In a recent public lecture delivered at the India Policy Forum, the deputy chairman of the Planning Commission underlined the new challenges of managing the water, energy, urbanisation and environment as critical to accelerating growth and making it more inclusive during the 12th Plan. On the energy sector, he stated that an increase in the sustainable energy supply would increase the cost of energy and, therefore, we can contain emissions from energy supply only when we reduce energy intensity. In an article in EPW, he stated, ?? our ability to grow rapidly in this environment depends critically on our ability to transmit the high energy prices to energy users in the economy, rather than keep the prices artificially low?. Surely, pricing of energy according to its scarcity value is important to ensure efficiency, be it petroleum, natural gas, or electricity. However, if the central government has been dragging its feet with regard to the economic pricing of petroleum products, the state governments have been totally insensitive to the proper pricing of electricity.
Take the case of pricing of electricity by various state electricity distribution companies. Severe politicisation of economic decision-making has resulted in not revising the tariffs for a number of years in most state utilities. The regulatory commissions are independent only on paper and the patronage distribution in the form of appointment to the regulatory commissions makes them subservient to political decisions. For instance, in Tamil Nadu, the tariff order was issued just before the recent assembly elections after a gap of eight years; in Rajasthan, tariffs were last revised in 2005. There have been no revisions of tariff orders in Haryana, Tripura and Nagaland since 2006. The situation is not much better in other states as well. Surely, with such uneconomic pricing policies, we cannot expect economy in energy use.
A major consequence of this poor pricing policy has been the mounting losses of electric utilities. Of course, most of the utilities do not have their up to date audited accounts and even those that are audited are not authentic. The estimate compiled by the Power Finance Corporation based on the information supplied by the state utilities is alarming. The annual losses of state electric utilities are estimated at R52,623 crore in 2008-09. The situation has only worsened since and the losses in the current year could be over R1,00,000 crore. The major contributors to this are the utilities in the states of Tamil Nadu (R8,964 crore), Rajasthan (R8,122 crore) and Andhra Pradesh (R7,628 crore). Uneconomic pricing is the most important factor contributing to this. The decision to supply free and unmetered supply of power to farmers has continued to be a bane in many states, which results in poor cost recovery, overstating the consumption of power by the agricultural sector, and erroneous estimates of transmission and distribution losses.
With the focus on meeting the deficit targets prescribed in the fiscal responsibility legislations, the states have not been willing to meet the losses through budgetary allocations. The utilities have had to borrow from the banks, of course with state government guarantees. Thus, even as states? aggregate fiscal deficit in 2009-10 is budgeted at about 2.3% of GDP, the off-budget liabilities on account of the power sector alone can be as high as 1.5%, which is not comforting. Indeed, borrowing from the banking system at rates of interest higher than the market borrowing will only add to the woes of the utilities further. In fact, indulging in such budget liabilities and still claiming to conform to the targets makes a mockery of the fiscal responsibility legislations.
Indeed, heavy losses incurred by state utilities and the lack of support from the state governments in their pursuit of fiscal deficit targets has resulted in very little investments in both generation, transmission and distribution systems and much of the additional investments have had to be made in the central sector. In the generation of power, for example, NTPC has been a major player and although the electricity generation has been opened up for private players, their entry has been recent and participation not substantial. Despite these developments, the power deficit has persisted and the peak deficit in 2010 was estimated at 13.8%. Indeed, there has been considerable concern about the shortfall in achieving the 11th Plan targets for generation and the deficit is likely to continue in the medium term.
Poor finances of state utilities on the one hand and persisting demand-supply imbalances on the other has created a peculiar situation. Given their poor finances, the state utilities are unwilling to purchase power at market prices from the spot market and prefer to have prolonged load shedding, unless of course there is an impending election and the state governments force them to do so for electoral reasons. When the demand declines due to load shedding, it impacts on the plant load factor. Electricity is something that you cannot store and, therefore, the power generators have to go slow in their generation even if they have the capacity. Thus, we have a situation where NTPC, the largest generator of electricity, had to lower its output because the state electricity utilities preferred to indulge in prolonged load shedding rather than pay the market prices.
Unless concerted action is taken, the problem of scarcity even when we have the capacity will continue. Creating additional capacity and not utilising it because of wrong policies is a social waste. The manufacturing sector cannot depend on the state utilities due to long hours of black-outs and has to invest in captive generation. Companies like NTPC, after creating generation capacity, cannot generate and sell power as the state utilities prefer to have black-outs rather than supply electricity to consumers. Although the sector has been opened up for private producers, there will be serious question marks on new investments. Even maintaining the growth rate at 8.2%, let alone accelerating it to 9%, cannot be done unless the policy mess in the power sector is immediately attended to. Surely, bail-outs of the type we had under the accelerated power development programme or its revised variant is not an answer to the problem. Although this was an attempt to sugar-coat the reforms, it dissolved the sugar, but swallowed the reforms.
The author is director, NIPFP. These are his personal views