Discoms need more than just smart metering

Prepaid smart metering is only a tool, not the solution to the power distribution sector's woes

The Budget presented on February 1 allocated Rs 22,000 crore to the power sector. Stress was laid on the financial position of distribution companies (discoms) and the need for major reforms. The government identified smart metering through prepaid meters as a key focus area, urging all states and Union Territories to replace conventional energy meters with prepaid smart meters in the next three years.

While this will be instrumental in giving consumers freedom to choose retail suppliers when segregation of supply happens, the plan to reduce aggregate technical and commercial (AT&C) losses and make discoms financially sustainable through smart metering is overly ambitious and needs reconsideration.

For a discom, the AT&C loss is the most critical measure of performance, and comprises two components. The first, the technical component, incorporates losses on account of energy dissipation in the electrical network and is 5-8 per cent. While technical losses are inherent to the distribution of electricity and cannot be eliminated, they need to be computed and controlled by investing in network strengthening, utilising it optimally, and through regular maintenance.

The second component, commercial losses, is attributable to poor billing and collection for the electricity supplied to customers. While billing efficiency measures the efficiency of the metering and billing system, collection efficiency refers to the amount “realised” in relation to the bills raised. Commercial losses range between 5 per cent and 40 per cent, and the aim is to reduce them through prepaid metering.

Prepaid smart meters can address only collection efficiency. However, most discoms suffer from poor billing efficiency (which a smart meter cannot address), resulting from network pilferage and inaccurate customer data in billing systems. Furthermore, utilities need to incorporate appropriate features in smart meters and develop resource capabilities to process the information generated to plug revenue leakages. Most state utilities lack this technological and data handling experience. 

The cost of smart meters for 260 million consumers and the associated infrastructure and maintenance expenses for a few years would be around Rs 1 trillion. Since there is no separate allocation for this, the outlay of Rs 22,000 crore will largely be utilised on ongoing schemes and upcoming schemes, such as Kusum in the renewable sector. The burden is likely to fall on state discoms, which are already financially stressed. It may be worthwhile to do a cost-benefit analysis of replacing all meters with smart meters, especially in a situation where there is no payback for low-end consumption cases and the burden of the installation will be passed on to paying consumers in the form of higher tariffs.
 

Going forward, the distribution sector needs to re-invent itself as a value creator. Further, with long-lasting market interventions as proposed in the amendment of the Electricity Act 2003, the emergence of electric vehicles, and consumers becoming “prosumers”, utilities need to evolve to handle dynamic demand-supply situations and network contingencies. The power sector outlay for the distribution sector needs to be effectively utilised, to make utilities future-ready for these challenges.

One way to address the emerging challenges could be leveraging the newly-formed National Electricity Distribution Company (NEDCL — a joint venture of NTPC and Power Grid Corporation Of India Limited, or PGCIL). All centrally funded schemes for discoms should be routed through this agency. Both JV partners have immense experience of successfully operating in the Indian power sector. However, neither has experience of handling retail consumers and the associated credit collection without secured payment — the backbone of a successful distribution company. This gap can be filled by private players.

To bring in techno-commercial and managerial expertise, NEDCL can enter into agreements with private discoms through a transparent bidding process. Private discoms can bring in retail consumer management expertise, technology leadership and change management expertise, while NEDCL will be responsible for deploying capital required for transforming ailing discoms. State governments can also hold shares in these ventures to enable a sustainable distribution sector with low loss levels and improved service delivery. The major portion of the Budget outlay of Rs 22,000 crore should be channelled through this partnership, focusing on reducing losses and improving service delivery. Stringent penalties can be imposed if targets are not met.

Another option would be to encourage state governments to adopt public-private partnerships (PPP), and the Budget funds could be used to provide transition support to the PPPs. To turn around an ailing utility with poor infrastructure, private partners would require an initial transition period to demonstrate improvements. Capital investment planned for better power reliability and customer service may result in tariff hikes initially. During that time, their capacity to pay power procurement costs may not reflect actual procurement costs, and here transition support can be useful for a defined period. Private players who require minimal transition support to turn around discoms can be considered partners for effecting reforms.

Prepaid smart metering is only a tool, not the solution to the power distribution sector’s continuing woes. To utilise it effectively and ensure that investments do not go in vain, a holistic view must be taken for making the sector self-sustainable through innovative allocation of resources to new models of ownership and governance of discoms.

The writer is president, T&D, Tata Power