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Power Pangs

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India has an installed power generation capacity of 2,43,000 MW as of March 2014. But only 1,30,000 MW is available to meet peak demand. So, the immense capacity is merely on paper. Again, peak power deficit is touted to have dipped to 5.4 per cent in 2014 from 16.6 per cent in 2008. Yet, large parts of the country continue to reel under power cuts, ranging between four and six hours daily.

So what is the reason for this paradox in the Indian power sector? Put simply, it is the inability of power generation companies such as National Thermal Power Corporation (NTPC) to sell power to distribution companies or discoms, which prefer to resort to load-shedding than purchase power from power generation companies. NTPC, on its part, failed to sell 30 billion units of power in FY14, suffering a loss of Rs 90 crore.

A Crisis Explained
Discoms have their own reasons for preferring to cut power supply to lakhs of homes than purchase adequate power from generation companies. Here are some of them:

Costly power: A shortage in the supply of domestic coal and gas has led power producers to use 15-20 per cent imported fuel to run plants, adding to expenses. When this cost is passed on to discoms, the latter find it difficult to charge higher tariffs from consumers.

Experts believe the average consumer in India is not used to paying more than Rs 5 per unit of power. However, in the past two years, the final cost of power, including generation and transmission costs, has touched Rs 6 a unit. At this level, either the state governments subsidise transmission companies or discoms resort to power cuts.

Poor financial health: As on 31 March 2012, eight state discoms had liabilities of Rs 2.46 lakh crore. Discoms enjoy a 3-4 month credit cycle with power generation companies. But such high debts restrict their capacity to purchase power as they are unable to make payments even after the grace period.

According to a report by the Indian Brand Equity Foundation, eight state electricity boards had stopped making payments to NTPC in 2011, despite being offered discounts of up to 2 per cent on immediate payment, and 1 per cent on payments made within a month’s time.

Lack of transmission infrastructure: According to the Planning Commission, in the 11th Plan (2007-2012), power generation capacity grew by 50 per cent, whereas transmission capacity increased by only 30 per cent. In 2012-13, plants supplying electricity to state electricity boards under long-term power purchase agreements lost 1.93 billion units to transmission capacity bottlenecks. In the same year, domestic power exchanges — Indian Energy Exchange (IEX) and Power Exchange of India (PXI) — failed to complete sales-purchase deals worth Rs 1,350 crore, amounting to 15 per cent of the total traded volume of power, due to transmission constraints.

The congestion was in evidence as recently as May 2014, when IEX failed to sell 210 million units of power due to the unavailability of an inter-state transmission corridor. “Several participants in the southern states refrained from bidding on the exchange due to the unavailability of the transmission corridor. The southern states of Tamil Nadu and Kerala were the worst affected as power could be supplied for only 10 days in the entire month and that too an insignificant quantum, resulting in an increased area clearing price (ACP) of Rs 11.01 per unit,” says Rajesh Mediratta, director of business development, IEX.

“States like Madhya Pradesh, Chhattisgarh and Himachal Pradesh have surplus power but they are not in a position to sell this excess power to states that need it,” adds Mediratta.

In a recent report, the Central Electricity Authority  (CEA) said the country is expected to see a power  shortage of 5.1 per cent this fiscal. While the all India power deficit figure may look minuscule, its break-up tells a different story. The shortfall in the north-eastern region comprising Assam, Arunachal Pradesh, Nagaland, Mizoram, Manipur, Meghalaya and Tripura will be the highest, at 17.4 per cent. Next is the southern region which includes Andhra Pradesh (Seemandhra and Telangana), Tamil Nadu, Karnataka and Kerala, with a power shortage of 12.7 per cent. At 3.4 per cent, the eastern states of Orissa, Jharkhand, Bihar, Sikkim and West Bengal are better off.  Punjab, Haryana, Rajasthan, Delhi, Uttar Pradesh, Uttarakhand, Himachal Pradesh and Jammu & Kashmir constitute the northern region which, at 3.1 per cent, has the lowest power shortage.

According to CEA, only the western region comprising Chhattisgarh, Maharashtra and Gujarat will have a surplus, of 0.3 per cent. But lack of adequate transmission infrastructure will come in the way of electricity being drawn from the western region. 

Selling power at exchanges: State discoms prefer to sell to power exchanges — even at a loss — to get payment upfront, rather than to retail consumers, who often default on payment.

Even power-deficit states like Uttar Pradesh, Punjab, Haryana and Rajasthan are selling to power exchanges (see tables). Haryana sold 100 MUs to power exchanges in March 2014 at Rs 2.60 per unit, though it buys electricity at between Rs 5 and Rs 6 a unit.

Harry Dhaul, chairman of the Independent Power Producers Association of India, attributes the phenomena to India’s bail-out culture. “Discoms know that they will be bailed out by the central or the state government every 10 years or so. So they prefer getting upfront money from the exchanges instead of realising actual tariff from customers.”

“Ten years ago, Montek Singh Ahluwalia had drawn up a bailout package for state power utilities. When that scheme was nearing its end, the government came out with another. Why should discoms think of becoming profitable,” asks Dhaul.

In 2001, based on the roadmap drawn by the Ahluwalia committee, the government offered a bailout package for cash-strapped state power utilities. The package was meant to ensure that dues owed to central public sector enterprises such as NTPC, National Hydroelectric Power Corporation and Coal India, amounting to over Rs 41,000 crore, were repaid.

The central government waived almost 50 per cent of the interest amount due. The remaining 50 per cent plus the principal — amounting to around Rs 33,000 crore — was to be securitised through the issue of tax-free bonds by state governments.

In 2012, the government came out with a similar carrot for state discoms that provided for conversion of 50 per cent of the accumulated debt of discoms till March 2012 to bonds.

The bonds are issued by distribution companies to participating lenders, backed by the state government. The balance 50 per cent of debt is restructured by providing a moratorium on the principal and best possible terms for repayment.

Light At The End of The Tunnel

What is the way out of this tricky situation? Debasish Mishra, senior director, Consulting, Deloitte, says it is essential that state discoms have the financial ability to procure adequate power to avoid load shedding. However, he says, this is possible only with annual tariff increases. “In the past, owing to political considerations, some states have postponed tariff increases for years together, pushing the distribution utilities into bankruptcy,” he observes.

Mishra adds that given a choice, consumers would prefer to pay and enjoy regular power supply. Consider this: diesel-based power (such as that from generators) costs Rs 17 a unit, whereas power from the grid costs a mere Rs 3 per unit for coal-based power and Rs 6 per unit for gas-based power. “If people are given a choice, they would rather pay more for power from the grid.”

Power exchanges can also play a role when there is surplus power available.  According to Mediratta of IEX, currently, power generation companies cannot sell more than 15 per cent of their capacity at exchanges. This means, even if they have surplus power, like in the case of power plants in Chhattisgarh, they cannot sell it to power exchanges. “The government needs to not only improve transmission infrastructure but also relax the cap on short-term power contracts for power generation companies. The competition will only bring down the cost of power for customers,” he says.

Former power secretary R.V. Shahi emphasises the need for open access — where people can buy power from any source in the country. Right now, many states do not allow open access.

The Electricity Act 2003 mandates that all states allow open access to industrial consumers (those with more than 1 MW demand) from January 2009, to the transmission lines of any utility across the country, subject to the payment of a wheeling fee by the user. Consumers opting for open access have to shell out a cross-subsidy surcharge, or a monetary penalty, to the state distribution company for each unit of power contracted from outside the state.

However, states like Gujarat, Haryana and Karnataka have disallowed electricity transactions under open access for industrial consumers. On May 14, the Haryana government used Section 37 of the Electricity Act 2003, denying consumers in the state the discretion to buy power from outside the state.

Earlier, the Karnataka and Gujarat governments had disallowed the sale of electricity through open access ahead of the general elections. Industrial consumers in Gujarat were forced to buy power from within the state at Rs 6-7 per unit as against Rs 4-4.5 per unit quoted on power exchanges. The government of Karnataka, on its part, restricted power sales to the state, curbing the freedom of power generators to sell power to consumers outside state limits.

Shahi also calls for a change in mindset as well as the law. “For 24x7 power supply to become a reality, it is essential that state discoms purchase additional power through the bidding process. The present mindset of not purchasing power and resorting to load shedding has to go.” He adds, “State load dispatch centres must be out of the state transmission company’s control. Then alone can power reform initiatives, including non-discriminatory open access and competition in retail supply, succeed.”

Union power minister Piyush Goel wants states to segregate electric feeder lines for domestic and agricultural use. The model is currently operational in Gujarat, and is often quoted by the minister in conferences. Having separate feeder lines for agriculture and retail consumers controls wastage of electricity which, according to a report by the Planning Commission, is a norm in all states where farmers get free or subsidised electricity.

Mishra is optimistic about the future of the power sector as he believes that even politicians are recognising the fact that they need to provide uninterrupted electricity to people.

In the past, discoms did not file tariff applications before state electricity regulatory commissions (SERC) because of political pressure. However, a judgment by the Appellate Tribunal for Electricity in 2011 said an SERC could suo moto consider a revision in tariffs without any prompting by a state distribution company if it believed there was a revenue gap.

According to a report by Deloitte, in 2012, 23 states and five Union territories raised their power tariffs while, till May 2013, as many as eight states and one Union territory had increased power tariffs in the range of 3.6 per cent to 24 per cent. The hike in electricity tariffs is likely to continue in the current year, improving the health of discoms.

With the financial health of discoms improving, there will, hopefully, be more power for the people.  

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(This story was published in BW | Businessworld Issue Dated 25-08-2014)