Column: The power conundrum

By: | Updated: April 21, 2015 12:28 AM

NITI Aayog must step in to harmonise policies and ensure reforms to prevent generators from becoming bankrupt

Coordination in calibration relating to infrastructure, in general, and the energy sector, in particular, between the Union and the states is a major challenge that has to be faced by the government in the coming years. There is an enormous disconnect between the policies relating to generation and distribution and this can lead to the serious consequence of continued power disruptions even when adequate generation capacity is available. The reforms in the power sector, including the Revised Accelerated Power Development and Reform Programme (R-APDRP), have failed to address the issue of coordinating the reforms between the generation and distribution sectors and the issue is unlikely to be resolved even in the Integrated Power Development Scheme initiated in December 2014.

The recent Economic Survey has underlined the problem of stalled projects as a major factor in industrial slowdown in the country. The Survey points out that in December 2014, the stock of investments of stalled projects amounted to R8.8 lakh crore or about 7% of the GDP. Of the stalled projects, almost 80% were in the private sector. These were mostly in infrastructure sectors and the stalled projects in power sector alone constituted almost 2% of the GDP. The major reason for the stalled projects in the power sector is stated as the availability of coal and other inputs. If this is the only problem, then the auctioning of the coal blocks should substantially resolve it. While this is surely the problem of generation, there are serious problems in the distribution sector and these are likely to impact on the capacity utilisation of the generation companies and eventually, future investments in generation as well. Thus, we are likely to see an ironical situation where even as we will have adequate generation capacity, woes of the people in terms of outages continue. This is mainly due to the disconnect between the policies relating to generation and distribution.

The major problem is that most of the electricity distribution companies are run by state governments, and they are in poor financial health. In FY12, accumulated losses of state government-run distribution companies amounted to R1.9 lakh crore. In the absence of making state government’s fiscal targets comprehensive to include power sector losses, many states have not cared to run their discoms efficiently even as their fiscal situation is reasonably healthy. The attempt by the 14th Finance Commission to use the definition of extended deficits and debt in the fiscal targets could not materialise due to the lack of up-to-date audited accounts of the discoms. In fact, a number of states do not even disburse the subsidies they owe to the discoms to conform to their revenue and fiscal deficit targets.

The financial restructuring plan (FRP) for the discoms, initiated by the government of India in 2012, entailed converting 50% of the short-term liabilities into respective state government bonds and restructuring of the remaining 50% by the lenders with a moratorium of 3 years. The action plan to bridge the difference between the average cost and average revenues of the discoms was also introduced by providing incentive to reduce the AT&C losses and to revise tariffs to bridge the difference between average cost and average revenue. As a part of the programme, the government of India promised to give grants equivalent to the value of additional energy saved by reducing the AT&C losses beyond what was prescribed—3% per year in the case of discoms having more than 30% losses and 1.5% in the case of the rest. Furthermore, the Union government agreed to reimburse 25% of the bonds/special securities issued by the state governments. In December 2014, the Integrated Power Development Scheme was introduced with a view to strengthen the sub-transmission and distribution networks in urban areas, metering of transformers, feeders and consumers in urban areas and IT-enabling of the distribution sector and strengthening of the distribution network.

The new scheme is essentially to strengthen the transmission and distribution systems, metering and IT-enabling of the system. It is supposed to subsume the schemes under the previous reform programmes.

Despite these initiatives, it is doubtful whether the situation in the distribution sector will see any marked improvement. This is because the problem is as much political as it is technical. Investments in transmission and distribution can bring down the AT&C losses to some extent, but this cannot resolve the issues relating to pricing and pilferage and theft. The issue of political interference in the functioning of discoms and the competence and independence of the regulators will also continue to plague the sector.

Indeed, the issue of assured supply of coal or gas, as indicated in the Economic Survey, is important for the generators. However, the recent auctioning of coal blocks is not likely to solve the problem. Even the power generating companies bagging captive coal mines are not likely to find the matter comfortable as 75% of their power capacity is not tied to power-purchase agreements (PPAs) with any state. Given that many of them had bid aggressively, the costly power that is generated is not likely to find adequate takers. In fact, recent reports indicate that almost 29,000 MW of power capacity of the plants with captive mines had not found any takers for entering into PPAs. This implies that many of these companies are staring at staggering losses, with attendant spillover of the problems to the financial sector. Even in the case of generating companies having PPAs, the government of India’s proposal to amend the guidelines to allow the discoms to place a ceiling on the fixed costs in advance can place the former in a serious disadvantage. The direction issued to state regulatory commissions to reopen power purchase agreements will impact even the past contracts. Indeed, the recent auctioning of the coal blocks has seen aggressive bidding by some generating companies with the hope that they can somehow manage the situation if only they had assured coal supply. But the decision to place a ceiling on the fixed costs might make many of these companies unviable.

The result of all these could be that the discoms may simply decide not to buy power from the generators and resort to outages even as various categories of consumers agonise and the competitiveness of the country suffers. Given that there are not very many elections in the near-term, there is no compulsion for the discoms or the states to ensure regular power supply.

It is important that the policy calibration in the power sector should be holistic and not segmented. Also, having a comprehensive approach, taking into account the repercussions of the policies on generation, transmission as well as distribution, is imperative. This requires serious policy coordination between the generation and distribution sectors, and between the Union and the states. Perhaps, NITI Aayog will have to step in now to harmonise policies and ensure that the reform attempts prevent the generators from becoming bankrupt.

The author is emeritus professor, NIPFP. E-mail:

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