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May 16, 2012

Losing Power

The gross mismanagement of the power sector means that viability of the sector is now at stake

Jignesh Patel (name changed on request) runs a manufacturing unit in rural Tamil Nadu. The unit is part of his family business, no different from the thousands of others that power the engine of India’s manufacturing. While setting up the factory, Patel had to bribe TNEB personnel to obtain the sanctioned load and put up the transformers. However, his factory suffers from six hours of scheduled power cuts on week days and he can expect additional two hours of unscheduled power cuts. On weekends, the load is cut to 1/10th, as part of a “power holiday”, rendering it practically unusable for running his plant. Effectively, he estimates that his factory gets power for only around 70 hours a week.

He has to power his factory off generator sets, and this costs him Rs16.50 to 18 per unit, nearly three times what the TNEB charges him, but the power that the generators supply is inadequate to power some of the upstream processes at his factory. The resulting scheduling issues have caused production delays, and loss of business opportunity.

Future historians will look upon India’s attempt to build a 21st century economy without adequate and reliable  supply of electricity with astonishment. India generated and used 835 TWh of electricity in 2009, as compared to 3446 TWh by China. This means that an average citizen of China consumes 3.6 times the electricity that an average Indian does. If India ever expects to be a manufacturing country, this is the magnitude of the chasm its factories are looking to leap over.

The story of India’s power sector since liberalisation has been the story of botched reform attempts, mismanagement, political rivalries and corruption. While there are problems in all three aspects of the power sector – generation, transmission and distribution, it is in transmission and distribution, particularly in the latter, that problems have proved most intractable.

Practically all power in India is currently distributed by the State Electricity Boards (SEBs). Transmission and distribution losses are at a whopping 33 percent, a figure that is way beyond the 6-8 percent that is the norm globally. Much of this loss can be attributed to what is euphemistically called “commercial losses”. In reality, this means that the power is stolen by consumers, often in connivance with the SEB personnel. Corruption at lower levels is not the only problem.  Free power to farmers is a common populist promise that politicians make at the time of elections. Redeeming this pledge comes at a cost to the national exchequer, and when power is provided free, it is wasted.

 

Photo: Misha Dontsov

India’s power generation capacity as of March 2012 was 173GW as against the target of 200GW set by the Ministry of Power as part of its “Power for All” vision. More concerning, however, is the inter-regional transmission capacity. India’s Eastern and North-Eastern regions have surplus power, while the North and West suffer from a deficit. Inter-regional transmission capacity, therefore, is very important, and utterly inadequate. The plan was to double this  capacity to 37,150MW by 2012. It is safe to say that this target will be missed by a wide margin.

Attempts to improve the power situation started almost as soon as liberalization began in 1991. Initial attempts were ad hoc, as evidenced by the Enron fiasco of the 90s. The first coherent piece of reform was the Electricity Regulatory Commissions Act of 1998, which established the Central Electricity Regulatory Commission and mandated the establishment of regulatory bodies by states. Under Suresh Prabhu, who is considered one of the most clear-thinking and visionary power ministers India has had, the ministry came out with a blue-print for development of the power sector in 2001. This resulted in the Electricity Act of 2003, which has formed the legislative basis for such reforms as have taken place since.

The vision, as revealed by the Act and the subsequent National Tariff Policy of 2006 is essentially this:

  • Unbundling of generation, transmission and distribution into separate companies.  This was intended as a precursor to privatising these companies and bringing in efficiencies. Unbundling was needed to prevent monopolies from forming.
  • Disaggregation of ‘wires’ and ‘supply’. Transmission lines are a natural monopoly that need to be regulated. Supply of electricity, however, can be a competitive business, as long as the transmission companies are willing to carry power provided by all suppliers. The key to this is the concept of Open Access. The Electricity Act mandates Open Access at inter-state as well as intra-state levels for industrial consumers above a certain size.
  • Tariff Regulation, which is intended to prevent monopolies from making usurious profits, while providing them with a reasonable return on assets.
  • Power Trading, which will result in power being priced to match supply with demand and enforce grid discipline. Both supply and demand for electricity are subject to fluctuations. Hydroelectric power generation is affected by the monsoon, and a hot summer pushes up the demand for electricity. The vision is for power suppliers and consumers to manage their requirements by trading electricity on exchanges, and for them to manage future demand through a futures market.

Unfortunately, while  many steps have been taken that ostensibly implement the provisions of the law, the measures that would have the most impact have not been. Almost all states have set up regulatory commissions and most commissions have passed tariff orders that set the tariff regimes in their respective states.

While many states have unbundled on paper, this has not made the slightest difference in how the state electricity boards operate – except that now the SEBs have been split into DISCOMs or distribution companies, and grid companies.  In reality, apart from a change in legal structure, the organisations continue to operate as before. They continue to function as administrative departments rather than as commercial organisations, tariffs continue to be set too low for political reasons, employee unions continue to resist change, and employees continue to connive with unscrupulous consumers in theft of electricity.

There have been some notable exceptions. Delhi and Odisha have privatized their power distribution companies, with mixed success. Maharashtra and Karnataka have attempted the franchise model where specified zones have been auctioned off to distribution companies to act as agents of the public sector DISCOMs. This model has had notable success in Bhiwandi, Maharashtra, but has now fallen victim to the central government’s apparent U-turn. After advocating the franchise model, The Planning Commission changed tack in late 2011, and started pushing for a “well-formulated Public-Private Partnership” model.

One notable success in unbundling without privatisation has been Gujarat, which has managed to turn around its power sector and attain a power surplus status by sheer force of administrative improvement backed by political will. The state electricity regulator has had a free hand in allowing increases in tariffs, and the state has combined the carrot of uninterrupted power supply with the stick of jail time for power theft, resulting in improved compliance and financial viability.

These, however are a few bright spots in what is overall a dismal picture. In general, the states have been reluctant to make any progress in reforms. Virtually no state has complied with the spirit of true open access.

Mr. Patel, for example, purchases additional power from the Indian Energy Exchange through Open Access. This, however, means bidding every day, and because he typically makes purchases during peak times, the cost is higher than what he pays for genset power. Also, during scheduled power cuts, the grid itself is shut down, which means that he cannot purchase power during those times, unless he invests in a transmission line, which is unviable at his scale of operations. Worse still, TNEB forbids purchase through open access during the weekend, when there is a “power holiday”.

Power trading is one of the few aspects of reforms that has succeeded to an extent. There are two electricity exchanges in operation, and around 3 percent of the power that is produced is traded, and the market is growing at 60 percent a year. However, unless other aspects of reforms are successful, power trading by itself is unlikely to unlock much value. Unless there is true open access, trading in power is unlikely to be of much use.

The gross mismanagement of the power sector means that viability of the sector is now at stake. Because the distribution companies are unable to meter and bill the consumers effectively, they are unable to pay upstream generating companies, making the latter unprofitable. The overall unprofitability of the sector means that private companies are unwilling to invest in it at all. Raising funds, whether from the equity market or through loans from banks, is now a challenge. Banks have exhausted their sectoral lending limits for power, and at the same time finding that their loans are now at risk. Worst of all, the lack of financial viability means that for the future, the much needed investments in the sector are likely to be delayed or cancelled.

Two decades after India embarked on liberalisation of its economy; it has reached a stage where the easy opportunities have been exhausted. Whether it is Information Technology or Telecom, such success as has been achieved has been by simply bypassing government controls and rigidities. It was easy for private telcos to bypass the MTNL monopoly by going the wireless route. Bypassing the tangled mess of electrical wires is another matter altogether.


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