India should see single-digit AT&C loss by 2030: Arthur D. Little

Founded in 1886, Arthur D. Little (ADL) is the world’s first management consulting firm linking strategy, innovation & transformation, in tech-intensive converging industries, ADL operates 40 offices globally and serves most of Fortune 1000 companies. In this exclusive interview, we have Brajesh Singh, President – Arthur D. Little, India, responding in detail to a range of questions on India’s power distribution sector – the weakest link in the electricity value chain. Brajesh, whilst sharing keen insights into power distribution reforms, believes that India’s journey to powering its energy sector has begun and the country shall see an aggregate single digit AT&C loss by 2030. An interview by Venugopal Pillai.

 

India’s aggregate technical & commercial (AT&C) losses in the power distribution sector stood at 16.5 per cent in FY22, according to a recent power ministry report. Prima facie, how do you assess this number in comparison with other developing nations?

India has come a long way and as we stand at around 17 per cent AT&C, it is important to see that incredible and all-round efforts have been made in last decade. We are certainly behind from many other developing nations, but it is encouraging to see that we have some discoms who can be role models for many developing nations too. While there is no fixed benchmark for acceptable AT&C losses, the average losses in developing countries are around 10-15 per cent, with some countries achieving even lower losses. While there is no such benchmark for AT&C but a single digit number is what all utilities and discoms aspire for. We have nations in EU who have significantly low AT&C and some South East Asian nation with incredibly good AT&C. I look at these numbers with high hope because some discom like Tata Power, BSES, Torrent and Adani have already attained single digit AT&C losses in Delhi, Gandhinagar, Surat & Mumbai and it is evident that collective and concentrated approach with right blend of technology and field work can pave way for greater achievements. The ~5 per cent decline in national AT&C losses that have helped arrest ACS-ARR gap could have been possible by various initiatives taken at various levels. There are structural and policy level difference between India and other nations with better and efficient energy distribution systems. They adopted technology much before India did, the sociopolitical dynamics are different which are very important for arresting technical losses and also economic aspects that impact commercial losses significantly. I believe India’s journey to powering its energy sector has begun and we shall see an aggregate single digit AT&C loss by 2030.

 

I strongly believe that privatization of utilities is the key to success. If India aspires to attain single digit AT&C losses, it can be attained only by privatization of power distribution.

 

AT&C losses are known to be much lower in private distribution companies, including those set up in the public-private partnership (PPP) mode, e.g. Delhi, Odisha. Do you feel that privatization of power distribution must be pursued vigorously?

See, it’s all about efficiency when it comes to power distribution. Efficiencies that can only be attained by timely action on capex deployment, course correction on process like billing and collection and building very good connect with consumers. Other factors like gap between ACS-ARR, Power purchase costs and managing sociopolitical influences are equally important. While despite all the support and freedom to operate, state run discoms have been bleeding but the ones that were privatized/ under PPP could turn their operations profitable. These use cases ascertain that PPP in power distribution has been a good option. It is important to highlight that some of distribution franchisees under PPP have failed as well but if you research thoroughly and dig deeper into causes, you would find that aggressive bids for committed ABR, non-deployment of timely capex in network augmentation and strengthening distribution network.

I strongly believe that privatization of utilities is the key to success. If India aspires to attain single digit AT&C losses, it can be attained only by privatization of power distribution; not limiting to this, appropriate efforts are also required to be made on strengthening and augmenting of infra/grid and metering system to mitigate challenges related to commercial losses.

It should be noted that ever since electricity distribution was privatized in Delhi in 2002, BSES managed to save Rs.1.2 lakh crore. Despite constant surge in power demand by 2.5 times and the aggregate AT&C losses came down from 55 per cent to 7.5 per cent. Now, Delhi’s AT&C losses are comparable to leading cities around the world, such as New York and London. The reduction of losses and increased investment have played a crucial role in bringing about savings for consumers in Delhi, and without these efforts, reliable power supply may have remained an unattainable goal.

Overall, the question of privatization of power distribution in India is a complex one, and any decision must be based on careful analysis and assessment of the potential benefits and risks. The government should continue to pursue PPPs and franchise agreements, while ensuring that the interests of consumers and the broader power sector are protected.

 

While the distribution franchisee model has had mixed results in India, it remains a viable option provided that it is implemented transparently and with the interests of consumers in mind.

 

We perceive that India hasn’t been too successful with privatization, especially with respect to the distribution franchisee model. What is your take?

It is true that India’s experience with privatization, particularly with respect to the distribution franchisee model, has been mixed. While there have been some successful examples, there have also been cases where franchises have failed to deliver on their promises.

One of the main challenges with the distribution franchisee model is the lack of transparency and accountability in the selection and management of franchisees. There have been instances where franchises have been awarded to companies with little or no experience in the power sector, leading to inadequate investment in infrastructure and services. In addition, there have been allegations of corruption and conflicts of interest in the selection and operation of franchises.

Moreover, there are concerns about the impact of franchises on consumers, particularly low-income households. Franchisees may focus on profitable areas, neglecting underserved and rural areas, which can lead to increased tariffs and reduced access to electricity.

Despite these challenges, there have been successful examples of the distribution franchisee model in India. For instance, the franchisee model in Bhiwandi in Maharashtra has been successful in reducing AT&C losses and improving customer service. Similarly, the franchisee model in Agra in Uttar Pradesh has improved the quality and reliability of power supply.

Overall, while the distribution franchisee model has had mixed results in India, it remains a viable option for improving the power sector, provided that it is implemented transparently and with the interests of consumers in mind.

 

 

While prepaid metering can be an effective tool for improving the financial health of state distribution companies, it may not be the ultimate solution on its own.

 

Do you feel that prepaid metering is the ultimate solution to restoring the financial health of state distribution companies?

Data is the key; in case of discoms, it is billing data. Knowing who is consuming and how much, is important. Consumer billing and collection of dues have always been biggest hurdle. Learning from telecom and other markets, prepaid metering was introduced in India as a tool for improving the financial health of state distribution companies and reducing electricity theft. Several states in India, including Delhi, Maharashtra, Uttar Pradesh, and Bihar, have implemented prepaid metering systems for both residential and commercial customers.

Prepaid metering enables avenue to save operating cost — the billing processes — and helps distribution companies to reduce revenue losses due to non-payment by customers. With prepaid meters, customers are liable to pay in advance for the electricity they wish to use, which reduces the risk of non-payment and improves the cash flow of distribution companies. In addition, prepaid meters can also help reduce losses due to electricity theft, as they can detect and prevent illegal connections.

However, there are several other factors that contribute to the financial health of distribution companies, such as high transmission and distribution losses, low tariff rates, and inefficient billing and collection systems. Addressing these issues requires a comprehensive approach that involves a range of measures, such as improving infrastructure and technology, reducing operational costs, and implementing effective tariff and billing policies.

In summary, while prepaid metering can be an effective tool for improving the financial health of state distribution companies, it may not be the ultimate solution on its own. A comprehensive approach that addresses the various factors affecting the financial health of distribution companies is also required to ensure long-term sustainability and affordability of electricity services for all customers.

 

The initial results of RDSS are overwhelming and very encouraging.

 

In this context, how important is the Revamped Distribution Sector Scheme (RDSS) that envisages the rollout of 25 crore prepaid energy meters?

Indian power sector has undergone various reforms in the past two decades and distribution remains the weakest link in the supply chain. The central government introduced several schemes that helped India achieve 100 per cent electrification in 2018. Despite stellar improvement in terms of coverage, quality and reliability of power, most of the state-owned discoms are yet to become financially sustainable.

Inefficiency led challenges have further fueled the fire and increasing debt burden have had a crippling effect on these discoms, in turn affecting the service provided by them and leaving them in cash drought and prohibited further investment in the enhancement of their infrastructure and quality of supply, especially in rural areas. Systemic issues in metering, billing, collection and network continue to affect the profitability and efficiency of discoms. While some discoms have been early adopters of reforms, information technology, and technological upgradation, others mostly state run still lag way behind, and are operating inefficiently.

Sensing that a one-size-fits-all scheme will not work for a large and diverse country like India, the government has envisaged the RDSS with a two-track system that will be governed under a uniform framework for all the states but which will also provide flexibility to include state-specific features in their action plans for prioritizing their investments.

The prepaid energy meters are a key component of the scheme and are aimed at improving the financial viability of power discoms and reducing electricity theft and losses.

With the rollout of 25 crore prepaid energy meters, the Indian government aims to achieve several objectives, including:

 

1. Reducing AT&C (Aggregate Technical and Commercial) losses: Prepaid energy meters are expected to help reduce electricity theft and losses, which account for a significant portion of the losses incurred by discoms.
2. Improving revenue collection: The use of prepaid energy meters will ensure that consumers pay for the electricity they consume in advance, reducing the risk of unpaid bills and improving revenue collection for discoms.
3. Promoting energy efficiency: Prepaid energy meters will help consumers to manage their electricity consumption better, encouraging them to conserve energy and promote energy efficiency.
4. Enhancing financial viability: The rollout of prepaid energy meters is expected to improve the financial viability of discoms by reducing their losses and improving revenue collection.

 

In conclusion, the rollout of 25 crore prepaid energy meters is an important component of the RDSS scheme in India and is aimed at improving the financial viability of discoms and promoting energy efficiency. The initial results are overwhelming and very encouraging. Discoms who have adopted RDSS, rolled out smart metering solutions have started arresting their billing and collection related issues resulting into improved performance. It is certain that data analytics will also help them overcome their challenges.

 

What is your view on the innovative “TOTEX” financing model that RDSS envisages? While state discoms need not incur any upfront capital expenditure, do you think developers (service providers) are reasonably assured of return on investment?

The “TOTEX” financing model envisaged by the Revamped Distribution Sector Scheme (RDSS) in India is an innovative approach that aims to promote sustainable development and improve the financial viability of power discoms.

Under the TOTEX model, discoms are not required to make any upfront capital expenditure, and the investment is made by the developer or service provider who implements the project. The cost of the project is recovered by the developer over a period of time through a performance-based contract, which incentivizes them to ensure that the project meets the agreed-upon performance parameters.

The TOTEX model is a departure from the traditional capex (capital expenditure) model, where  discoms invest in infrastructure and equipment upfront and recover their costs over time through tariffs. The TOTEX model incentivizes developers to adopt cost-effective and sustainable solutions, as they are responsible for the long-term operation and maintenance of the assets they create.

In terms of return on investment, the TOTEX model provides reasonable assurance to developers or service providers, as their revenue is linked to the performance of the assets they create. The performance parameters are designed in a way that ensures that the assets are operated and maintained efficiently, which reduces the risk of breakdowns and unplanned downtime.

Moreover, the TOTEX model also provides an opportunity for developers or service providers to earn additional revenue through the sale of excess power or the implementation of energy efficiency measures. This helps to enhance the financial viability of the project and provides an additional source of revenue.

Overall, the TOTEX financing model envisaged by the RDSS is an innovative approach that can help to promote sustainable development and improve the financial viability of  discoms in India. The model provides a reasonable assurance of return on investment to developers or service providers, as their revenue is linked to the performance of the assets they create.

 

One of the major challenges that Indian power sector is facing is high cost of infrastructure development and maintenance, which leads to significant capex & opex burden for discoms.

 

The recent Electricity (Amendment) Bill, 2022 that will come for discussion in the upcoming Monsoon Session of Parliament envisages multiple distribution companies using the same infrastructure. What is your overall reaction to this proposal?

The proposal to allow multiple distribution companies to use the same infrastructure under the Electricity (Amendment) Bill, 2022 is an interesting one that has the potential to bring about significant benefits to the power sector in India.

One of the major challenges that Indian power sector is facing is high cost of infrastructure development and maintenance, which leads to significant capex & opex burden for discoms. Allowing multiple  discoms to use the same infrastructure can help to reduce these costs by promoting resource sharing and increasing the utilization of existing infrastructure.

Moreover, the proposal can also promote competition and encourage discoms to adopt more efficient practices, as they would be competing with other discoms for customers. This can lead to improvements in service quality and lower tariffs for consumers and may be for greater good of society, consumer and industry as this will help attaining optimum use of resources, reduce significant carbon footprints, and will lead to healthy competition.

Prima facie the idea looks advantageous but it would be good to see how unforeseen and potential challenges associated with the proposal are dealt with. For instance, there could be concerns around the equitable allocation of infrastructure resources, as some discoms may have more resources than others, which could give them an unfair advantage.

Additionally, there could be concerns around the coordination and management of multiple discoms sharing the same infrastructure. This could potentially lead to issues such as disputes over resource allocation, which could impact service quality and reliability.

In conclusion, while the proposal to allow multiple discoms to use the same infrastructure under the Electricity (Amendment) Bill, 2022 is an interesting one, it is important to carefully consider the potential benefits and challenges associated with the proposal. If implemented effectively, the proposal has the potential to bring about significant benefits to the power sector in India.

 

 

Do you feel that this Amendment Bill is a precursor to the eventual “wire” and “supply” (or “carriage” and “content”) segregation that has been under discussion for quite some time now?

The Electricity (Amendment) Bill, 2022 that proposes to allow multiple distribution companies (discoms) to use the same infrastructure is not necessarily a precursor to the eventual “wire” and “supply” segregation that has been under discussion in India for some time now. The “wire” and “supply” segregation model, also known as “carriage and content” segregation, involves separating the ownership and operation of the electricity distribution network (wires) from the supply of electricity (content). Under this model, multiple supply companies can use the same distribution network, which is owned and operated by a single entity.

While the proposed amendment bill does allow multiple discoms to use the same infrastructure, it does not involve the separation of ownership and operation of the distribution network from the supply of electricity. The amendment bill primarily focuses on improving the financial viability of discoms and promoting the adoption of renewable energy sources.

However, it is possible that the discussions around the amendment bill could pave the way for future discussions around the “wire” and “supply” segregation model. The Indian power sector has been exploring various options to improve efficiency and reduce costs, and the “wire” and “supply” segregation model has been discussed as a potential solution.

In conclusion, while the Electricity (Amendment) Bill, 2022 is not necessarily a precursor to the eventual “wire” and “supply” segregation model, it is possible that the discussions around the amendment bill could pave the way for future discussions on this topic in the Indian power sector.

 

Investment in infrastructure, adoption of advanced technologies, and unlocking value by localization of generation are three broad measures that can help to effectively bring down India’s AT&C losses.

 

If you were to suggest three broad measures that could effectively bring down India’s AT&C losses, what would they be?

India’s high Aggregate Technical and Commercial (AT&C) losses remain a major challenge for the power sector. There are several measures that can be taken to address this issue. Here are three broad measures that could be effective in bringing down AT&C losses:

 

1. Investment in infrastructure: One of the key reasons for high AT&C losses is the poor quality of infrastructure. To address this issue, significant investment is required in upgrading the transmission and distribution infrastructure. This could involve measures such as the installation of smart meters, upgrading of transformers, and laying of new transmission lines. Improved infrastructure can help to reduce technical losses and improve the reliability of the distribution network. Private sector’s participation in the value chain can yield faster and better results and will improve overall efficiencies.
2. Leverage and adopt advanced technologies: Advanced technologies such as distribution automation, demand response, and predictive maintenance can help to reduce AT&C losses. Distribution automation involves the use of sensors and automation technology to improve the efficiency of the distribution network. Demand response involves the use of advanced metering infrastructure and pricing incentives to encourage consumers to reduce their electricity usage during peak hours. Predictive maintenance involves the use of data analytics and machine learning to identify and address issues in the distribution network before they lead to outages. Measures such as improving billing and collection efficiency, reducing power theft, and reducing technical losses can help to improve the financial viability of power distribution companies. This can involve measures such as the installation of tamper-proof meters, improving the accuracy of billing, and implementing better collection processes.
3. Open access and localization of generation: Inflated Power Costs, thin margins between ACS and ABR have been key deterrents and resulted into poor financials which ultimately leads to AT&C losses. It is time to relook at power procurement from fresh perspective as the cost of power generation has significantly come down as the energy mix is changing. Renewable power generation in India is already at a very good scale and expected to continue improving. Discoms should be given opportunity to exercise power procurement from renewable generators (also) and it is needed to relook and review age old PPAs. Localization of power generation using microgrid will also unlock values for all the players in value chain.

In conclusion, investment in infrastructure, adoption of advanced technologies, and unlocking value by localization of generation are three broad measures that can help to effectively bring down India’s AT&C losses. These measures require a coordinated effort from all stakeholders in the power sector, including power distribution companies, regulators, and consumers.

 

Note: All industrial photographs used in this interview are for representation only.