Column : At an inflection point

Written by T N Thakur | Updated: Jan 18 2013, 05:41am hrs
Apart from losses, discoms now face problems related to fuel availability, land acquisition and environment

Inflection points: They represent, in my description of it, what happens to a business when a major change takes place in its competitive environment. A major change due to introduction of new technologies, a major change due to the introduction of a different regulatory environment. The major change can be simply a change in the customers values, a change in what customers prefer. Almost always it hits the corporation in such a way that those of us in decision making position are among the last ones to notice.

Andy Grove, former chairman & CEO, Intel

After nearly a decade of rapid growth marked by reform, buoyancy and investment, thoughts of pessimism in Indias power sector are nearly the same as they were a decade ago when the growth phase started. Questions about the financial health of distribution companies are not very different from what were asked a decade ago. This time, the additional survival questions have emerged on fronts of fuel availability, land acquisition and also on environmental issues.

The Economic Survey 2010-11 highlights that India currently has some of the lowest and most uneconomic average electricity tariffs at retail levels in the world, which are around 50-150% lower than the tariffs in the countries much better endowed with coal or gas energy. As per a study by Crisil, power tariffs in India in the five years ended FY10 grew at an annual rate that was virtually half the general inflation rate in this period. This caused the share of energy expenses in the total expenses of the Indian household to decline in this five-year period from about 10% to about 8%. This was the first time it happened in the last two decades.

Leave aside the crunch in getting fuel supplies that may come in future, India is stretched to meet its fuel requirements even today. Around 20,000 MW of capacity was lying idle because of scarcity of fuel. Average PLF at which gas plants are running is only around 45%. If India were able to manage its fuel supplies aptly, the peak deficit and energy shortage of around 10% to 12% that we talk about would not have been there at all.

Since 2005, more than 44,000 MW has been tied up through competitive bidding, majority of which is expected to face difficulty in meeting their supply obligations. The competitive rates discovered through competitive bidding have not only threatened viability of many of the projects but have also left the states dependent on these sources of power generation for meeting their projected demands in a tight spot. Today, the tariffs discovered in competitive bidding are actually higher than what would have been if agreements were to be signed on cost-plus basis. A case in picture is recently opened bids in Uttar Pradesh for purchase of 6,000 MW wherein the tariffs quoted varied in the range of R4.48 to R7.10 per unit.

The move to bail out distribution companies, the second such in just over a decade, underlines the fallacy of the political interference and dole outs of free power, unrealistic tariffs and rampant prevalence of power theft. The government did bring in a proposal to restructure debts to avoid the collapse of the sector, but the same is not a long-term solution and the progress even on this is very slow and only Rajasthan has submitted its proposal so far.

If the decision makers do not notice carefully the inflection points now emerging, it may not be long before India loses its sheen because of the crumbling power sector.

There are no fundamental changes in the technology available to the sector or in the competitive landscape. In fact, there is no major change in the regulatory environment as well (changes in regulatory process remain largely on paper as tariff fixation still has political interference). But, increasingly, it is seen that elections can be lost or won depending on the quality of power situation in a state. So, there must be some change somewhere.

I believe what has changed significantly is that now to a reasonable extent, and in coming years to a very large extent, the era of power markets will actually belong to customers.

The consumer expectations have changed. Consumers expect service and reliable quality. If provided with the right service, they are willing to pay for it. Even a below poverty line consumer today is connected with his family and peers with a mobile phone and does not mind paying for its bills because he is receiving the desired service. The question actually is of quality of service.

The current thought process of decision makers which leads the political class to the conclusion of dolling out free benefits (which are quite poor in eventual service and quality) coupled with high-headed feeling of making an obligation to population needs to be inverted to that of providing high quality service with best-in-class reliability.

If the focus shifts to providing quality service to the consumer, then the key problem of political interference in fixation of tariffs will wane off sooner than later. Regulators in parallel will also need to insist on better and realistic performance improvement from SEBs. In one of my earlier articles, I had advocated that there could be an empowered body under PMO with cross-functional representations from key ministries impacting the power sector. The proposal of the Cabinet Committee on Investment (a apoxy for National Investment Board) is a step in the right direction.

To reduce financial burden, utilities should plan their procurement in advance for the medium term and long term so that they do not depend heavily on expensive short-term purchases. I also propose that well-thought-out interventions for short term, medium term and long term should be chalked out. As a suggestion, some of the measures that can be undertaken are: introducing coal banking intermittently, pooling of domestic and imported fuel, swapping of coal arrangements between coastal and in-land projects, planning more of expansion capacities at brown field sites, implementing point of connection tariff transmission down to STU level, making open access possible in practice, creating even more deep power market with around 15% of total generation traded, creating equitable level playing field for SPUs, CPSUs and IPPs etc.

The author is former chairman & managing director, PTC India Ltd