Business India ×
 Climate Change

Published on: Feb. 14, 2020, 7:48 p.m.
What if I told you that rural areas cross-subsidise urban areas for electricity?
  • Rooftop consumers do not exit the grid. They come back in the evening

By Dr. Rahul Tongia. The author is Fellow, Brookings India. He is also an adjunct professor at Carnegie Mellon

What if I told you rural areas effectively cross-subsidise urban areas when it comes to electricity? Most people think of electricity prices as subsidising or cross-subsidising the poor, based on slabs or tiers of consumption, but we have low-consumption homes in both areas. The fact that there is far more load-shedding in rural areas means that discoms (utilities) avoid buying sufficient power, often peaking power, which saves them money. But the beneficiaries of such savings – reflected in average tariffs – are disproportionately those who get supply.

No one benefits from poor quality supply; and improving quality supply is one of the many ongoing transitions. A more popular transition deals with decarbonising energy supply, because of worries about climate change. We’ll ignore global issues of fairness and carbon budgets – India isn’t the villain when it comes to the global challenge but it also can’t be the global saviour alone either. Focusing on domestic issues, we find there are several specific challenges that may be holding back superior outcomes. Many of these stem from trying to solve the issues with a single lens, instead of holistically. Unfortunately, this space is like a balloon – if you squeeze too hard on one end, it may burst somewhere else.

Limits to treating everything like a supply-side problem:

Decades of shortfalls made “more supply” the solution to what ails the Indian power sector. This is not the only problem at hand, and affordability and coordination are gaining importance. No longer can we just ask for more energy (kilowatt-hours) – we need capacity (kilowatts) at the right time and the right place. This is especially critical with rising Renewable Energy (RE) in the system.

The good news is RE prices have fallen dramatically, to the point where many people tout “grid parity” or cross-over, i.e., RE is now cheaper than coal. The bad news is, this simple calculation is based on levelised (averaged out) costs of energy, and ignores any aspects of time of day, or system level implications. These are not new concerns, and nor is India unique when it comes to such issues, but only now are we approaching the levels of penetration where we cannot ignore (or simply socialise) the cost implications of integrating high levels of RE.

Consider the 100 GW solar target planned for 2022. As much as 40 GW of this is planned for the so-called rooftop PV (photovoltaic), or “behind the meter” consumer-owned solar. This segment is only about 10 per cent of its target, far behind the grid-scale target of 60 GW. The latter can be bid out by states, but rooftop systems need consumer acceptance. This space has been supported by capital subsidies, but we have to ask why are we paying 30 per cent capex for effectively richer consumers. Even worse, consumers may like rooftop solar only because they compare rooftop PV costs to their retail tariffs, instead of with wholesale generation costs today. 

In addition to the costs of last-mile infrastructure, so-called “paying consumers” (commercial and industrial, plus high-usage residential) today also pay a lot for grid power because they cross-subsidise other users. But rooftop PV consumers don’t exit the grid – they come back in the evening. They may even “bank” solar power with the grid. But if they are treating the grid like a battery, they aren’t paying their fair share of such costs today.

Going forward, utilities may resist the rise of RE, especially rooftop, as they lose their paying customers. They covertly if not overtly resisted “open access” (ability to choose suppliers) for bulk consumers, allowed under the 2003 Electricity Act. Unless we make holistic pricing norms, they may do the same with RE. As we push ahead on growing RE, we are bound to face hiccups, and require reinvention. We can streamline this process by not brushing challenges under the rug, rather addressing them in a manner that aligns incentives and makes sure we aren’t unfairly distributing costs upon others.

The upcoming challenge with RE economics isn’t the comparison to coal, it will be the comparison to RE in the future, which invariably becomes cheaper. As RE’s share grows, its marginal value decreases and the costs of integration increase. This is especially true for Variable RE (VRE), without storage, which is expensive in the foreseeable future.

Even coal should not be overlooked in the short and medium term. Because of growing electricity demand, coming on a very low per capita consumption, India needs electricity growth of about 6 per cent through 2030. This quantum is so high that to avoid additional coal generation we would need about 500 GW of RE capacity by 2030. Not only is this financially and institutionally challenging, it is so high that we’d need cost-effective storage solutions (plus lots of transmission and load shifting).

Instead of wishing coal away, we should focus on cleaning it up, ranging from raising efficiency to reducing local emissions. Thanks to very high transportation costs – the railways are afloat only by over-pricing coal – disproportionate coal is consumed in or near the mines. Such regions now bear very high air pollution.

Geographic disparities aren’t restricted to coal. Renewable energy potential is disproportionately concentrated in south and west India, far from coal mines. These regions bear the brunt of high RE in terms of grid integration. We need improved pricing signals which reflect the state of the grid, including the time of day, and then need credible instruments to handle costs that are not distributed evenly.

Of course, welfare redistribution is the hallmark of energy policy in India, and helping the poor is a necessary need. However, much of the burden has fallen on electricity distribution companies, who might have efficiency and operational challenges, but they also have a range of political constraints under which they operate. For the most part, they aren’t allowed to operate on commercial terms.

Things are getting better… but we now need to tackle the harder (structural) issues. 

Who could have predicted, a few years ago, that India would be power generation capacity surplus? Of course, how it evolved has led to a banking crisis, with under-utilised and Non Performing Assets (NPAs), but what power shortages remain today are no longer due to lack of supply – they are based on non-purchase of power by discoms. The other remarkable shift has been the dramatic fall in RE prices, especially solar, whose prices fell by 80 per cent in about five years.

A lot of the improvements have come from either efficiency gains, or by global trends, such as the fall in equipment prices. In some cases, there was also concerted effort and coordination, showcased through the LED procurement programme. However, as many of these efforts either saturate or reach diminishing returns, India needs to tackle some of the trickier structural issues facing the sector. This spans not just the supply side (highlighted above) but discoms.

The first place to start is on electricity pricing – even today’s subsidies and cross-subsidies by other users aren’t enough to keep the distribution companies viable. Proper price signals encourage energy efficiency, a vastly under-funded and lagging aspect of electricity and energy. Procurement like with something as sexy as solar power always trumps something as diffuse or mundane as energy efficiency. If we consider buildings, another challenge is one of jurisdiction and enforcement – there is only so much the Central (or even state) government can do.

The second area that needs improvement is agriculture. The real beneficiaries of virtually free for farmers – ostensibly for cheap food – are a tiny fraction of farmers; most farmers are labourers, and many others have no irrigation or rely on canal irrigation. Even solar pumps don’t solve the problem of efficient water usage.

Third, we have to consider new and inclusive framings for the transition. Some Indians may care about carbon at an abstract level, but far more care about local air pollution (not to mention quality, affordable electricity supply). If we apply a co-benefits framework, we may find much more acceptance of public transportation as well as electric vehicles (EVs).

EVs reduce local air pollution far more than they reduce carbon emissions in the short term. This is not only because coal dominates electricity production in India, but because coal is the swing producer. Overnight charging will dominate many users’ usage patterns, such as fleet, buses, and households, and that means more coal in the short or medium run. On an energy basis, handling EVs is easy for the grid, but if all of them plug in at the same time – the grid could collapse. This emphasises the granular nature of EVs – time (and location) matter. We also cannot ignore fiscal impacts of the switch from oil to electricity for vehicles. About half the costs of running a petrol vehicle are taxes. The good news is this could be considered a high implicit carbon tax!

Real reforms will require a smarter grid – one that is more nimble, granular in signalling (beyond just time of the day pricing), and resilient. Smarter doesn’t just mean hardware like a smart meter. It requires changes in pricing, policies, incentive structures, etc. Here, India has great potential for embracing change, not least because of the opportunity to leapfrog. In the west, people take electricity for granted. If you tell them to change their lifestyle, and they might save a dollar or two a month, very few will be interested. In India, if you tell people that a smarter grid with consumer interaction can mean saving Rs50 per month, with zero load-shedding, they’ll be quite interested. Our policies need to not resist technology and policy change, but embrace them for the broader energy transition.


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