Bitter truths about our power sector

The CAG report covering Delhi’s power distribution companies vindicates the writer for consistently maintaining, since 2006, that the claimed reductions in Aggregate Technical and Commercial (AT&C) losses by the distribution companies should have lowered consumer tariffs at the time these claims were made. More importantly, the CAG report exposes how vested interests and poor regulation combined to propound myths that dominate power sector policies.

The consumer is burdened by high costs resulting from inefficiencies and lack of transparency in every element of the power value chain. Lack of essential diligence by financiers and an inept regulatory regime that allows cost-plus tariffs selectively to certain vested players have also contributed to making India’s power sector uncompetitive.

India’s per capita electricity consumption is about 29 per cent of the global average, 20 per cent of the Chinese level and below 6 per cent of the US level. The 2011 Census confirms that over a third of Indian households do not yet have electricity. Using village electrification to measure electricity access is akin to measuring financial inclusion by the number of bank branches. A 24x7 grid-based electricity supply, under any technically acceptable definition, is practically non-existent for over 95 per cent of Indian end-users.

Coal-based power provides the cheapest base-load electricity in India. However, in energy terms, the average cost of coal at the burner tip of Indian power plants has been 15-20 per cent higher than that in the US and Western Europe. Currently, it is over 40 per cent more than the US, 30 per cent more than Western Europe and comparable to Japan which imports all its coal. The approved capital costs of India’s coal-based power plants are among the highest in the world on a like to like basis. China builds comparable plants at 60 per cent of the Indian costs.

The lenders to the Indian power sector are reportedly holding ₹2.65 lakh crore of stressed debt, accounting for over 40 per cent of their exposure to this sector. This includes the exposure to loss-making State distribution utilities (SDUs).

I have no sympathy for the lenders. Poor due-diligence norms, if not downright corruption, in providing both project finance and corporate loans, are responsible for their woes. The lenders have significantly contributed to the high costs and unviability of this sector.

High plant load factors that typified India’s power sector masked some of these financial inefficiencies. The recent rapid rise in generation capacity without firm fuel linkages and without matching required investments in transmission and distribution has reduced average plant load factor to a realistic 60 per cent level and exposed the weak financial structures.

The central public sector units (CPSUs) active in this financially stressed sector, however, jointly extracted over ₹50,000 crore of post-tax profits in 2013-14 despite their own inefficiencies compared to global standards. These CPSUs include three of India’s Maharatna companies, four Navratnas and one Miniratna. Power Finance Corporation and Rural Electrification Corporation, the Centre’s non-banking finance companies, created to lend exclusively to this sector, are both profitable AAA rated institutions. The private sector companies active in this otherwise bankrupt sector are also profitable.

The regulators routinely pass through the cost of questionable debt and regulatory assets to power tariffs and allow the world’s highest guaranteed returns on claimed or normative equity components to the CPSUs and private players. The State government-owned utilities are, however, not given the same mandated returns on debatable grounds, thereby exacerbating their financial stress.

Consequently, the required investments in the State-level transmission and distribution infrastructure have remained elusive for years and States that undertook such investments are heavily indebted. Regulatory reforms that deliver transparent competition in every element of the electricity value chain remain unimplemented.

The two attempts at the so-called financial restructuring of the SDUs were devoid of any understanding of financial restructuring practices and, as predicted by this author on both occasions, only kicked the can down the road at a huge cost to the sector and the country.

The above truths result in bulk power currently costing the States over 6 US cents/kWh in nominal terms and even if the States had efficient transmission and distribution systems, and we all know that this is not true, retail tariffs would need to average over 8 US cents/kWh in nominal terms for viability. In purchasing parity terms these bulk and retail tariffs effectively translate to about 3.5 times their nominal values!

Based on ever-optimistic estimates of cost-of-supply, the Planning Commission concluded that the State distribution utilities needed an average nominal retail tariff of ₹6/kWh to cover their 2013-14 cost-of-supply. This translates to over 31cents/kWh based on World Bank’s Purchasing Power Parity for India in that period.

Clearly, electricity is relatively very expensive in India already. The low consumption at sub-Saharan levels corroborates this bitter truth. While I have consistently supported tariff reform, I have equally consistently opposed mindless increases in retail tariffs. Vested interests have, however, successfully equated tariff reform to mean tariff increase.

Empirical data demonstrates that higher tariffs for the cross subsidising consumers lead to higher levels of AT&C losses even if one ignores the consequent higher arbitrage incentivising more theft.

Contrary to the popular myth, India’s rising dependence on imported coal is not the key culprit contributing to high-cost power. Poor regulation and corruption as exposed by the CAG in Delhi, rampant inefficiencies in the entire electricity value chain devoid of effective and transparent competition, inability to use imported coal in dedicated coastal power plants designed for such coal, inability to tie up reasonable long-term coal supply contracts, and above all a mismatched investment pattern resulting from the mismatched risk and reward profile that effectively favours CPSUs and private sector players have all combined to undermine this sector.

The Centre’s entry into bulk power generation and transmission in 1975 was prompted by the ideals of cooperative federalism supporting resource constrained State governments. Today the CPSUs together with the private sector are the dominant force in the sector. This in itself would not have been a cause of concern if independent regulation of the sector that commenced in 1998 had succeeded in its primary objective of shaping a competitive and efficient power sector functioning transparently and offering a level rule-bound playing field to all participants.

This has, unfortunately, not happened. Strong vested interests have reduced independent regulation to a mechanical cost-plus tariff setting exercise with little transparency or justification for the underlying numbers. The playing field is tilted to serve these vested interests.

We need a White Paper that critically evaluates the myths currently ruling policy formulation in this crucial sector. India cannot deliver inclusive development without adequate and affordable power on demand.

The writer is the former Principal Adviser Power & Energy, Government of India

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