An Indian Utility Case Study

The role of policy in development has always been a topic of interest to me and it led me to pursue a masters degree. Now,  I have submitted my thesis titled ‘The Evolution of Electricity Retail Markets in a Low Carbon World: An Indian Utility Case Study’.

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The research for this topic involved reviewing case studies from other electricity markets especially considering the impact of solar rooftop adoption on electricity retail tariffs. The Indian utility considered for evaluation was Bangalore Electricity Supply Company (BESCOM). A detailed analysis of its past reports, Annual Revenue Requirement (ARR) filings, consumer and energy sales figures were analysed. It provided a solid reasoning to estimate the impact of existing rooftop solar PV policies and solar tariffs to the utilities.

A key part of the thesis turns out to be a new solar tariff proposed through this research. Under the Gross Metering regulations the solar tariffs are proposed to vary depending on the consumer. Although this could raise questions, it proves to be beneficial to the utility under Gross Metering who tend to increase tariffs under the pretext of revenue loss incurred. Also, considering the next phase of installing smart meters, flexible tariffs could be easily adopted and not to mention the declining solar system costs.

Since the report is under review I wouldn’t want to discuss the case in detail. However, I have presented key snapshots from the analysis in the slide deck below.

Comments/feedback/suggestions are welcome. Do drop a line if you need to know more about this research.

Information asymmetry in solar power markets

“The more you know, the more you know you don’t know”-Aristotle

Information asymmetry closely follows the quote albeit in a different way. It reflects upon the unknowns in any market over a transaction. The information asymmetry in electricity market is subtle but is turning to be prominent. The stakeholders in this sector include the electricity market regulators, the utilities, power generating companies, project installers and the end consumer. The information asymmetry at the national level between the government agencies and top power companies is well documented which allows me to look at the domestic scale.

Lets look at the market for residential solar projects in a country like India. A consumer with a requirement of a 1-2kWp rooftop unit for his house approaches a bank for financial assistance. It is unlikely that the consumer gets a loan, let alone walking away with funds straight away. Under current circumstances in a nascent market for solar rooftops in India, the banks are sceptical due to a lack of information.

  • No expertise in evaluating the solar rooftop project proposals
  • No reliable guarantee from the system installer on the project performance
  • Multiple components in the system with individual warranties ranging from 5 years to 25 years
  • If at all a Power Purchase Agreement (PPA) executed with a local utility is presented the chances of securing a loan increases but again depends on the reliability of the utility. Not every utility is reliable for the financial commitment.

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At the consumer’s end the information asymmetry stems from multiple sources.

  • First, there is no guarantee on securing a financial assistance from the bank.
  • Unless technically qualified or inquisitive, there will be lack of knowledge in understanding and comparing various solar solutions.
  • Lack of policy clarity. The issue with policy is not an isolated case in India. Residential rooftop projects across the globe have been subjected to this through Feed in Tariffs (FiT) and metering regulations. Its hard for residential consumers to invest in a technology without being sure of the payback.

Like in all cases of information asymmetry there will be someone who could leverage on the uncertainties and in this case it turns out to be the system installers. The system installers are solution providers who integrate the various components of solar Photo Voltaic (PV) system and offer it as a package to the consumer, like the residential consumer.

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  • They are better off because they know the technical nuances of solar PV.
  • Wouldn’t read good, but they are capable of identifying the gullible consumers under any policy and tariff contexts. Of course it is business.
  • It is good to see the prices of solar modules and other components drop significantly in the last few years but it has also opened up the market to the problem of lemons. In order to offer a net low price for the product, components with below par performance end up on the roofs of consumers inadvertently (or otherwise?).

It doesn’t justify to blame the system installers for leveraging this situation. Its a perfect market and companies like SolarCity have proved that it is possible to build business models under these circumstances. Taking the complete risk of project including capital cost and allowing consumers to benefit from solar power at a discount of retail tariffs is proving to be a success. System installers in India have taken cue and have started offering third party investment-energy sale model for residential scale solar PV rooftop projects. Utilities and regulators who often look up to system installers to evaluate the policy effectiveness have taken note of this initiative from Indian system installers and now offer PPA agreements with third party investors. Overall, information asymmetry is a natural phenomenon in any free market and its only a matter of time before all stakeholders are brought on level terms.

Images © Author

Where have the industrial buyers gone?

Continuing my recent trend on emphasising a need to restructure the electricity tariff structures in this post I present the case of missing industrial consumers.

I recently analysed the data of industrial consumers over the past decade for Bangalore Electricity Supply Company (BESCOM). I wasn’t entirely surprised with the decline in energy sales over the past few years considering BESCOM has been highlighting this every year before electricity tariffs are hiked. What is entirely surprising is the link between rise in consumers and drop in energy sale.

Summary

The data from the utility reports indicate that the number of industrial consumers have been rising over the past decade however between the period of 2013 to 2016 the total units sold to industrial consumers have dropped. In a recent filing [ARR, 2016-17], BESCOM attributes a loss of 1148MU energy sale due to consumer opting for power through open access which is an increase from 12% to 20% between 2013 to 2016. The loss is significant considering industrial consumers contribute to nearly 30% of BESCOM’s annual revenue [ARR, 2016-17]. Every retail tariff revision in this period has been attributed to the fall in revenue and widening deficits. Interestingly, tariff revisions by the utility during the same period indicate the annual increase has been consistent across all consumer segments. The negative effect of this is that the vulnerable consumers with low income and consumption are subjected to the same burden as others.

Why are industrial consumers crucial to Indian utilities?

  • The retail electricity tariff is different for industries and domestics users
  • Utility recovers most of the fixed cost incurred in maintaining the power infrastructure from billing the industrial consumers a premium
  • In short they have been cross subsidising power for the rest

“Large industrial electricity buyers who are likely to exit are also those keeping the system afloat by cross-subsidising other users such as farmers and households. If, because of open access they were to shift their power purchases to independent private generators, the finances of the public utility would become untenable, leading to declining quality of supply to poor, but politically important constituencies” Navroz K Dubash Senior Fellow Centre for policy research,Business Standard, 2011

 Industrial consumers have been on a love-hate relationship with the utilities for a long time.

“…distribution companies in Rajasthan told industrial consumers that they ought to fend fr themselves and that there is no more any obligation to serve them. … On the other hand, West Bengal has argued that there is no way that it can let go such consumers who bear the subsidy”- Pramod Deo, Chairperson, CERC, 2012

A classic economic equation of supply and demand is unlikely to be reflected in an electricity market, especially a deregulated market where there is an option for open access electricity.

Open Access

Incidentally BESCOM is not alone. A recent report has indicated that the Tamil Nadu utility has seen over 10% loss in industrial energy sale year on year for the few years. (read more)

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