Red marks in green power plans amid lack of reform in electricity pricing

The lack of market reform in electricity pricing has limited states' ability to expand capital expenditure on the critical transition to clean energy

There is a good reason why Union Power Min­ister R K Singh recently asked states to set up steering committees at the level of chief secretaries to plan for energy transition. Except for subsidies to keep the power distribution companies running at a loss, few states have money or plans for this critical sector.

To be sure, capital expenditure among states is rising fast after a long hiatus, but it is not rising in energy or more specifically in the power sector (see table 1). This lack of enthusiasm at the state level is worrying since the demand for energy is rising across India and this expansion will need commensurate investments by state governments. The incremental outlay, however, seems to be taking place only at the level of the central government.

In a recent paper, Ajay Shah and Akshay Jaitly argue that more capital spend can take place in the energy sector only if power sector reforms are linked to market-based pricing, replacing the long-standing system of subsidies or free power to targeted user groups. “The solution lies in electricity reform that addresses the long-standing fundamental problems of the electricity sector that places this sector on the foundation of the price system,” they argue.

This might seem surprising, because there is a recent provision made by the Centre to spur state level spending on energy sector reforms. According to the recommendations of the 15th Finance Commission, the Centre has provided more fiscal room for states to borrow from the markets. The condition is the money has to be spent on power reforms. The leeway is for an additional borrowing space of 0.5 per cent of their Gross State Domestic Product (GSDP) over and above the 3.5 per cent limit. In FY22 states raised Rs 282 billion under this head.

But in the name of reforms all that money is going towards expenditure meant to square off the past debt liabilities of the distribution companies. Net of those debts, no fresh money has been spent as capital expenditure to beef up capacity in the energy sector. Yet there is a demand to spend money to improve the quality of the distribution networks, including provision of metering capacity, or installing sub stations for renewable energy to feed into the grids. The states have also not taken any steps to rationalise power tariffs. An NSE report card shows that for 20 large Indian states, aggregate capital expenditure growth in FY22 grew by a handsome 48 per cent and is expected to grow another 12 per cent in FY23. But energy spending is less than 10 per cent of that purse.

A look at the finances of five largest states that account for 50 per cent of India’s GDP shows where the problem is. These states are Tamil Nadu, Karnataka, Maharashtra, Gujarat and Uttar Pradesh. As table 2 shows, after adding up the additional borrowing space for power reforms, these states will have used up all their allowable fiscal headroom of 4 per cent of their respective GSDP.  They can spend more only if they break the cap set by them under their respective fiscal management Acts.

For instance, Maharashtra ended up with a fiscal deficit at 2.8 per cent of its GSDP against the budget estimate of 2.2 per cent. In FY23 it has projected a fiscal deficit of 2.5 per cent and is therefore leery of adding more costs. It has kept the GSDP growth rate estimate at a conservative 12 per cent. In Tamil Nadu, FY22 ended with a fiscal deficit at 4.2 per cent of GSDP. It hopes to bring it down to 3.9 per cent in FY23. The numbers for Karnataka are similarly at the margins at 2.8 and 3.3 per cent, respectively.

A Comptroller and Auditor General (CAG) report on the states show that the pain points for these states are not necessarily Covid-related but long term. In Karnataka, spending on energy subsidies was Rs 8,647 crore in FY17, more than half of the total subsidies paid out by the states. These subsidies have expanded to Rs 9,139 in FY21. Remember, these are Covid-agnostic expenditures and were paid to the discoms, of which Rs 2,594.63 crore was due to deferred tax and other similar liabilities.

In neighbouring Telangana, the financial numbers are worse. Of the total subsidy spent by the state each year, the share for discoms was almost 54 per cent. Southern Power Distribution Company of Telangana had a net worth of Rs 21,537.41 crore and Northern Power Distribution Company of Telangana a negative net worth of Rs 9,557.68 crore. It is only when these companies are nursed back to the black would the renewable energy companies find the confidence to build more capacity. The state portal says it has a capacity of 20.41 GW of solar power, of which just about a quarter has been achieved.

There is another dimension to the capital expenditure required for power reforms in eastern India. States such as Jharkhand and West Bengal need to spend money to encourage the population depending on coal mining and ancillary business to gravitate to other sectors. West Bengal, however, spends even more than its declared subsidies, to pay its power bills. Another CAG report shows (FY21) that the state spent Rs 833.11 crore in FY21 as payment for electricity bills to Kolkata Municipal Corporation because it could not pay for electricity from private sector company, Calcutta Electric Supply Corporation Limited. “Though, these were in the nature of subsidies, they were not reflected as subsidies and the (figures) shown in the accounts are understated to that extent”.
 

Jharkhand has total outstanding loans of over Rs 20,000 crore to its power generation and distribution companies. The CAG report notes that at least the return on investment and loans should match the cost of government borrowing.  “Otherwise increasing fiscal liabilities accompanied by negligible rate of returns in investments might lead to a situation of unsustainable debt”. Because these are paying for old dues, the return on equity for these spends are abysmal in each state. For Odisha, which has one of the better run power sectors the numbers were negative 1.26 in FY19 and 2.64 in FY20.

As Shah argues, the capital spent by the states for energy needs to be bundled with price signals. Only then will they find more returns and therefore will be enthused to spend on the energy transition. Power minister Singh needs to reinforce this lesson in his meetings with the chief secretaries of the states in the energy transition committees.