Intermediation struggles

Power sector's problems lie with discoms

The problem with India's energy sector is not just a problem of capacity; over the past few years, power generation capacity has expanded, and more is expected - almost 38,000 megawatts of capacity has been added in the last two financial years. It is not even entirely one of inputs; although natural gas is not available in the quantities earlier expected, most estimates are that the problem is only temporary. Even coal, which India is struggling to mine and importing which is expensive and difficult, is not the only constraint. The bigger problem is one of intermediation. Even if capacity is sorted out and inputs are made available, it remains difficult to get power from the generator to the end-user. And that is because of the continuing problems with state electricity boards and distribution companies, or discoms. As was reported in this newspaper, the dues that discoms owe state-owned generation firms jumped to Rs 15,800 crore in September, compared with Rs 6,200 crore in June 2010. And unless state-owned generation companies are paid for the power they sell to utilities, they will not be able to expand or even operate to capacity.

A major indicator of this fact is that spot prices for electricity in power exchanges hit a five-year low in north India recently - less than half of what they were five years ago, in fact, according to reports from the Indian Energy Exchange. Nor is this a product of a drop in demand, thanks to a distressed industrial sector. This is because many state utilities are "managing" demand - in other words, they are shedding load across their distribution areas because they don't have the money to pay their dues. At low prices - approximately Rs 2.25 per unit - many generating plants struggle to meet their costs and margins, especially given that they also rarely receive payment on time.

The government has long worried about discoms' financial health, and a recent bailout package was in fact offered to them by the Centre. It is not as if tariffs have not been raised: in the past two years, most states have raised tariffs for consumers, ranging from only two per cent in Gujarat to a massive 37 per cent in Tamil Nadu. Meanwhile, aggregate technical and commercial losses have fallen. However, several state electricity boards continue to be in financial crisis. Cost coverage ratios - the amount of their costs that are covered by tariffs, the rest being met by debt or subsidies - are still below 90 per cent, and in some cases as low as 55 to 60 per cent. In some states, transmission losses are still over 60 per cent. As much as some reform has been carried out, a great deal more is still required. Without a clear change to user fees, and a more effective and efficient regulation to determine tariffs as well as a reduction in transmission losses, it is difficult to see how this continuing problem with intermediation in the power sector can be solved. Privatisation will help, but such measures should not be allowed to create private sector monopolies and electricity regulators should ensure early introduction of the open-access policy to give consumers the choice of the supplier from whom they wish to draw their power. In particular, power tariffs need to be depoliticised. Agricultural tariffs in many north Indian states are the source of the problem, and alternatives like those tried in Gujarat must be implemented. The Centre must insist that the stringent terms of its bailout package for state electricity boards are met, and that regulators are empowered to work towards depoliticising tariffs.