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Riding The Same Boat

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For the last fiscal year, Gujarat state had the highest electricity tariff rates for industry among all the major states in India. And yet nobody would argue with the fact that industry is still thriving in Gujarat. Unlike the popular rhetoric high industrial or domestic tariff rates do not scare away the industry, bad governance does. As per an analysis by policymakers, Gujarat also has some of the lowest staff cost on per unit sales basis and therefore the board is pretty efficient when it comes to employee productivity, if that is any clue towards better governance. In fact higher electricity tariffs will not necessarily lead to lower production but it will lead to smarter use of electricity, pushing the consumers to do more with less electricity. That is not bad for a power strapped nation like India. However in spite of higher electricity tariffs being an obvious and easily implementable solution, they continue to be a taboo for Indian states. Many state electricity boards have failed to increase the power tariffs over the years to cover their losses which emanate both from their operational inefficiencies as well as low electricity tariffs. Instead what seems like a Ponzi scheme, they continue to raise more debts to cover their earlier losses while failing to plug either lower tariffs or their operational inefficiency. State electricity boards (SEBs) across the country are bleeding financially and their ill health does not bode well for either conventional or renewable power producers.

As per CEA, as many as thirty three power plants are running dangerously low on coal inventories currently, with available inventory for less than a week as against a stipulated fifteen days stock. However given their health the SEBs are neither in good shape to make up their stocks through imports nor are they able to keep up their existing payment schedules. State electricity boards are frequently defaulting in their payments to Coal India Limited (CIL). Simple economics will dictate that Coal India should not be selling more coal volumes to such customers but step up its supplies to more lucrative customers such as steel and cement manufacturers or even to independent power producers who are known to keep up their payment schedules. Since these other customers may not be able to mop up the entire CIL production, therefore CIL should have little incentive to increase production to continue supply to SEBs. However on the contrary the power ministry expects coal India to step up its supplies to power plants.
On a macro level this continued disarray in coal supplies is increasing supply chain risk for coal based power plants and if this continues, it will also eventually also result in higher cost of finance for coal based power plants. Increased tariffs will allow the power producers to make up their stocks through coal imports as imported coal is around five times the cost of domestic coal. However higher tariff will not entirely solve the problems pertaining to poor operational performance although improved financial health can at least allow the SEBs to raise capital for equipment  and infrastructure upgradation that can ultimately allow for better operational performance.

On the other hand the renewable energy power expansion also depends upon the prudent financial health of SEBs. Renewable Energy Certificates (RECs) mechanism is a laudable policy instruments introduced in India to incentivise renewable energy generation. The mechanism has been designed to ease the financing of renewable energy projects. While the mechanism is in itself well designed but its effectiveness has been stymied by one practical reason- the poor financial health of state electricity boards in India. The mechanism will obligate the distribution companies to procure a certain share of their electricity from either renewable energy sources or through procurement of renewable energy certificates (RECs). The cost of buying each REC will go towards improving the financial viability or renewable energy projects. Theoretically both state owned and private distribution companies will become buyers of RECs but practically bulk of these buyers will be state electricity boards and their actions will dictate the state of market. The poor financial health of state electricity boards will make it difficult for the states to keep their REC obligations much like their obligations to pay for coal they purchase.
The banks are now beginning to refuse to lend to the SEBs for their working capital requirements, part of which goes towards the payments for coal purchases and a part of which could have eventually also gone for REC purchase. This will curtail the ability of the SEBs to pay for their REC obligations in future, which will restrict the RECs from becoming a bankable commodity. In some of my interactions with financial institutions, the ill health of SEBs and the implied inability to purchase RECs has come out as the biggest factor why the financial institutions will not consider RECs when appraising projects. If the RECs don't become a bankable commodity - which is increasingly looking certain now- then it will not ease the financing of renewable energy in the same way as they were designed to.

Higher electricity tariffs will also lead to other interesting developments- Increased electricity unit cost may encourage greater number of consumers to install renewable energy units in their premises. Such decentralised energy generation units will be interesting for a number of reasons like leading to greater use of smart grids or achieving greater energy self dependence.
Higher tariffs however will not be a panacea for SEBs. They will probably have to also embark upon a more determined path to improve their operational efficiency. SEBs in India have been in past requesting tariff increases to cover their losses although their continued dismal operational performance has failed to convince the policy makers on many occasions that increased tariffs alone will solve the problem. But whatever is the shape of the policy prescription, financially strong State Electricity Boards will be the lynchpin of future power sector growth for both the conventional and renewable energy sources and on this, the renewable and conventional power generation sub sectors are riding the same boat.

Yash Saxena is a sustainability consultant with Emergent Ventures, a climate change mitigating consultancy. He also works on innovation evangelism with Techpedia