Electricity reforms in the economic strategy of Tamil Nadu

by Akshay Jaitly, Renuka Sane, Ajay Shah.

Electricity is important for economic growth and for India's path to decarbonisation. The field of electricity is deeply sub-national; conditions in each state are different and require ground-up thinking. In a new working paper, Electricity reforms in the economic strategy of Tamil Nadu we make the following arguments:

1. Electricity investments in Tamil Nadu have faltered, and the lack of electricity availability could hamper growth. Tamil Nadu used to be the leader in renewables investments, but these have stalled in recent years.
2. The argument that the state electricity system could just buy electricity -- and doesn't need to generate it -- has limitations. If the discoms find it difficult to pay investors on time, they will likely have difficulties paying out-of-state generators on time as well, and those firms will be swift to cut off supplies. Also, there have been instances when state governments have banned the sale of electricity to out-of-state buyers. Such events impede the purchase of electricity from out-of-state when the market is tight.
3. Given that Tamil Nadu is an export-oriented economy, renewables are an important part of its economic strategy, because exporters are shaped by ESG investments and by carbon border taxes.
4. The status-quo is coming under stress. There are feedback loops through which C&I exit reinforces C&I exit, which undermines the financial viability of the discom.
5. The future of the energy system requires a great wave of investment and risk-taking. What is required is a process of discovery, and not design, where profit-motivated private persons peer into the future, speculate about what might work, and take risks in building businesses that constitute bets about certain technologies and business models. This process requires investibility in the Tamil Nadu electricity system.
6. The problem of electricity is not just a narrow problem within the energy sector; in Tamil Nadu it rises to a greater materiality within the overall economic growth strategy.

The paper offers a feasible and practical path to solutions.

Improving electricity regulation in Tamil Nadu

by Akshay Jaitly, Charmi Mehta, Rishika Ranga, Renuka Sane, Ajay Shah and Karthik Suresh.

The Indian electricity sector is a centrally planned sector that faces increasing financial stress. In other words, a centrally planned decarbonisation would result in enlarged costs and political difficulties. The path forward for electricity reforms is to make changes one state at a time. We have started this journey with the state of Tamil Nadu.

The case of Tamil Nadu is particularly interesting. It holds great potential when it comes to the energy transition with high potential of offshore wind and solar. However, poor quality of supply along with indiscriminate subsidies for domestic and agricultural consumers has led to deep levels of fiscal stress on the Tamil Nadu state exchequer. Fiscal stress harms investibility in electricity, which is particularly a challenge for renewables. Due to multiple reasons, some of which may be attributed to the political economy at the state level, the state of Tamil Nadu has also revised tariffs only four times since the Electricity Act was enacted in 2003. These tariff revisions have often not reflected the cost of supply of electricity (e.g., the tariff revisions in 2017).

While the electricity sector in Tamil Nadu has recently undergone institutional changes in the form of TANGEDCO's demerger, the present state of regulatory challenges has not been adequately addressed. In a new paper, Improving electricity regulation in Tamil Nadu, we present evidence on regulatory failures of the electricity regulator in Tamil Nadu (TNERC) and contextualise the impact of this on associated aspects of public finance and private finance. We bring the knowledge of regulatory theory to bear upon the possible causes of these failures. We discuss the TNERC's performance on elements that make up a well-functioning regulator, such as clarity of purpose, separation of powers, selection of board members, fair adjudication, public consultations and financial independence.

Many aspects of regulatory reform require amendments to the Electricity Act, and hence the problem statement lies in identifying the levers available to make progress in Tamil Nadu. We identify several levers that the state government can use to undertake reforms, well within its powers under the Electricity Act, to make Tamil Nadu a turnaround story and a model for good electricity regulation nationwide. When these improvements are put into motion, they will materially change the views of private investors on the feasibility of investment in the Tamil Nadu electricity sector. This paper offers ideas on how this can be done.

Akshay Jaitly, Rishika Ranga and Renuka Sane are researchers at Trustbridge Rule of Law Foundation. Charmi Mehta, Ajay Shah and Karthik Suresh are researchers at XKDR Forum.