Understanding the power reforms in India
Over the course of years, the Indian administration has undertaken bold reforms. With a diverse democracy like ours, amendments are par for the course. A part of which can be attributed to change in central political power and some to corporate visionaries who lookout for opportunities to enhance the ecosystem. The one in focus for this blog post is - Electricity Amendment Bill, 2021.
Before we dive into the details of the fine print, it’s imperative to understand the framework of the power sector in our country. The power chain in India is a 5-step process. First is Raw Material Processing, wherein raw inputs are refined and made usable. Second is Power Generation, involving companies who use the raw materials to generate electricity. Next is Transmission, intermediaries who ensure the transfer of electricity from the base power units to all parts of the country. Followed by Distribution, entities who are responsible for getting electricity to our houses and offices. And lastly, Consumption.
The loss of power
Now given this long-drawn process, inefficiencies make their way in. The most pertinent of all is the loss of energy. This is measured by a metric called Average Technical & Commercial (AT&C) loss. A recent report from NITI Aayog states that the AT&C loss in our nation stands at 24.54%. It means that if India is producing 100 units of power, only about 75.46 units are being utilized (or monetized). If that does not seem a big deal to you, then there is merit to mention that the world average is just around.. 8%! Insane, right? Following closely is the problem of operational and financial rot across all distributors in the country. They have been running wide losses for a long time that ends up eating into the resources from the national exchequer. These entities have gotten into long-term restrictive contracts that do not financially bode well for particular states, thereby skewing the entire system. Thirdly, absence of private players in the market. This not only restricts options for the end-user, but also does not allow room for innovation.
An attempt to regain power?
So what does the Electricity Amendment Bill, 2021 intend to change? To begin with, it plans on privatization. If you are thinking that this has become the favourite word for Indian policymakers these days, you are not alone. Anyway, the Bill shall allow private players to operate in the sector in two capacities- a) Franchisee, i.e. to help the Public Sector Units (PSUs) in operations; b) Licensee, i.e. to own assets and drive solo. This would lead up to having multiple players in one state, consequently letting the end-user choose their preferred company. Essentially, it is like shopping for electricity. Just like you choose your telecom network provider, you will get to choose who you can buy electricity from. Pretty cool, right?
The government opines that the best way forward for the industry is a Public-Private Partnership (PPP) model. This would ensure a power balance between the different stakeholders in the ecosystem, while at the same time improving user experience. The Bill also proposes the idea of Smart Meters, in order to arrest energy leakage and fraudulent billing. The reform, additionally, aims to float in differential pricing as well as better subsidy transfer. Simply put, the government wants to introduce the factor of competition in this industry so that every player is incentivised to give in their best service — thereby reducing operational and financial inefficiencies in the system.
Globally, one is witnessing an aggressive push for clean energy. Large corporate houses are undertaking initiatives to do their bit for the environment, in order to facilitate sustainability, at the very least. Governments, businesses, and individuals across the board have come to terms with the despicable situation of our energy habits and policymakers have been focusing intently on this. It’s encouraging to see that the Indian administration is mindful of such responsibilities, striving to plug in the loopholes. As an investment theme as well, the sector is gaining attention from domestic and foreign players. This might very well be the inflexion point of the power space, as bold moves hold the potential to change the face of it.
If you believe in the potential of this Bill to change the game for Indian power and energy companies, you might want to check out the Energy Tracker smallcase.
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