Ujjwal Discom Assurance Yojna -- Chartered Accountant's approach to Uninterrupted power supply

Mr. Piyush Goyal is a Power minister in Narendra Modi's government.  He is Chartered Accountant by profession.
Please refer to Time of India news dated 12 January 2016 about his approach to Uninterrupted power supply -- Ujjwal Discom Assurance Yojna. This article shows limitations of his approach.
Mr. Goyal is suggesting a MoU to be signed by central government, state government and distribution company.  This MoU would turn each area in the network - called 'circle' in industry parlance - into a separate business unit.  The discom boss of the area, either an executive or superintending engineer, would be responsible for following:

• Meeting supply target
• Maintain and strength the distribution network to reduce down time and losses
• Check theft

Meeting supply target

Discom boss of the circle is not expected to generate electricity.  He would probably have more than one sources to buy electricity.  However, peak demand timings would be more or less same for all circles. Discom bosses of each circle would demand more power at the same time.  Some circle would not get electrical power as power generation is limited.  It cannot meet the peak demand of electricity.
It is incorrect to blame Discom boss for it as he is helpless. Number of units generated are not just sufficient to meet demand.
Similar strategy is used in corporate world.  Instead of solving problems at top level, people at operational level are expected to address it.

Maintain and strength the distribution network

You don't need a new scheme for it. It is a routine activity of distribution companies.

Check theft

You don't need a new scheme for it.  It is a routine activity of distribution companies.

Power Purchase Agreement. Do we need it?

A power purchase agreement (PPA) is a contract between a company that generates electricity (the seller) and one who is looking to purchase electricity (the supply-chain buyer).

Typically distribution company is a supply-chain (intermediate) buyer.  Distribution company commits a business to Generating company -- that it will buy all electricity produced by a generating company -- when distribution company is not sure about electricity demand from end buyers (consumers) of electricity. Distribution company takes a business risk.

This happens only in electrical power business -- that a link between supply chain is exposed to  business risk -- and not the original manufacturer.

Take an example of automobile industry.  Maruti Suzuki manufacture motors. Sai Services is sales and services agent of Maruti Suzuki. Maruti Suzuki takes complete ownership of its business and is exposed to business risk.  Sai Services never commits that it will buy all the motors produced by Maruti Suzuki. Picture shown below explains the situation.

Then why electrical power industry is different that automobile industry?  The only reason I see is to protect private players in power generation as majority of distribution companies are owned by state governments.

Why accounting books of a distribution company are not good?

I am writing this post with reference to Indian environment.  However, it is true for any other countries having similar set up.

Background

CAG audit of Delhi's power distribution companies

In January 2014, Aam Aadmi Party (AAP) government slashed power tariff in Delhi and asked the Comptroller and Auditor General (CAG) to audit the performance of Delhi's power distribution companies.

Electricity Act 2003

Before year 2003, There was only one company per state called respective state electricity board -- for example Maharashtra State Electricity Board (MSEB).  MSEB was looking after everything -- generation, transmission and distribution of electricity. There was one Profit and Loss account covering all three activities.
As per electricity Act 2003, Maharashtra State Government restructured Maharashtra State Electricity Board in 4 companies w.e.f. 06 June 2005:

1. M.S.E.B. Holding Co.Ltd
2. Maharashtra State Power Generation Co. Ltd. (MahaGenco) -- Generates electricity
3. Maharashtra State Transmission Co.Ltd (MahaTranco) -- Looks after transmission of electricity
4. Maharashtra State  Distribution Co. Ltd (MahaDiscom) -- Looks of distribution of electricity

Problem analysis

June 2005 onwards, MahaDiscom company is purchasing power from MahaGenCo by signing a Power Purchase Agreement (PPA). PPA is signed by both parties before the power is actually generated. MahaDiscom company is then selling electricity to end users and bills them for used electrical units.
Everything looks good and rational till this point. However, the catch is electricity cannot be stored. MahaDiscom never gets a 'delivery' of electricity it purchased from MahaGenco. Then MahaDiscom never supplies electricity to end users. End users get electricity directly from MahaGenco using transmission and distribution infrastructure of MahaTranco and MahaDiscom. Accounting books of a distribution company are not in good shape as it is trying to do something abnormal. It is trading electricity:

• Which is not generated by them And
• Which cannot be stored -- distribution company never gets a 'delivery' of electricity

Conclusion

1. One cannot trade electricity as it cannot be stored.
2. End users should pay electricity bill directly to MahaGenco. MahaGenco will then pay some amount of it to MahaTranco and MahaDiscom for using their infrastructure.

Electrical Power Economics

Introduction

Electrical power is necessary for industrial and overall growth of a nation as most of the industries are directly / indirectly dependent on electricity. Hence it is necessary to study electrical power system and its economics.
Electrical power industry is different compere to other industries in following:

• Electricity cannot be stored. One has to generate electricity instantaneously to meet end customers' demands. 
• Electrical power demand is fluctuating. It is difficult to predict demand with ~ 100% accuracy, based on past data. 

Terms and their meaning

Base load and peak load of power grid
Base load is constant or permanent load on power grid. Peak load is maximum load on power grid.
Base load and peak load terms are also used for power stations. In this document we are using these terms with reference to power grid.
Capital expenditure and Operational expenditure
A capital expenditure (Capex) is money invested by a company to acquire or upgrade fixed, physical and non-consumable asset such as building, generator, turbines, boiler, transmission lines, transformers etc.
An operational expenditure (Opex) is the money a company spends on an ongoing, day-to-day basis in order to run a power system. Fuel cost, employee salaries, cost associated with transmission and distribution losses are few examples of Opex.
Generation, Transmission and Distribution
Electrical power activities can be broadly divided in these three categories. Power stations generate electricity. Typically, power stations are away from civilisation.
Transmission lines carry power from power stations to substations at higher voltage. Distribution lines carry power from substation to end customers of electricity at lower voltage.
Power station load factor
Power station load factor in a given duration is defined as number of units generated divided by maximum units plant can generate. For example if 100MW power station generates 2400 MWH power in one day, power station load factor is 100% for that day. Power companies are interested in ~100% power station load factor.

Electrical power supply and associated economics 

All the power stations are connected to electrical power grid and they together supply electrical power to all end customers.
In a supply chain, distribution company buys power from generation company and sells it to end customer. Distribution company then collects revenue from end customer for units consumed by him.
In fluctuating electrical demand, all generation companies are interested in supplying base load and not peak load of power grid. Base load supply ensures that their power station load factor is better, which further ensures better Return on Investment (ROI) on Capex.
However, all the power stations cannot be designed to supply base load. Some power stations has to take peak load. Load factor for power stations dealing with peak load would be much less compare to power stations dealing with base load.
Also, all types of power stations cannot act as a peak load power stations. Thermal power station and nuclear power station cannot act as a peak load power stations as it takes lot of time to switch on and switch off these types of power stations.
Another challenge is distance between power station and distribution substation as transmission losses are directly proportional to this distance -- more distance, more transmission losses.
Companies involved in transmission and distribution of electrical power are also interested only in base load. Base load ensures better Return on Investment (ROI) on their Capex.
End customer is not interested in all these things. He demands continuos supply of electricity and prefers paying only for electrical units he is consuming.

Conclusion

Currently end customer is charged based on his electrical consumption. He should also be charged for his maximum demand in peak hours. Charges associated with maximum demand should be ~50% of total bill.

Smart grid -- facts and myths

What is smart grid?

We have to first understand electrical grid before moving to smart grid.
Electrical grid is an interconnected network used for delivering electricity to its customers. It consists of:

• Power stations that generates electricity
• Transmission lines
• Distribution lines
• Transformers
• Capacitor banks to improve power factor
• Switchgears, circuit breakers and relays

With the help of analogue or digital signals, smart grid gathers information at various nodes of electrical grid. This information could be:

• Voltage 
• Current
• Power factor
• Frequency
• Harmonics
• Transmission losses
• Distribution losses

Above information can be used in various ways:

• Handle abnormal situations -- Smart grid would detect abnormal situations and initiate signals. Circuit breakers and relays would operate as per these signals to isolate problematic areas in electrical grid. In non-smart electrical grids, electromechanical circuit breakers and relays provide the same function. However, accuracy and reliability would be better with smart grid
• Big data and Business Intelligence -- Smart grid data can be supplied to IT systems. IT systems would then analyse this data to find out electricity supply- demand trends.
• Centralised view of electrical grid – Smart grid would pass above information to a centralised location, where one can see graphical view of electrical grid with various parameters

What is not smart grid?

• Smart grid does not generate, transmit or distribute electricity.
• Smart grid does not store electricity
• Smart grid can measure transmission and distribution losses.  However, it cannot reduce transmission or distribution losses
• There is no direct relation between smart grid and renewable energy sources.
• Smart grid can find out more about fluctuating demand.  However, it cannot easily control electrical supply.