Apex industry body IEEMA (India Electrical & Electronics Manufacturers’ Association) recently held its Annual Convention 2019 in Mumbai, on September 17, 2019. The event, themed “Transformative Reforms,” saw the confluence of path breaking ideas coming from an erudite set of speakers and panelists. This story is based on insights gained during individual presentations and the panel discussion.
During the panel discussion at the IEEMA Convention, the point of affordability of power was raised. This issue was pertinent in view of the fact that with nationwide household electrification underway, it was important to made electricity affordable. A number of interesting points emerged from the discussion.
Dr Ajoy Mehta was of the view that to begin with “affordability” was a term defined by the political setup and not by the actual consumer per se. Mehta explained that affordability should be seen from the social perspective. For instance, “we cannot have electricity so expensive that a poor man’s child cannot study,” he observed. The distribution of electricity must be such that every must be able to access it, and a person should be able to improve his present living condition by its use. “Every citizen needs some amount of electricity to maintain a basic standard of living. This electricity should be affordable in the present source of income,” observed Mehta.
Mehta also made an interesting observation. He argued that electricity is perhaps the only subject where there is a “backward” calculation. The total cost of electricity is defined first and then it is distributed to individual consumers. Hence, the tariffs paid by the consumers, and the element of affordability, depend on the cost of power generation that is not in the hands of the consumer.
Rahul Tongia brought about some radical points and established that affordability is closely linked to the subject of social welfare distribution, which unfortunately has not been handled well by the government. “We have genuine concerns but we are using wrong instruments and mechanism to address them,” Tongia felt.
Tongia argued that that thanks to energy efficiency in power consumption, for instance through the use of LED lamps, the quantum of electricity required for meeting a “lifeline” level is actually going down. Technocrats and policy makers alike have generally felt that 15 to 20 units (kwh) of electricity per month is quite reasonable for households in the first rung of the energy ladder. It also turns out that this quantum can be easily delivered by the existing grid. Secondly, even at Rs.4 per kwh and adding fixed costs, the electricity bill would come to Rs.100 per month. For a large section of the population that is termed as “poor,” this is a cost that can be borne by the consumer. For those who cannot, it is such a small quantum, even in aggregate, that the situation can easily be handled using social redistribution mechanisms.
New Frontiers
Elaborating on “Transformation”, the theme of the panel discussion, the eminent panelists suggested various solutions, mainly to do with bringing commercial efficiency to power distribution companies. All panelists agreed that problems of “yesterday” like energy deficit, non-electrification of households, etc. have been duly addressed over the years. It is time to now think of issues of “tomorrow”.
Rerouting of subsidy: In Delhi, for instance, residential consumers are given a subsidy if their monthly electricity consumption is below 400 kwh. With the result, 95 per cent of consumers get subsidized on an average of six months in a year. Such subsidy is rather ineffective. Instead, this amount could be used to subsidize ultra energy-efficient appliances and devices that could lead to energy savings and thus a flattening of the peak demand curve.
Direct benefit transfer (DBT): Currently, some classes of consumers like residential and agricultural are entitled to lower tariffs. However, in almost all cases, this is achieved through cross-subsidisation, which is to say that industrial consumers are paying a higher tariff to offset the lower rates applicable to certain classes of consumers. There are two points that came up for discussion in this context.
Firstly, it should not be the responsibility of the discom to decide who should be receiving subsidy. This is the job of the government. The discom’s primary responsibility is to procure quality power at reasonable rates, supply it to consumers and generate revenues. The government can very easily provide subsidy to consumers that it deems fit, by means such as direct benefit transfer. In such mechanism, the subsidy reaches the bank account of the consumer directly. It could also so happen that the subsidy received by the consumer is not really used for paying for the next electricity bill. In such a case, digital mechanisms in “kind,” such as entitlement of certain units (kwh) of electricity can be worked out.
Commercial viability: The power sector must be made viable. Discoms should be able to generate more revenue than its costs. Losses are not going to be in anybody’s interest; the power distribution industry can get potentially sick. Under the UDAY scheme, the state governments will bear some of the discom losses. There is a limit up to which states can sustain these. Ultimately, the burden will fall on the Central government. Only when the power distribution activity is commercial viable will there be a scope for more privatization. More privatization will result in more investments, creating a positive virtuous cycle.
New demand avenues: Various Central government schemes like DDUGJY and Saubhagya had resulted in high demand for medium- and low-voltage equipment like distribution transformers, overhead conductors, household wires, etc. However, with these schemes now coming close to meeting their stated objectives, the demand for electrical equipment has turned subdued over the past 5-6 months.
The panelists, while agreeing to this, foresaw newer avenues that would generate demand for equipment. Smart meters was one such. India has a demand for 25 crore smart meters (under the assumption that all connections would be so equipped) against which there are barely 1 crore smart meters installed as of today. The potential for smart meters and associated services is obviously immense.
There is this much awaited proposal of separating the “wire” and “supply” business in the power distribution sector. Once this takes place, the “supply” side can be privatized and this is expected to make the supply business commercially profitable, thereby attracting investment in upgrade of power distribution infrastructure. Energy storage is an area where substantial investments could flow in, felt some panelists.
Investment in R&D is a must
In her address, Ms Anu Madgavkar, Partner, McKinsey & Co observed that there are some don’ts for companies, especially in times of an economic slowdown. Madgavkar stressed that in time of stress, companies should never arbitrarily cut down their expenses on research and development (R&D) as well as business development. Companies should also refrain from unsustainable pricing of their products, which simply kills market economics. “It is a lose-lose situation for everybody even when the growth cycle in the economy is back,” she observed.
Companies that adopt a long-term mindset end up performing better over long periods of time. Citing an example, Madgavkar observed that a company like Tesla Inc increased its expenditure on R&D in a time of financial stress. In fact, the company opened a $5-billion electric vehicle facility in China at a time when economic stress in that country was forcing to withdraw support even to local players.
Big private companies, as Anu Madgavkar noted in her presentation, will play a major role in bringing about the real transformation in India. Citing the example of China, Anu Madgavkar observed that in China overall growth in GDP came from large companies, particularly those in the private sector. There is always a long tail of tiny companies, which are good for “inclusion” or “equity” but don’t really drive the productivity growth that large companies are capable of. In China, private sector companies raised their share in corporate revenue from 27 per cent to 65 per cent. They also showed better returns on assets and equity. With the result, the entire economy was boosted.
India can learn from the experience of emerging markets. Over the past few years, the Indian government has put in place an ambitious set of reforms. This is a good starting point. The next phase of reforms should double-down on those that can kick-start growth. Real estate and infrastructure play a huge part in the Indian economy, because of the linkages and multipliers. Driving affordable housing will be an important aspect.
In the manufacturing sector, India would need to create 5-6 large zones with a “CEO like” mentality that would be accountable for output and the investment. India should reincentivize R&D, without which India could lose her competitive edge in the global market.
The agenda does not stop with government or policy. There is a big agenda that companies can independently pursue. It starts with the mindset of long-term growth; it is the ability to “look through the noise” and establish where in the value chain the company wants to dominate and excel. Companies should think long-term. Companies could be late in the game when the growth has already kicked in. Long-term mindset goes along with a tight focus on operational excellence that includes making operations cost-effective and flexible.
Systemic changes
In India, there has been a traditional belief that all government-related services are free. Thus, services like roads, water and even electricity are services that need not be paid for. Even as this belief is now fading away, much needs to be done. For example, the modern mobile telecom industry does not have problems of under recoveries as the industry does not have legacy issues (of non-payment culture) as in the case of the power sector. In fact, most mobile telephone connections are of the prepaid type and therefore there is very little scope of non-payment of services availed. Industry experts feel that for the power distribution sector to become profitable, it should go the mobile telecom way.
Secondly, power distribution has largely been an area that was in the complete control of the state government. One panelists at the IEEMA Convention felt, “Whenever there is a monopoly that is headed by the government that secures the job of its employees no matter what you do, there are bound to be problems.” Much like typical government-owned companies, the business and profitability aspect of the corporate entity was never looked into seriously.
Changes in the power distribution sector need to be systemic. Gradual privatization of the supply business could be a good starting point. Secondly, there also needs to be social reforms where power theft, willful non-payment of electricity dues and other malpractices are seen as social offences.
Note: The various personalities quoted in this story are: Subhash Chandra Garg, Secretary, Ministry of Power, Government of India; Dr Ajoy Mehta, Chief Secretary, Government of Maharashtra; Ms Anu Madgavkar, Partner, McKinsey & Company; Rahul Tongia, Fellow, Brookings India; Ashish Khanna, President-Renewables, Tata Power
