Prepaid power is not the silver bullet to solve problem of discom finances

The Union Finance Minister, while presenting the Budget 2020-21, urged states and union territories to replace all conventional electricity meters with prepaid smart meters over the next three years. Mentioning it in the budget speech was a symbolic nudge to an issue that has already gained traction. Last year, the Central Electricity Authority and the Ministry of Power (MoP) had envisaged a complete switch to prepaid smart meters.

Smart meters are the third pillar of the proposed technology-driven transition in electricity systems globally, in addition to renewable energy and energy storage technologies. Prepayment is an additional feature of these meters that has gained prominence in India, based on two hoped-for outcomes. First, prepayment is seen as a remedy for the financial ailments of the electricity distribution companies (discoms), thus solving a long-standing problem. Second, consumers are expected to be empowered to plan consumption in an efficient manner, and be able to choose the supplier and tariff plan in a future multiple supplier system. Both are virtuous goals.

But will prepaid smart meters deliver on these promises? Is prepayment an effective disciplining technique? What are the political consequences of such a technological shift, given the barely concealed political context of electricity provision in India? There are at least three reasons to doubt the wisdom of a rush to smart meters and prepayment.

First, prepaid meters address only a small part of the problem of discom finances – non-payment of billed amounts. In fact, discom losses have two additional components: Line losses in the distribution network, and theft outside the meters, neither of which will be helped by smart meters. Moreover, non-payment accounts for the smallest share of discom losses – about 2.5 per cent in the 21 per cent AT&C loss (based on the power ministry’s claim that the Ujwal Discom Assurance Yojana has improved collection efficiency to 97 per cent). This is far lower than theft, which is estimated to account for half of discom losses on an all India basis. Further weakening the case for smart meters is that bulk of the non-payment is by state government departments. Instead of imposing stricter discipline on a small number of (predominantly government) defaulters, the Centre is choosing to impose prepayment on all customers. This is unlikely to be either effective or efficient.

Second, smart meters will require access to network and support architecture to transmit and store data. There is no clarity on the network costs, who will bear it, and the impact on the electricity bills of the poor. Prepayment will imply elimination of security deposits, which offer cheap working capital. Both factors impose costs on discoms. On the positive side of the ledger, prepaid meters will reduce meter-reading and billing costs, and working capital requirement. Ultimately, they will reduce the cost of supply and the retail tariff. For example, the Delhi Electricity Regulatory Commission allows 1 per cent rebate for prepaid meter users. How these various cost factors balance out, and whether transitional financing is needed, does not seem to have been considered adequately.

Third, prepaid smart meters are advocated as pro-poor, but the poor may, in fact be the first to suffer. The pro-poor argument is that prepaid meters allow payment in small, affordable fragments, offer a sense of disciplined autonomy and control over consumption, and thus, relieve the poor of the debt they accumulate with the discom. However, poor agriculture-dependent households currently treat electricity dues as a credit option that is accumulated during the lean period and paid in the harvesting season. In a prepaid system, their choice is between exercising disciplined autonomy to stay in the dark when they cannot pay for electricity or finding ways to bypass the meter to access electricity. The latter accounts for a substantial block of discoms’ losses; prepaid meters could increase the incentive for theft. The supposed gains of autonomy must be balanced against the fear of being left in the dark and the resultant impetus to bypass the meter.

Prepaid meters invert the order between consumption and payment, but are unlikely to address the fundamental problem: Weak accountability between discoms and consumers. Non-payment is often observed as a consumer response to poor quality supply. Several studies claim stronger consumer willingness to pay for better supply quality. Prepayment offers the promise of future consumption, but not the security that electricity will be available on demand. Prepayment in the current tariff structure does not eliminate the discoms’ incentive to prioritise their affluent consumers over the poor.

The likely outcome is an unjust accountability structure where consumers are accountable for their consumption, but are not rewarded with any additional avenue to hold the discoms accountable. Experiences in Sub-Saharan Africa suggest that prepaid meters tend to have a reifying effect, particularly on the poor. Electricity problems that were blamed on the corrupt and incompetent utility staff are now attributed to the meter itself.

The Centre’s push for smart meters may be an important ingredient for transitioning to a 21st century electricity-system. However, let us not pretend it is the silver bullet to solve the long-standing problems of discom finance and losses, and accountability and governance in the Indian electricity system.

Originally published in the Indian Express on March 19, 2020.

Environmentality is a collection of ideas, perspectives, and commentary by researchers at the Initiative on Climate, Energy and Environment, Centre for Policy Research, New Delhi. Views and opinions expressed in this blog are solely those of the authors. They do not represent institutional views.

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