 2013 represents the period April 2012-March 2013

As per the reports from Power Finance Corporation Ltd for various years, state DISCOMs accumulated losses worth of Rs.3.4 trillion-2.2% of GDP-during FY2012-FY2016. (Source). Due to high losses and negative cash-flows most of the DISCOMs across India resorted to load shedding.

Aggregate DISCOM losses ballooned during FY2012- FY2016

Note 1: PFC- Power Finance Corporation Ltd. The aggregate losses are on subsidy received basis. 

Note2: The years in the graph represent the fiscal year, for instance, the year 2013 represents the period April 2012-March 2013

In 2015, the central government introduced UDAY, a policy package to improve the financial health and operational efficiency of the State DISCOMs. The plan was to transfer 75% of their debt burden to state governments’ budget, reduce AT&C losses to 15% and ACS-ARR gap to zero by FY2019. But as of March 2018, AT&C losses stood at 18.72% and the ACS-ARR gap was above zero at Rs.0.17/Unit. (Source). In our view, UDAY has not yet achieved adequate implementation and continues to remain a work-in-progress. The financial turnaround for DISCOMs is only possible if they reduce technical losses, accurately bill for the energy supplied, reduce corruption and improve revenue recovery. Going forward there is also a need for adequate demand estimation and respective power procurement by DISCOMs to reduce load shedding.

Conclusion

In the past few years, India has made important progress towards the goal of supplying uninterrupted, clean and affordable power. However, the goal remains unreached due to the constraints in the transmission and distribution system. The precarious financial health of the state-run DISCOMs is a significant hurdle for India in meeting its electricity demand. Furthermore, electricity demand is expected to increase by nearly two-folds by 2027. Adding generating capacity to meet the expected demand increase, strengthening transmission system and removing bottlenecks impeding financial viability of DISCOMs are necessary to meet the growing demand for power. Until this is achieved, 24x7 power supply will likely remain a distant dream.