Time for a power-ful reform

Updated: Jun 9 2014, 06:03am hrs
Appraising a government by its first day in office may be as hazardous a business as judging a book by its cover, regardless of who the author is.

Yet it has to be said that the Narendra Modi story has gotten off to a promising start, particularly in areas relevant to Indias comatosed infrastructure and manufacturing sectors.

With just a few decisive strides, Modi has shown that he means to walk his talk. First, his move to integrate the ministries of power, coal and renewables into a single entity is commendable. This step is in line with best M&A practices that target higher efficiencies and faster decisions by merging separate but mutually-reliant pieces into unified, synergised business units.

It is no secret that Indias growth story lost much of its steam largely owing to the chronic shortage of coal during UPA-2s tenure. The hardest hit was the power industry, which consumes 85% of the countrys coal output. Until five years ago, gas (along with coal) was expected to lead Indias power charge and consequently its economic aspirations. The fuel is no longer even relevant owing to its non-availability and exorbitant cost.

Therefore, the future of Indias thermal power industry, which is 70% of its total generation capacity, is hitched to coal more than it ever was. Hopefully, now that the ministries have been merged with a clear agenda to aid growth, decision-making would not only be faster but also more cohesive.

The problems plaguing the power industry are well known but in the absence of clear, coherent policies, the sector has suffered to an extent that few financial institutions are willing to engage with it any more. Consequently, with the finances required to complete projects drying up, a number of investors find themselves on the brink of financial collapse. Even projects that have limped to completion face an uncertain future because of the fuel crunch.

Ironically, states like Gujarat and Chhattisgarh, which have built excess capacity, have no way of evacuating their surpluses to power hungry states like Tamil Nadu and Andhra Pradesh.

The power industry is in such a bind largely owing to lack of planning. A country sitting on 200 billion tonnes of coal reserves, shockingly enough, imports 140 million tonnes of coal annuallythis is likely to grow to over 400 million tonnes by 2020.

Sure, Indian coal is of inferior quality. But it is our own. Since fuel accounts for 40-45% of power cost, it is clear that if the capital equipment and coal is of Indian origin, its cost would not be subject to fluctuations in foreign currency, leading to price stability.

Just as important is the issue of transmission and distribution. Almost all electricity boards are facing collapse owing to cross-subsidies and non-collection. With funding from banks hard to come by, the SEBs can no longer buy power, forcing them to resort to load shedding, which adds further to their losses. Here is a ten-point action agenda for the Modi government, which we believe would energise Indias ailing power sector:

1. Build Centre-state consensus. Power being a concurrent subject, the government must build a national policy consensus for any turnaround effort to work. The way forward: Evolve a common minimum programme in partnership with states and set up a regulator to monitor progress.

2. Stop cross-subsidies. SEBs supply 85% of power and, therefore, reviving their health is critical for the well-being of the sector. The way forward: Stop them from bleeding by ending the practice of cross-subsidies.

3. Involve private sector & PPP in distribution. The move has spawned financially robust power distribution companies in cities like Mumbai, Kolkata, Delhi, Ahmedabad and Surat. The way forward: Adopt private/PPP models to restore distribution health.

4. Make power affordable. Cutting power losses from a national average of 25% to even 15% will yield huge savings. Similarly, since power is a critical growth catalyst, the government must withdraw taxes.The way forward: Reduce distribution losses, reduce manpower through automation and adopt a policy of zero taxation for ten years.

5. Decentralise coal mining. Coal India struggles to produce even 500 million tonnes and cant hope to meet the surging demand.The way forward:Open mining sector to private companies, including MNCs, with adequate safeguards. Importing coal is not an option; costs make it unviable.

6. Say no to gas-based power plants. Strangely enough, unlike other fuels, gas produced even in India is priced in dollars. Imported gas is forbiddingly expensive. At $8.4/Btu, the per-unit cost of gas-based power works out to R6-7, making it an unrealistic option.

7. Plants should be next to mines. This will not only reduce the cost of power but also provide a natural habitat for the asha huge environment dividend given the high ash content in Indian coal.

8. National and regional grids. The biggest bottleneck today in making power available is the lack of adequate power transfer capacity.The way forward: Accelerate power transmission projects to build national and regional grids.

9. Adopt IT for greater efficiency. Implement automation and tech-driven solutions to maximise efficiency across the power value chain.

10. Go for the best HR. Engage highly qualified professionals to manage state regulatory bodies and ensure they do not become a sinecure for retired bureaucrats.

The per capita consumption of power is a measure of a nations economic stature. While we must continue with our efforts to produce more power, it is equally important that we pursue pragmatic and sustainable policies. Such an approach will result in a robust power industry and an empowered nation.

The author is MD & Group CEO, JSPL