How Free Electricity can help the Economy ?

January 20, 2022

Industry:

Subject:

What is the ideal level of free electricity units ? This would depend on the region where it is implemented. It can’t be a random number say 250 units or 300 units. One has to do a lot more analysis to find the right number.

Free Electricity is good for economy, consumers, distribution utility and of course Politics. How ?

Demand Increases

Per capita consumption of electricity is very low in India. For years, policy makers and strategists have been betting on improving per capita power consumption and hence justifying the investment in Power Sector. It is around 100 KWh ( called units from here on ) per capita per month India per capita Power. World’s average is 271 units per month. For some of the poor states, it is even lower. In UP it is 50 units per month, and Bihar 27 units per month.

So what happens if we give free power ?

Demand tries to increase to the level of free electricity. If it is 250 units per month free, demand increases to 250 units per month ( Who doesn’t like free stuff ? ). For UP, if we assume 4 people in a household, demand increases from current 200 units to 250 units.

What about states with higher consumption ?

There Demand decreases. What ? Yes, if prices above the free level are steep, households would try to reduce their power consumption. They would move to more efficient appliances, save power etc. to keep the level below the free level.

Increased Electricity demand improves the economy

How can anyone use more electricity ? They would buy a washing machine ( Yes, poor Indians don’t own a washing machine ), they would buy an electric scooter ( for use in small business ) , students can use it for online classes, women would use more of induction cookers ( If I was a minister, I would give free induction cookers rather than gas. Did you know home LPG produces CO and NOx when used. So don’t close windows during cooking food at home ). There are innumerable examples on how electricity can improve people’s lives, and in turn provide stimulus to the economy.

 

How it is good for Distribution Utility ?

Those not eligible for the scheme would think all this would come from taxpayer’s pocket. So let’s see how it Discoms ( Electricity Distribution Utility ) benefit.

Less Stealing

In India it is common to see power theft that causes Discom losses. If power is free, no one would steal. This would also help Discoms to install meters at consumers who were earlier stealing power. They can have better data and better accounts, which they can bill to the government. They have a better and stable cash flow as money now comes from the government, and not the consumer. One can study in detail how Delhi has reduced its losses after implementing free power scheme.

Demand Management

As the residential consumer would try to limit their power consumption to the free level, it would be easier for the utility to maintain demand and lead to better forecasting. Agricultural consumer can also be given free electricity upto a level. ( Agriculture I have talked about earlier in a separate article, by coincidence, PM-KUSUM scheme was implemented on similar lines )

Also, if the utility can give free power during some slots like 10 am – 4 pm ( during solar power ), it can shift the peak load from evenings to day time. Consumer would be inclined to move consumption towards the free slot. Differential pricing is a very powerful method to shift demand during day times to help manage peak loads.

Renewables would make it free anyways in some time

In Australia, average spot prices between 10am and 3:30pm fell from $30/MWh in 2020 to just $0.01/MWh during August and September. The increase in renewable energy supply, combined with a mild August and COVID-19 restrictions reducing demand, led to wholesale electricity prices being negative or zero for 16% of trading intervals AEMO

In India, with targets such as 450 GW renewables by 2030, if met, can lead to negative prices during some slots or days. If there can be free mobile data plans, free calling etc. in India, why not free electricity plans in the future ? (In a way telecom and solar are very similar)

“Electricity and Light cannot be stored, they can only be converted”

The issue with solar is all this increased capacity would be available during the day. Demand is not necessarily during that time. Either install Energy Storage Systems, or incentivise consumer to install it by giving free power during the day.

Efficiency

If I am consuming 300 units per month, and first 250 units is free, and next 50 units is charged at double the price, I would install more efficient devices at home. A middle class consumer would certainly be incentivised.

Next steps/ Questions ?

  • What is the ideal level of free electricity units ? This would depend on the region where it is implemented. It can’t be a random number say 250 units or 300 units. One has to do a lot more analysis to find the right number
  • When to give it free ? This is also an important question as I mentioned earlier in the article, it has to be free during day time in a few years. It would depend on region, season and renewable source.
  • Who to give it free ? This article only covers residential consumers which is only a small part of overall electricity consumption. For industrial and commercial consumers, different plans have to be worked on. For electric vehicles, incentives have to be given so that they charge during the day.

Electricity is a powerful tool, and lifeline of an economy. Do GDP growth precedes electricity growth or vice versa is a question that would decide if we want incentivise demand growth of electricity

 

geeky strategy

Author:

Ananta Ekam

Founder/CEO of Strategy Boffins

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