Consumer Dilemma: Facing High Tariffs or Rising Temperatures

The political economy of power pricing discourages the utility to purchase high-cost power, even if that results in load shedding. Heat waves make load shedding unpopular. The alternative is to bite the bullet and raise tariffs

“Outrage over outages” — headlines like these strafe even the election-reinforced cocoon of citizen comfort in city after city, as unusually severe temperatures scorch India. At the same time, much of the installed gas-based generation capacity lies idle in the country. Blame the political economy. By aggressively pursuing the current strategy of adding ever more renewable energy capacity, without any complementary investment in storage, India will face ever-rising shortages of power, even as precious generation capacity lies idle.

High Costs and Low Demand: India’s Underutilized Gas-Based Power Generation in a Market Context of Rising Temperatures

According to the Central Electricity Authority’s dashboard, India has an installed power generation capacity of 442 GW (one gigawatt is equal to 1,000 megawatt). Of this, a little over 5% is capacity that runs on natural gas/naphtha. The cost of power produced by these plants can be as high as Rs 18-20 per unit. Nobody buys from them. India has a fairly sophisticated market for short-term power purchases, a day-ahead market, a sub-segment of that called the High-Priced day-ahead market. The HP-DAM is as bereft of activity as the office of an independent candidate the day after polling.

Are we short of people who run captive generators, whose output cost would be comparable to the cost of power from the idling gas/naphtha plants? Why force these plants to lie idle when there are potential buyers, for whom power even at three times the average rate normally available from the grid is far more affordable than the alternative of no power? We are like this only.

In India, there is no open access for distribution, in practice. Even when a state distribution utility is willing to let a bulk buyer purchase power directly from a producer, rather than from itself, it would add on a wheeling charge high enough to make that power more costly than captive generation. The political economy of power pricing prevents the utility from purchasing high-cost power, even if that means carrying out load shedding.

We are all led to believe that the cost of solar energy has been plummeting, thanks to ultra-cheap solar panels from China and some domestic producers. Even if the generation cost of solar power dips below Rs 2, the actual cost of delivering that renewable power is significantly higher.

There is the cost of the kit required to maintain grid frequency within the prescribed, very narrow band around 50 Hz. If a state utility allows the grid frequency to move out of this acceptable range, either through higher offtake than indicated or lower offtake, it is penalized by a cost called the Deviation Settlement Mechanism. Translated into price per unit, the DSM cost can be as high as Rs 10 a unit. Ancillary power has to be purchased to stabilize the grid and that costs much higher than under long-term power purchase agreements.

Renewable power is intermittent. When the sun does not shine and the wind does not blow, the grid has to rely on normal thermal supply, mostly coal-based. For being available to tap round the clock, distribution utilities must pay generators a capacity/availability charge, regardless of whether they use the output of the generation capacity. So, to the cost of the renewable energy, one must add the capacity charge being paid to the thermal utility, whose power is forgone to absorb the renewable power into the grid.

Intermittent power capacity in tandem with storage would be different. Battery storage for gigawatt-hours of energy would mean tearing the earth apart to source the minerals needed for those batteries. A better form of storage is pumped hydro: using the intermittent power to pump enough water to an elevation from which to run it down and turn a turbine to produce power when required. Provided storage locations can be found without ravaging mountainsides, forests and communities. Green hydrogen is an alternative, to run a gas turbine, provided it becomes cheap enough.

Right now, India is madly adding renewable capacity without a thought to the aggregate cost of delivering that power. Building storage, running expensive gas-based utilities, so as to supply households and the economy with the needed quantity and quality of power cannot be done without realizing the full cost of the power from the consumer, or from the government, if it wishes to shield some consumers from that full cost.

That means tariffs have to go up. To be roiled by higher tariffs or by the rising mercury – this is the choice we have.

TK Arun is a senior journalist based in Delhi.

The article was first published in MoneyControl as ‘Consumer Conundrum: To be roiled by high tariffs or by the rising mercury‘ on June 03, 2024.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

Read more from the author at:

Smoke & Mirrors: Exposing the Tobacco Industry’s Playbook for Hooking Kids

Who Are India’s Labharthis– the Visible and the Veiled

Acknowledgment: This article was posted by Mansi Garg, a Visiting Researcher and Assistant Editor at IMPRI.


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  • TK Arun

    TK Arun is a Senior Journalist and Columnist based in Delhi.

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