In the Govt’s announced $266Bn stimulus to kickstart the economy post-COVID, our Finance Minister Nirmala Sitharaman has proposed an Rs. 90,000Cr ($14.4Bn) for discoms to clear their pending dues to power generation and transmission companies. While the move to address discom’s financial health is welcome, maybe it is time to use the crisis as an opportunity to reform the frail Indian electricity sector and achieve the vision of decarbonization of the electricity grid. The Govt. is in a unique position to build a strong governance system at Discom board and build a consensus for initiating the much-required reforms before all the stimulus is released.
Overall Stimulus seems to be in line with Global Averages though it can be higher
On May 13th, Prime Minister Modi announced the $266B Aatmanirbhar Bharat package which was later followed by Finance Minister Nirmala Sitaraman providing key areas where this package will be deployed. An immediate analysis of this package shows that India is on par with some of the major economies of the world while comparing it in terms of spending as a % of GDP. It, however, includes the emergency measured undertaken by RBI earlier this month, which amounts to appx 3.2% of GDP.
India has backpedaled on decarbonizing its electricity grid over the past 2 years
Back in 2014, India had pivoted to portray itself as an emerging leader with a grandiose vision of delivering 175GW of renewable energy projects by 2022, which includes 100 GW from solar, 60 GW from wind, 10 GW from bio-power and 5 GW from small hydro-power. But over the past 2 years, it seems that India hasn’t been able to keep up with its renewable promise of 12-15GW per year. India has seen a total of only 7.3 GW of solar in the calendar year (CY) 2019, a 12% decline year-over-year, compared to 8.3 GW solar installations in CY2018. With a total installed capacity of 35.7GW as of Dec 2019, the Govt. has a gap of 64.3GW to fill in a span of 3 years, averaging about 21.4GW per year for the next 3 years.
One of the key stakeholders for achieving this target is the Discom and getting their buy-in on this goal has been a herculean task for the highly motivated MNRE officials as well. As the Indian electricity grid operates in a federal structure in the electricity market, despite Central Govt. or CERC directive, all state electricity boards operate differently. The State Discoms have struggled in its identity between being a tool for vote bank politics and being an economic engine for furthering the State’s industrial activity. Additionally, actions like the renegotiation of past PPAs or retroactive changes to the solar policy have affected operating projects and hampered the investor sentiment.
The Rs. 90,000 Crore Discom stimulus needs to come with strings attached
Interestingly, the renewable energy sector offers a unique way of making a profound impact in each of the four key focus areas of land, labour, liquidity, and law that the Aatmanirbhar Bharat package aims to achieve. Discoms have the unique ability to play a leadership role in building momentum in greening the grid and mostly the biggest challenge has been to align incentive with the outcome. To date, despite UDAY and other reform agenda on the table, the discom hasn’t been able to de-couple themselves away from the political agenda. The reformists in the Central Govt. and MNRE are probably looking at the learning from the aftermath of UDAY and earlier schemes and wondering how this time it can be different. PFC and REC being the Govt’s finance nodal agencies are entrusted with the agenda to raise funding of Rs. 90,000 Cr for the discoms based on the state govt counter-guarantee. This formula has been used before and if PFC and REC have to be successful in raising Rs. 90,000 Cr or higher there has to be some additional value proposition for bond investors other than state govt counter-guarantee alone.
Funding Structure may hold the key for incentive alignment
The Rs. 90,000 Cr Discom package can be a potential magic pill of sorts if the PFC /REC funding can be utilized more as a quasi-equity instrument instead of a pure low-cost debt instrument. As part of the quasi-equity structure, the Discom can become a technical JV with both the representatives of the Central Govt. and State Govt. being part of its board. Under the aegis of the new board, the Discom 2.0 will have to focus on the reform agenda which includes
- Decarbonization of the electricity grid
- Enabling a 24 x 7 active electricity markets where the tariff is determined by supply and demand
- Trading of renewable energy power on the Energy exchange
- Phasing out end-of-life thermal plans with round the clock renewable energy
- Reduction in aggregate technical and commercial (AT&C) losses
- Reduction in the gap between the average cost of supply (ACS) per-unit of power and per-unit average revenue realized (ARR)
- Regular tariff revisions by Discoms
Having a business plan that incorporates the above reform agenda as part of every discom raising capital from PFC/REC will go a long way in steering the Indian electricity sector to strong financial health and an active decarbonization agenda.