November 3, 2021
To: either/view subscribers
Good morning. A bat just won Bird of the Year. Yes, you read that right. A bat won New Zealand’s Bird of the Year. Are bats technically birds? Nope. They’re just mammals with wings. Did they still beat all the birds that were in the running for New Zealand’s annual avian award? Absolutely. The ultra-rare and tiny Pekapeka-tou-roa was originally thrown into the ring as the critically endangered species really needed the awareness. Little did the organisers know that these long-tailed bats, barely bigger than a thumb, would actually garner enough votes to win. And despite all the controversy, this has stirred among bird fans, we’re still proud of the little guys. They won fair and square!
📰 FEATURE STORY
Market-Based Economic Dispatch: Is It The Right Way To Reform The Power Sector?
Complicated and messy are probably two words to describe the power sector in India. For as much as the Centre and state governments have invested, many utilities continue to suffer. The current energy crisis is but a snapshot of long-standing issues plaguing the sector.
Given the country’s population, level of economic activity, and industrial and manufacturing output, the power demand is understandably high. Power, after all, is one of the most critical components of infrastructure. The sector is undergoing changes necessitated by time and the emergence of green energy. The most recent is the government’s introduction of a Market Based Economic Despatch (MBED) system. It aims to help power distribution companies (discoms) cut costs.
Let’s take a brief overview of the power sector in India for context. As of October 2020, India is the third-largest producer and second-largest consumer of electricity in the world. India’s power sector is one of the most diversified. It means sources of power generation range from coal, natural gas, and oil to non-conventional or renewable sources like solar, wind, and agricultural waste.
For any country to sustain economic growth, power demand will likely be constant, high, and perhaps ever-increasing. It’s no different for India. For general power distribution, India began using a grid management system in the 1960s. It was done on a regional basis with five grids – the Northern, Eastern, Western, North Eastern, and Southern Grids. This was done so that surplus power could be transmitted between states in each region.
Fast forward to the 1990s, there were talks of a national grid. In the decades since, regional grids got interconnected. The first regional grid was formed in October 1991 by interconnecting the North Eastern and Eastern grids. The Northern grid was interconnected as well, and the Central grid was formed in August 2006. The remaining Southern grid was interconnected to the Central grid in December 2013.
Discoms, nearly three decades after they were created, remain the weakest link in India’s power sector. Data shows that the loss for discoms in 2019-20 was ₹90,000 crores. Several reforms to restructure their finances have been implemented. The most recent was the Ujwal Discom Assurance Yojana (UDAY) in 2015. Politics comes into the picture here. Of late, parties have used the free or subsidised power rhetoric. Will this win them votes and elections? Sure. But it erodes the long-term financial viability of discoms.
What does the future of the power sector look like? In many ways, it’s unpredictable. However, power demand will certainly continue to increase. The International Energy Agency estimates India will add 600-1200 GW of additional power generation capacity by 2050.
A new dispatch system will help discoms and the sector as a whole
From April 1, 2022, the first phase of the government’s Market Based Economic Despatch (MBED) system will be implemented. It’s a system whose goal is to cut procurement costs of discoms. The slogan for the plan is “one nation, one grid, one frequency, one price.” The MBED approach entails mandatory participation of power plants that supply electricity across multiple states. Other power generation plants can volunteer.
Here’s how it works. The new market design will accumulate power demand from all states into a central pool. Power from the cheapest source available will be allocated. Discoms will submit bids for time blocks of the upcoming day. The generators selected by the states will submit their offers with tariffs. The mechanism will match the bids and offers. The demand will be met with the lowest cost mix of power.
Initially, the plan will begin with thermal stations of state-run NTPC Ltd. This will give the participants and regulators time to gain experience and limit the discoms to commercial exposure.
The MBED is meant to ensure that India finally has a uniform procurement price. It’s a short-term power trading mechanism. Per the government, this plan could save an estimated ₹12,000 crores at least, with procurement costs cut by about 4%. One of the initial benefits would be for thermal and renewable power projects with more than 35 GW capacity that haven’t been able to get buyers for long-term supply. It will provide renewable energy companies access to a bigger market.
Savings won’t be worth it, and MBED is not in line with the market structure
Let’s take an overview of tariff generation. In India, there’s a two-part tariff system. The first is the fixed cost paid by the discom. The other is a variable cost for the quantum of power generation. A power generator is paid its complete fixed cost only if it can generate 85% or more of its capacity. If it’s less than 85%, then there’s a graded payment.
The variable cost paid by a discom will depend on the quantum of power needed, i.e., scheduled. States have two generators – their own and inter-state generating stations (ISGSs). States first get electricity from their own stations. For the remaining, they ‘schedule’ from ISGSs, even if getting all power from these ISGSs will be cheaper overall. Due to the fixed cost being paid by the original discom, a cheaper plant may be idle, and a more expensive plant will run at full capacity. It’s an inefficient model.
The MBED has a few issues here. Since the bidding is only on the variable cost, why would developers want to build new plants? The existing ones will get a fixed cost till they retire. It reduces the scope for fresh capacity. The 4% savings cited by the government is only a gross saving. As during the bidding process, discoms will have to pay upfront, there’s a carrying cost. Hence, the savings might be only 2%. Also, for discoms facing a cash crunch, it could have a negative effect.
The MBED proposes a centralised model against the current decentralised one. In India, the subject of power legislation is shared by the Centre and states. A centralised model goes against the Electricity Act 2003. Hence, discoms will be dependent on the centralised mandatory pool. States won’t have the freedom to decide their power requirements. For renewables, a decentralised model works best for increased penetration through voluntary pools.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
US Universities Are Beginning To Recognise The Ugly Truth Of The Caste System
For the Left:
Don’t Overhype India’s Kashmir Security Problem
🏴 STATE OF THE STATES
Indigenous upgrades to defence (Karnataka) – A small Bangalore-based arms firm, SSS Defence, has become the first Indian company to upgrade a rifle for the Indian Army. Before this, Israel’s Fab Defense had a monopoly in the market, especially when it came to AK-47s in service. But this year, SSS Defence beat the foreign firm “with its own indigenous design and product” as the lowest bidder for upgrading the weapons. As of now, 24 AK-47 rifles in a unit will be upgraded by the indigenous firm.
A no for territorial integration (Nagaland) – Given that the Naga peace talks are in their final stage, the Nagaland Tribes Council (NTC) has made it clear that they will not sacrifice any tribal land for “pacification purposes”. According to the NTC, the people of Nagaland are worried about the Centre taking away privately owned land to appease negotiators. They even said that the Nagas will protect their own territorial integrity just as much as the neighbouring states will protect theirs. Thus, they will not be “opting for territorial integration”.
Protecting the dolphins (Punjab) – While the Centre plans its upcoming census on the world’s most threatened cetaceans, Punjab has taken charge of protecting both the dolphins and their natural habitat. Since the Indus river dolphin or the Platanista gangetica minor was declared their State aquatic animal, Punjab has been steadily conducting research on these freshwater mammals. They even “sent a proposal to the Government of India that focuses on a multi-pronged strategy, including habitat management, research, monitoring, advocacy, and environmental education”. One of the major goals of this 5-year project will be to encourage community-led biological monitoring.
Fishing ban (Odisha) – The state government has imposed a seven-month ban on fishing activities in the Olive Ridley Sea Turtle Migratory Corridor. From now on, fishing will be banned from November to May to ensure the safety of these endangered sea turtles. A blanket ban on sea fishing already exists in the region but this new restriction involves river mouths as well. Given that this time of the year marks the beginning of their nesting season, this move has been hailed by activists all over.
Praise be to ethanol (Goa) – Addressing the state’s industrialists, Union Minister Nitin Gadkari said that the use of ethanol will not only be cheaper but also be “better for the environment”. This was in response to a concern raised by an industrialist about rising fuel prices. Gadkari even spoke about how increasing the production of ethanol in the state can eventually stop the import of crude oil. He also said that ethanol would be a better substitute than electricity as “we [make] electricity from coal.”
🔢 KEY NUMBER
1 billion tonne – In an unexpected turn, PM Modi on Monday pledged to cut 1 billion tonne emissions by 2030. In 2018, India’s total greenhouse gas emissions were 3.3 billion tonnes. This is said to rise above 4 billion tonnes each year by 2030. Cutting 1 billion tonnes of emissions would see a reduction of 2.5% to 3% in total emissions in the next decade.