Not the ‘power’ move! Govt’s flip-flop in power sector shows complete lack of clarity

February 11, 2021 3:45 AM

Resolving to give financial assistance to states by linking it to reforms once again, the Centre is doing a flip-flop—it knows fully well that this approach has not worked in the past

electricityRepresentative image

By Somit Dasgupta

In her FY22 Budget speech, the finance minister made three major announcements as far as the power sector is concerned. First is the announcement of a Hydrogen Mission; second is related to a reforms package that would cost the government Rs 3.05 trillion over five years; and the third is about giving a choice to the consumer for choosing her distribution company.

The announcement of the Hydrogen Mission, no doubt, is a step in the right direction. In fact, this should have been done several years ago. If India wants to get to net-zero or near net-zero emissions in the foreseeable future, it has no alternative but to reduce the cost of making green hydrogen, which costs about Rs 400 per kg today. It is felt that it could be reduced to about Rs 150 per kg by 2030, and there are studies which indicate that hydrogen demand could increase five-fold by 2050 and the major consumer would be the industrial sector.

As far as the reforms package is concerned, one has seen just too many such schemes funded by the central government whereby grants/soft loans are given to the states on the basis of reduction in their commercial losses, also known as aggregate technical and commercial (AT&C) losses. It all started with the APDP scheme of 2000, which was followed by several similar schemes, all of which entailed giving money to the states. The money was to be used for strengthening the distribution infrastructure, including metering. While thousands of crores of rupees have been spent on these schemes, the fact is that reduction in AT&C losses has been minuscule. Even today, the AT&C losses, pan India, are estimated at about 22% (2018-19), and there are discoms whose losses are in excess of 40%. Today, one should really question if disbursing money to the states is the correct thing to do because the financial health of the discoms is going from bad to worse despite all the incentives being given linked to reforms. When the central government formulated UDAY in 2015, it consciously moved away from giving any monetary assistance to the states and left it to them and their discoms to reduce commercial losses through the issue of bonds. The role of the central government was limited to being a facilitator. This was the right approach since it held the states responsible for undoing the mess they had created in the distribution space. The fact that UDAY too has failed is another matter, though things got exacerbated after the pandemic. By resolving to give financial assistance to states by linking it to reforms once again, the government is doing a flip-flop, knowing fully well that this approach has not worked in the past. The tariffs determined by the various state electricity commissions should ensure the viability of the discoms and even their capex should be funded from the tariffs.

On the final issue of the consumer choosing her distribution company, it is rather surprising that the finance minister made such an announcement since this issue was laid to rest when it was omitted in the Electricity (Amendment) Bill 2020. Choosing one’s own distribution company was part of the Electricity (Amendment) Bill 2014, and it is understood that it was opposed by the states tooth and nail, and therefore, dropped in the Bill of 2020. This concept is generally known as separation of carriage and content where there are several retailers (as against one distribution company) and only one owner of the distribution wires. All the retailers use the same set of wires to reach their respective consumers. One can clearly see from the statement of the finance minister that an attempt has been made to word it very carefully. The truth is that going by the existing provisions of the Electricity Act 2003, having more than one discom in an area is possible, but each will have its own set of distribution wires.

This, of course, is neither practical nor economically viable since the wires business is a natural monopoly. Exactly what the government proposes to do will be known when the details are released. However, it is abundantly clear that the Electricity Act 2003 will have to be amended to accommodate the provision of giving a choice to consumers. This is yet another flip-flop and does not augur well for the sector and reveals a lack of clarity on policy matters.

One cannot miss the euphoria expressed by some of the well-known consultancy organisations on the issue of giving consumers the choice of their distribution company. This move means more business and more revenue for the consultancy organisations since the government/regulators will depend on them to take it forward. No one in the bureaucracy or regulatory commissions has the time (and perhaps the competence also) to draw up the road map, charting out what needs to be done to make this idea functional. One can’t really blame the consultancy organisations for egging on the government on such ideas because it is their job to earn revenue for their firms. It is for the bureaucrats and regulators to apply their minds and decide what is feasible, practical and cost-effective.

The author is Former member, CEA and currently senior visiting fellow, ICRIER. Views are personal

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Robo sapiens: Future of work
2Recovering from the pandemic
3Get skilling right