Delicensing Electricity Distribution

On Thursday this week, the Prime Minister announced that the government will free the electricity distribution sector from licensing. What did he really mean and how would it affect us?

Power generation, transmission and distribution businesses in India have traditionally been facilitated by government-owned enterprises since independence. Around 1991, while power distribution continued to be licensed to state entities, power generation was opened up to the private sector in order to encourage more competition and to meet the growing demands of the country. There was just one problem – the State Electricity Boards (SEBs) which distributed electricity to end consumers were in such poor financial health that they could hardly be expected to pay for power generated by private companies. This led to the recognition that fixing the financial health of these SEBs took priority. A number of measures were announced in support of fixing the DISCOMs’ (distribution companies) books, but most of it never really delivered results. Why? Well, fixing DISCOMs’ books actually would require state governments to increase tariffs to end consumers. Even me, with my little political astuteness, can tell you that this wasn’t going to get any votes. But fairly soon, the state governments realised that could not afford to play politics around power sector issues, quite simply because there is only so much the DISCOMs could afford to subsidise. Their books got stretched, they were unable to pay to buy electricity from generating companies leading to power cuts – which proved even more unpopular among the population base.

One of the proposals that has been on the table for a long time now is to allow the participation of the private sector in electricity distribution and permit ‘open-access’ to the transmission and distribution system enabling customers to obtain electricity from any supplier. How would it work? Well, think about your landline telephone. You can get BSNL today or Airtel tomorrow or some other provider the day after. The infrastructure is shared between the operating companies and the customer has a choice of selecting between multiple suppliers. That’s exactly how.

This has been rolled out on a limited basis in Mumbai and to some large industrial electricity consumers. But a wide roll out across the country would be a game-changer to the power sector. More players will enter the scene to distribute electricity more efficiently and at better tariffs.  We may be able to choose the supplier by how electricity is actually generated. An environmentally conscious citizen can say no to a supplier who generates electricity through fossil fuels and say yes to another one who does renewables. Power cuts will reduce and inefficient players in the distribution space (as most DISCOMs could eventually leave the market. They could end up owning just the infrastructure).

Sounds great, isn’t it? Well, mostly. We will have to say good-bye to electricity subsidies. Not fun, is it? 😉

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