Coalgate has dominated politics for the past week. The noise has centred around non-transparent allotment of captive coals blocks and the (notional) losses has caused to the exchequer. All of this is key and many points of governance are involved.
But one major point is being obscured in the shouting and walkouts. The process of allotment was opaque and frankly, it smells. But the policy behind the allotments was clear enough. The government decided to allocate captive blocks because there is a large and growing power shortage.
Plant load factors are low because of the coal supply problem. On the basis of Coal India’s (CIL) track record, it seemed unlikely that the monopoly PSU would be able to exploit the blocks, which were lying idle. So the blocks were allotted directly to generators.
There are multiple reasons for poor domestic coal supply to thermal stations. The two major ones are a) CIL is inefficient and b) Indian Railways is inefficient. It is worth pointing out that the railways is wholly owned by the Government of India and the GoI is the overwhelming majority shareholder in CIL. Obviously the government lacks confidence in its ability to improve the efficiency of either or both entities.
We can assume that, one way or another, Coalgate will cause a bottleneck in the exploitation of the blocks under question. This means that fuel shortages will continue to plague the power sector. In turn, that means the power sector will continue to underperform. It also means that hopes of attracting more investments into power will diminish.
The problems in power are intractable and they affect every segment of the value-chain. There is a large demand-supply gap – perhaps 12-15 per cent of peaking demand cannot be met. There are incredibly high transmission and distribution losses. T&D loss amounts to 30 per cent or more in many states. The Eleventh Plan signally failed to meet the T&D loss reduction target of 15 per cent.
More From This Section
Most state power outfits are bankrupt. The accumulated losses of the state-controlled distribution units exceeded Rs 100,000 crore by March 2011 and losses will continue to rise. This means the state units cannot afford to pay for more power even if it is available.
Tariffs are controlled and discriminatory in many states with farmers given free or cheap power while industry pays through the nose. The Planning Commission estimates that the gap between tariff realised and the cost of supply has grown steadily over the last Plan period. In the absence of open access, this leaves little incentive for anybody to get into power generation. In turn, equipment suppliers will suffer.
About two-thirds of generation capacity is thermal. This is affected by a combination of coal shortages, gas shortages and rising prices. Hydro capacity (currently about 20 per cent) and its growth is affected by environmental concerns and by monsoon vagaries. Renewables technically contribute about 12 per cent of capacity but renewables also have very low load factors in practice and suffer from intermittent generation and other issues.
Banks and other lenders have hit their sector limits when it comes to power and would need a bailout to recover the bad debts already incurred. Most new capacity addition is slow and uncertain because, apart from being inherently long-gestation, projects are bottlenecked by slow regulatory clearances and lack of fuel linkages. Venture capital and equity financing in general, is reluctant to touch conventional power.
Against this backdrop, the Twelfth Plan estimates of adding 88,000 MW of generation capacity appear to have been dreamt up in la-la land. The associated capacity expansion targets of 109,000 circuit km of transmission length, completion of the national grid, 270,000 MVA (megavolt amperes) of transformer capacity, and 13 lakh Ct-km of distribution lines and 88,000 MVA of substation capacity are also likely to be missed.
There are some key health indicators to watch. T&D loss reduction must dramatically improve. Tariff hikes must close the gap with cost of supply. Fuel linkages must be sorted out. State units will have to be bailed out and rebooted to run on a financially sustainable basis. Open access will have to become a reality – that implies a better transmission grid and arm-twisting states into allowing open access. Most of this won’t happen in a meaningful timeframe.
The conventional power sector is therefore, best avoided. Some private enterprise will come into T&D but it remains to be seen how efficient and profitable it will be. Renewables will continue to grow, perhaps helped along by technical breakthroughs. Power trading will continue to grow. Both segments attract some capital and will continue to do so.