Daily Times

Media is currently abuzz with reports and debates about how the IPPs, under the various private power generation policies of the various governments, have fleeced the nation by minting billions in terms of unprecedented profits on top of their invested capital. We leave it to experts on both sides of the fence to wrangle out the extent to which the above allegations are true and who actually has been responsible for this alleged abuse-the IPPs, the power sector regulators and managers, or both? Below, however, we will focus only on how the country can avoid recurrences of a similar situation in the future.

In a nutshell, the country can avoid IPP-type conundrums from happening in the future by re-thinking its current approach to regulating and managing the power sector, and instead of its current focus on expanding large-sized central-station power generation plants, by promoting distributed and renewable power generation technologies. But before moving further, it will be useful to understand the complex and peculiar nature of the electricity supply industry (ESI).

Most people expect electricity to be available to them with the flip of a switch and gone when they turn it off. However, few realize that to provide its consumers this control and flexibility-day in and day out, under scorching heat or in bitter colds, during heavy rains or choking dust storms-the ESI has to make tremendous investment in generation, transmission, distribution, and allied facilities.

Electricity supply and delivery system is among the most complex and expensive of infrastructure facilities for any country, but it’s lifeline for its economy and society. Electricity is also a unique service. It must be produced and delivered to its consumers, the moment it’s demanded, as its storage at any significant scale is still very expensive, if not impossible.

Most of the complexity (and cost) of ESI is due to the random nature of consumer demand which varies not only from moment to moment, over the day, week, and season, but over the years also. An electric utility must have adequate resources and facilities available and ready to precisely match this demand at all times, from next moment to next couple of decades, otherwise the economy could suffer huge losses and society a great deal of inconvenience.

The regulator will also need to loosen up its tight control on the licensing and pricing of electricity from such producers, but limit itself to setting some general principles for setting prices within certain bounds

Three salient aspects of ESI standout: (i) it must maintain sufficient power generation “capacity” in the system to meet any reasonable demand on the system regardless of its location, timing, and duration; (ii) it must keep at hand adequate resource supplies (fuels, water, nuclear, solar radiation, and wind, etc.) to serve the consumers’ “energy” demands (the electricity consumed by their appliances); and (iii) it must design, configure, and deploy each component in the system extremely carefully to deliver electricity to its consumers within a very tight band of “quality” (frequency and voltage).

ESI is a highly capital-intensive enterprise, often involving billions and trillions of investment upfront and also during operation. Roughly, 60 to 70 percent goes to generation facilities, 10 to 15 percent to transmission systems, and 20 to 25 percent on distribution networks and services. Even a 1,000 MW power plant alone can easily involve over a billion dollars investment upfront. The generation and other facilities in the ESI are also not independent of each other but are embedded in a tightly interlinked value chain. Any disruption in fuel supplies upstream or demand downstream can cause billions invested in plant and machinery to become stranded, leading to bankruptcy of the utility or its sponsors.

This is the primary reason that when generation part of the ESI was opened for private investment, complex and attractive policy packages, based on attractive return on investment, long-term commitments and guarantees (including the infamous “take-or-pay” contracts), and risk sharing were introduced as without these no commercial creditor would lend capital to sponsors of such projects. Often, their proponents, the multilateral development banks, had to guarantee such investments or become part of the lending consortiums to let that happen.

Even in developed economies, and some developing countries with relatively strong and stable economies and institutions, efforts to invite private investments into power generation projects on the concept of merchant plants (“take-and-pay”) have not met any significant success and some long-term commitment and guaranteed off-take by power purchaser had to be assured to lure private investors putting their money in such schemes.

Fortunately, the world’s energy market has taken a favorable turn recently, opening up a historic window of opportunity to gradually phase out our dependence on large-sized and capital-intensive generation facilities including IPPs and reorganize our ESI on a more decentralized and distributed grid. Small power plants have emerged that beat the cost and performance features of large plants. Renewables, even without government support, are proving competitive. Deployment of intelligent and smart devices and meters are unlocking new opportunities for demand management. Affordable and modular battery storage technologies are enabling consumers to reduce, and even eliminate, their dependence on grid supply by coupling these with their rooftop PV installations. Electric vehicles (EVs) are also opening up new vistas due to their dual role as loads well as sources of supply.

A four-pronged approach is required to capitalize on these new opportunities: (i) an enabling policy to encourage an objective and neutral assessment of various options; (ii) suitable investment framework and schemes to facilitate small businesses and individuals to invest in such schemes; (iii) an enabling institutional setup to aggressively seek out deployment of such technologies; and (iv) empowering DISCOs to offer value-based pricing and compensation packages to make these beneficial for developers as well as customers.

First, a new policy framework will be required to empower the relevant power sector entities to evaluate any future requirement in the country in its proper context and work out the most feasible option for serving that requirement, at source, through a nearby distributed plant, or from the centralized grid, whichever is the most economic, reliable, affordable, and sustainable option.

Second, the government will need to establish a suitable investment framework to encourage small enterprises and individuals to make use of these distributed energy supply schemes. Potential entrepreneurs and willing individuals may be discouraged from investing in such projects due to their lack of experience or risk aversion. The government can give them a kick-start by sharing some risk and helping them by establishing a suitable fund from which they can borrow on favorable terms.

Third, the electricity business will need to be recast on open and flexible lines to treat these new supplies not as threat to their business but as partners to serve the nation. DISCOs should not just encourage, but aggressively pursue contributions from customers and investors. They will need to develop toolkits and databases to assist potential investors and customers in assessing the scope and viability of these options. This should also include any technical assistance customers and investors might need for making such asset.

Fourth, the government will need to encourage DISCOs to offer value-based pricing and compensation packages to customers to make it beneficial and win-win for developers as well as customers. The regulator will also need to loosen up its tight control on the licensing and pricing of electricity from such producers, but limit itself to setting some general principles for setting prices within certain bounds.

The future of a secure, reliable, affordable, and sustainable ESI is already knocking at our doors. The only thing stopping us from this transition to it is our comfort in routines and lack of imagination. As the US president JFK had once noted, “Change is the law of life, and those who look only to the past or present are certain to miss the future.” We may have missed it for us, but let’s not miss it for our children.

The writer is a freelance consultant, specializing in sustainable energy and power system planning and development.