Power up the reforms

N. Ramakrishnan | Updated on March 12, 2018



Several areas are crying for attention

The 1990s heralded a new dawn in the country’s power sector, or so it seemed. That was when the private sector was encouraged to set up power plants. The Government of India even offered counter-guarantees to a handful of them, so that they would not get stuck in payment problems and get delayed. Scores of projects were announced, the most high-profile of them being Enron’s plant at Dabhol in Maharashtra.

The reason for getting the private sector in was to quickly increase the power generating capacity in the country, which till then was the monopoly of the State electricity boards and Central generating stations.

It was also a signal to the outside world that India was a good place to do business in, as some of the top global power companies lined up with investments in projects. Some of them came on their own, some roped in local partners. There was a spate of announcements. Attracting foreign investments in the power sector coincided with the opening up of the economy.

State utilities

However, the euphoria was short-lived. Both investors and the planners realised that the health of the State electricity boards was not good enough to instil confidence in the foreign companies. Clearances took a long time in coming and most of the projects got bogged down in delays due to various reasons. The Centre, which was keen to usher in reforms in the power sector and increase the electricity capacity needed to fuel economic growth, and the States were not on the same wavelength. It was more or less back to the drawing board as far as the power sector planners were concerned. They decided to tackle a major impediment to capacity addition — the distribution sector. The Centre came up with schemes that offered incentives to the States to set right their distribution system.

Along with this, archaic laws governing the sector were amended and an omnibus Electricity Act, 2003, was enacted to transform the power sector. It became mandatory for States to set up electricity regulatory commissions, a Central regulator came into being and the States were also forced to unbundle their power utilities into separate arms dealing with generation, transmission and distribution. A number of States baulked at this and had to be forced into doing so.

However, the bigger problem continues to be the poor health of State utilities, which hampers investment in the sector, be it in generation or creating new transmission capacity or in improving the distribution network.

Installed generating capacity has increased by more than three times in the last two decades — from 69,065 MW at the end of March 1992 to 225,133 MW at the end of May 2013. However, energy shortage and peak power shortage continue. The Central Electricity Authority’s latest Load Generation Balance Report estimates the energy shortage to be 6.7 per cent and the peak shortage at 2.3 per cent.

More than 70 paise is lost on every unit of electricity sold to consumers. This is because States continue to heavily subsidise electricity supply — a number of States supply free electricity to agricultural pumpsets, domestic consumers are subsidised and high-tension consumers are charged heavily because of which a number of power intensive industries have opted for captive power generation capacity.

Inadequate inter-regional transmission infrastructure is yet another reason for the shortages in some pockets. For instance, the southern region is the worst off this year with a projected 19 per cent energy deficit and a 26 per cent peak deficit. The eastern region, however, will have a 10 per cent surplus energy for the year. Poor inter-regional grid network means that electricity from the east cannot be wheeled to the power-starved South.

Power outages

Coal-based power plants account for a bulk of the generating capacity. The private sector’s contribution is steadily growing and with more ultra-mega power projects going on stream, the private sector will have a more important role to play in power generation. With urban and rural India facing frequent power outages, the focus has so far been on adding large base-load generating capacities, in the hope that this will bridge the gap. However, this strategy does not seem to be working properly. As the CEA points out, urban India accounts for more than half the country’s GDP and the electricity consumption peaks during the day and drops significantly at night and on weekends. This demand pattern does not suit plants meant to run on base load. Therefore, future power planning will require reliability and flexibility in the power system, for which separate peaking capacity will have to be created.

As a Planning Commission document notes, the distribution segment is clearly the weakest link in the whole chain. The losses are enormous — over Rs 70,000 crore — and the Centre has come out with a scheme to help a handful of States whose distribution companies are bankrupt. Losses of such magnitude break the whole system. The reasons for these losses are many. Regulators at the State level have lagged in revising power tariffs annually, as they were supposed to under the Electricity Act, 2003. This is also because of political pressure, due to which the utilities quite often do not file a tariff petition every year. Free supply of electricity to large sections of the population results in considerable leakage, which is quite often passed off as free supply.

The solutions for the power sector’s woes are quite obvious — treat it as a commercial enterprise, recover the cost of producing electricity, set targets for the distribution companies to bring down technical losses, protect the vulnerable sections of the population since there is a political angle to selling electricity and restore the financial health of the utilities. Besides, the process of sanctioning environmental and other clearances should be made more transparent and time-bound. All these, however, are easier said than done.

Published on June 27, 2013

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