In India there is a great concern over the retail tariffs being charged for electricity, but ironically little attention is paid to the components contributing to the overall costs.

Power generation costs make up 70-80% of the cost of supplying electricity, and power procurement practices have a significant effect on that cost. Yet almost no attention is paid to how distribution companies (discoms) procure power.

Declining plant load factors (PLFs) of thermal power plants are an indicator of surplus generating capacity in some states, which, in turn, leads to additional fixed costs that must be paid ultimately by consumers. While some may argue that surplus capacity is preferable to persistent shortages, the shift from shortages to surpluses points to serious shortcomings in the power procurement practices of discoms.

Current practices focus on the short-term, and, at best, on ensuring resource adequacy, or having sufficient generation capacity to meet peak demand. But how resource adequacy is achieved is also important; discoms must strive to have the right mix of resources to ensure demand is met in the least-cost manner. Therefore, the discourse needs to move to resource planning which focuses on more than just resource adequacy. Resource planning would still aim to meet the estimated peak demand and total energy requirements of all customers, but it focuses on doing so cost-effectively, with minimum risk, and in compliance with environmental and policy goals. Resource plans typically have a planning horizon of 10-20 years.

Unfortunately, resource planning is not part of the power sector lexicon in India, and its value is not appreciated. Discoms often have separate cells for power procurement, planning, and regulatory filings. These are interlinked activities, but it seems that the coordination between the cells is limited. Moreover, the final decision is often taken by another committee. This results in the dilution and diffusion of responsibility for long-term power procurement. Resource planning is further hobbled by several flawed practices: poor quality of load forecasts; lack of integrated consideration of all options to meet load; little attention to the resource mix; and considerable interference by state governments. Regulatory scrutiny is often on a case-by-case basis for each new supply addition. But the appropriateness of supply addition depends on other resources in the discom’s supply portfolio and on additions that are already in the pipeline. Such holistic evaluation of a discom’s resource portfolio is rarely done.

One of the most puzzling aspects of the existing planning process is the near absence of any analysis of uncertainty and consideration of risk management. In a sector where generation and transmission resources can have lead times of up to 10 years and life-times of 40-100 years, it is irresponsible to spend crores of rupees and not give a thought to what would happen if the future does not unfold as expected.

The challenge of effective power procurement will be even greater in the future, as discoms will need to deal with increasing amounts of renewable energy (RE) in the resource mix, and the uncertainty over the amount of RE in the resource mix. A bigger concern is that there will be uncertainty in the load of the discom, because as the prices of RE and storage decrease, remunerative load may leave the grid seeking supply from a competitive source. Furthermore, discoms will also have to address RE’s impacts on the operation of the grid, and ensure adequate amounts of flexible resources to balance the variability of RE. Other changes, such as smart homes, roof-top solar, and charging of electric vehicles, which occur behind the meter, and are often not visible to the discom, besides being beyond its control, will only add to the challenges and magnify the uncertainty.

Clearly, there is an urgent need to improve power procurement practices. More advanced countries are facing similar challenges and much can be learnt from the evolution of best practices there. In India, an additional benefit of effective resource planning will be a decrease in the cost per kWh of providing electricity, which, in turn, will allow access to electricity for a greater number of people for the same amount of money.

With most discoms unable to manage resource planning effectively today, it is clear that they are ill-prepared to deal with an even more challenging future. Discoms will need to make organizational changes. A quantum jump will be needed in the capabilities of discom staff involved in resource planning, with nationwide training programmes to rapidly fill the gaps in the expertise of staff. Most importantly, the electricity regulatory commissions will need to develop regulations that hold discoms accountable for developing effective resource plans. Training of regulatory staff in resource planning will also be required.

However, there are signs that the shortcomings of long-term power procurement practices are being recognized. NITI Aayog, in India: Three Year Action Agenda 2017-18 to 2019-20, states that any generation capacity augmentation beyond 2019-20 should be “scheduled as per demand for power and operational viability". In a recent order for the largest discom in the state, the Maharashtra regulator has mandated that any additional generation capacity must be based on a comprehensive plan that compares various resources and leads to the least cost. These are important first steps, but clearly much more needs to be done.

Daljit Singh and Ashwini K. Swain are, respectively, director of research and executive director at the Centre for Energy, Environment & Resources, New Delhi.

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