Energy Transition: Toward a Deficit-free Discom
The high cost of electricity coupled with relatively low levels of revenue realization by distribution utilities (discoms) has resulted in massive debt that is currently being held by banks in India. There are two primary reasons for the debt: first, discoms revenues are falling short of covering their costs; second, discoms are not purchasing electricity from existing power plants because it is too expensive—further increasing the gap between costs and revenue.
Approximately 70 to 80 percent of existing coal generation’s variable costs (INR/kWh) are greater than the contract price of new solar and wind resources (INR/kWh). One way to systematically and effectively attain deficit-free discoms is to transition from expensive coal to deflationary new solar and wind resources over a specified period of time. Decoupling coal from power generation in India will not only ease the existing financial burden of non-performing assets in the power sector, it will also have positive spillover effects on other key sectors of the economy.
We are using E3-India to design a portfolio of complex scenarios for deliberation over various policy options for transitioning coal. For instance, impacts of a proactive policy decision to retire coal capacities, options for adjustments to write-off the stranded investments, mapping recursive effects of increased economic growth from lower electricity prices from utilising deflationary wind and solar generation and concomitant increase in tax revenue base of the central government.
We are using the E-3 India model to estimate the increase in economic growth under this scenario due to the decrease in the cost of electricity; the better availability of lending from banks as their balance-sheets are restored to health; and the diminishing need for state electricity subsidies. We are also estimating the increase in tax revenues leading to an aggregate increase in economic growth and comparing it with the bond servicing requirements of the central government.
The E-3 India model is a powerful tool for analysing the impacts of policy options like the one described above. The model provides researchers not only with a sufficiently detailed representation of the energy sector at the state level, but also has a well-integrated financial block to map the impacts of bonds and other financial transactions between the financial sector, discoms, and the government consumption at the state level. Further, the model allows researchers to analyse the impacts of these transactions on government expenditures and other critical economic sectors. The model also allows the user to define targets and set incentives.
We provide guidance and help to those interested in using the E-3 India model. If you are interested in learning more, contact Surabhi Joshi.