The Indian Power Distribution landscape is changing rapidly and going through various developments and reforms. In addition to high AT&C losses, the sector is struggling with increasing share of power purchase costs and financial constraints. Further, unforeseen shortages of fuel and poor planning by power distribution companies (discoms) has led to a steep rise in the power purchase costs – the key reason for widening the gap between discoms costs and revenues.

Power purchase cost is the major portion (in the range of 70%-80%) of the total cost of supply and are outside the direct control of most distribution utilities in India.To add to woes, the financial position of the state electricity distribution sector has been a concern for over a decade.

The financial restructuring plan announced by government is expected to bail out the sector temporarily but in the long-term functional autonomy of discoms, reforms at the distribution level and investments to augment capacity is required to supplement the restructuring plan. Hence, power procurement cost reduction forms the strategic priority for most distribution utilities.

The current sources of power procurement are also a mix of sources from Central, State and Private sectors for most distribution utilities. The typical energy mix for Discoms is 80% Coal, 15% Hydro and the rest from other sources like Wind, Solar, etc. Short-term power purchase transactions contribute a very small fraction for most utilities.Some of the key reasons for increase in power procurement costs include,

  • Rise in generation costs, primarily because of hike in fuel prices
  • Transmission charges – inter and intra state

In addition to above, discoms has been facing challenges in assessing/forecastinginput energy demand due to the uncertainty of weather, T&D losses, changes in policy and other economical factors that drive industrial consumption. Most discoms uses mixed methods (trend analysis, in-house built tools, etc.) for load forecasting however, there is a need for national level demand side datasets to be made available for improving load forecasting. Although power purchase guidelines exist, discoms needs to be better equipped to deal with estimation of demand forecasting and scheduling.

Good load forecasting tools will help discoms manage variability in power procurement, which is a major challenge as of today. The demand for reducing power procurement costs is being driven through regulations and also due to the viability concerns for the discoms themselves. Hence, in order to reduce the power procurement costs, regulators continue to consider various policy level initiatives like driving O&M efficiencies of state generating plants, reduction in transmission charges, availability of imported coal at affordable costs and others.

Summarizing, given the high priority for power procurement cost reduction, the discoms need to undertake interventions like lowering of AT&C losses &hence quantum of energy procurement for same amount of revenue collections, use of load scheduling, power trading and banking, increasing renewable mix in power procurement (to mitigate rising fuel prices hike).

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