Discoms privatisation: A step towards efficiency

Private energy companies must compete with government-backed entities such as NTPC, BHEL and Power Grid, often offering more stable job security and better benefits.

The Indian power distribution sector has long been a subject of reform, with privatisation playing a pivotal role in driving efficiency and service quality. The government’s introduction of reforms linking distribution schemes and disinvestment efforts has sparked significant discussions on their impact on privatisation. The energy sector is undergoing a major transformation, with an increasing push towards privatisation, renewable energy adoption, and regulatory reforms. These changes bring challenges and opportunities for private companies, regulators, and consumers. The core questions in this transition revolve around how private companies can compete with government entities, ensure job security, keep electricity tariffs affordable, and enhance efficiency while ensuring a fair regulatory framework.

Privatising Indian Power

Privatisation in the Indian power sector enhances efficiency, attracts investment and improves service quality. It reduces government burden, fosters competition and encourages innovation. However, challenges like tariff concerns, regulatory hurdles and equitable access remain. Successful privatisation requires balanced policies ensuring affordability, sustainability and reliable electricity supply for all consumers.

Himadri Banerji highlights that privatisation in India has a long history, beginning with the Calcutta Electric Supply Corporation. Over time, cities like Ahmedabad and Delhi have seen privatisation efforts with varying levels of success. One crucial observation is that privatisation cannot be successful without significant investment. As Himadri states, “The investment required to bring in change has to come, without which you cannot do anything.” While cultural change and workforce motivation are necessary, financial resources remain the foundation for effective transformation.

The financial aspect of privatisation is complex, as utilities require large capital expenditures. Himadri points out that regulatory mechanisms like regulatory assets impact investors’ financial returns. “The investor has not got paid by a very peculiar mechanism called a regulatory asset,” he notes. This structure ensures that electricity tariffs do not skyrocket, thereby maintaining consumer affordability, particularly in a country with a socialist economic framework.

However, privatisation cannot function in isolation. Himadri emphasises that “government support is essential for privatisation to continue.” This support can come from grants, low-interest loans and schemes such as RDSS and UJALA. Furthermore, investment in renewable energy also depends on government funding, ensuring a sustainable future for the power sector.

Role of Digitalisation

Another key aspect is the role of digital technology. Digitalisation enhances efficiency, grid reliability, and energy management through smart meters, AI-driven analytics, and IoT-based monitoring. It enables real-time demand response, reduces losses, and integrates renewable energy. Advancing automation and data-driven decision-making ensures sustainable, cost-effective, and resilient power distribution for a growing economy.

Himadri refutes the notion that digitalisation in utilities is a recent phenomenon. “Utilities, by force, had to take digital technologies like SCADA,” he explains, highlighting that automation and digital control systems have long been part of power distribution. Over the years, utilities have integrated ERP and SAP systems to improve efficiency, and today, with the advent of generative AI, digital tools play an even more significant role in ensuring operational effectiveness.

Affordable Electricity Tariffs

Balancing affordable electricity tariffs with efficiency in India requires smart grids, reduced transmission losses and renewable integration. Government subsidies, competitive bidding and digital monitoring optimise costs. Energy-efficient technologies and policy reforms ensure sustainability, benefiting consumers while maintaining financial viability for power producers and distributors.

Milind Solanki addresses this concern by emphasising that efficiency improvements are not cost-free. He states, “You must first invest in many measures; most of them in the current era are digital.” Technology adoption has grown exponentially, making previously expensive solutions more accessible and cost-effective. Solanki highlights that digital transformation leads to operational and capital expenditure savings, improving the financial health of utilities. “Companies shall not only bring about operational savings but also reduce their CapEx savings and have a better payback period,” he notes. However, challenges remain, especially in monopolistic markets, where limited competition hinders rapid technological adoption.

Dr. DP Kothari states, “Renewable energy sources like solar, geothermal, and small hydro projects provide cheaper alternatives to thermal power, which is costly unless integrated with co-generation techniques.” Co-generation, where excess heat from power generation is used in textiles and paper manufacturing industries, can significantly improve efficiency and lower costs. Gujarat, for example, has successfully implemented such systems.

Impact of Privatisation on Rural Electrification

Privatisation has boosted rural electrification in India by improving efficiency, investment and service quality. Private players enhance grid expansion, smart metering and renewable integration. However, challenges like tariff affordability and last-mile connectivity persist. Balanced regulations and public-private partnerships ensure reliable, cost-effective electricity access for rural communities.

Solanki advocates for developing off-grid solar solutions to reduce dependence on traditional power infrastructure. “Give electricity or possibilities to the agricultural sector, the farmers,” he suggests, arguing that decentralised energy solutions can ease the financial burden on utilities while ensuring wider access to power. Furthermore, Solanki compares power distribution to the telecom sector, illustrating the importance of service quality. “Look at a mobile app nowadays. If you go and pay a bill, it is one click out. I don’t mind paying a little more tariff to get that kind of service eventually.” This analogy underscores the evolving expectations of customers who increasingly demand convenience and efficiency in power services.

Competing with Government Entities

Private energy companies must compete with government-backed entities such as NTPC, BHEL, and Power Grid, often offering more stable job security and better benefits. Dr. Kothari emphasises, “Privately owned companies must offer at least equal salaries and job security to attract top talent from institutions like IITs and NITs.” He further suggested introducing pension schemes similar to the Old Pension Scheme (OPS), which could help retain employees.

Private firms must provide better incentives, such as housing in rural areas, skill development programmes, and opportunities for higher education. “Higher education in energy studies, such as MBA programmes at institutions like NPTI Faridabad, could create a highly skilled workforce capable of managing smart grids, microgrids, and future grids,” Kothari noted.

Regulatory Reforms and Fair Competition

Regulatory frameworks play a crucial role in ensuring a balanced energy market. Himadri, an expert in regulatory policies, points out, “Urban networks might struggle to adopt the Distribution System Operator (DSO) model, but rural networks have already seen small community-driven energy providers emerge.” These distributed energy resources are helping power remote areas through solar and small wind projects.

However, regulations must evolve to prevent monopolies and ensure fair pricing. “Regulators must focus on maintaining power reliability and affordability while ensuring a transition to sustainable generation,” Himadri emphasises. As more renewables enter the grid, the overall system inertia decreases, increasing instability risks. Battery storage can mitigate these risks but also add to the cost. “Balancing solar power generation with battery storage is expensive, making it difficult for regulators to maintain affordable tariffs,” he adds.

Consumer Benefits and On-Site Generation

Consumers benefit significantly from demand-side management (DSM) strategies and on-site power generation. “Providing consumers with tools to lower their electricity bills through off-peak pricing and rooftop solar installations is crucial,” Himadri states. However, these initiatives are not gaining traction as expected.

Despite these hurdles, distributed energy solutions will eventually become mainstream. “This transition will occur naturally rather than through forced regulatory changes,” he predicts.

Challenges and Solutions

Privatisation faces challenges like political resistance, regulatory hurdles, financial distress, and public opposition. Solutions for this include transparent policies, improved regulatory frameworks, competitive bidding, and strategic private participation. Ensuring accountability, reducing losses, and leveraging technology can enhance efficiency, making power distribution more reliable, cost-effective, and consumer-friendly.

Milind Solanki states, “A conducive environment can be created at a policy-making level, and if you see, it has already been created.” However, he emphasises that awareness and behavioural change are crucial for successful implementation. Misinformation and a lack of understanding among employees and customers can hinder the transition.

Solanki suggested a structured approach involving information, education, and communication (IEC), followed by behavioural change communication (BCC). He stated, “Only once you conduct Part 1 of the exercise, where you spread awareness campaigns at the employer and customer level and then assess behavioural change, will the real impact be visible.” He also highlights the need for state-level committees to release recommendations, ensuring employees and customers are engaged in decision-making.

Employees’ apprehensions about privatisation are significant, particularly regarding job security. Solanki notes, “The employees only worry about what will happen to PF and EF. Will I be shunned when private players come in?” Drawing from past experiences in Mumbai’s power distribution sector, he points out that when Reliance Energy transitioned to Adani, few employees were asked to leave, demonstrating that privatisation does not necessarily lead to widespread job losses.

Himadri adds insights on the financial viability of privatisation, explaining that while generation has seen private sector involvement since the 1990s, distribution remains more complex. He remarks, “Investors will find a better IRR in a generation. However, in distribution, the factors that determine success are very complex. Unless the investor understands these factors and can bear initial losses for 5-10 years, profitability from day one is difficult.”

On the transmission front, he explains that privatisation would likely progress more slowly than generation and distribution due to the high capital intensity and technology requirements. He also touches upon the financial incentives for investors, stating, “The only way they can get some return is through capital expenditure because there is a 16 percent return on CapEx, unlike OpEx, which is harder to recover.”

Ultimately, the transition towards a more privatised energy sector will be driven by economic viability, technological advancements and regulatory adaptations. The goal should be to create an energy ecosystem where private and public entities collaborate to ensure affordable, reliable and sustainable power for all.

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