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February 22, 2013

Let there be light

Without generating adequate revenues from distribution of power, neither generation nor transmission can be sustained.

If telecom has been liberalised India’s unqualified success, ‘power’ has been its unmitigated failure. Of all the factors holding back the Indian economy from attaining its potential rate of growth, inadequate power supply is among the most important. It continues to keep crores of Indians in primordial darkness and denies them a quality of life taken for granted in most parts of the world. Our failure on this front was evident last July when India entered the record books for experiencing the biggest blackout in history: three of the five grids collapsed, affecting almost 670 million people.

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Discussion on the power sector in recent months has focused on the inadequacies of the national transmission infrastructure and much more so, on the fuel supply challenges faced by the generating plants. At his first press conference last Tuesday, the new Union Power Minister Jyotiraditya Scindia focused on new capacity and fuel deals and continued to gloss over the gargantuan problems on the distribution front.

Yet, distribution is at the heart of what ails India’s power sector. The challenge here adversely impacts the entire value chain. Without generating adequate revenues from distribution, neither generation nor transmission can be sustained, let alone expanded to the required levels.

The Deepak Parekh Committee on the power sector, set up by the Government of India said, inter alia, “India’s power sector is a leaking bucket…The logical thing to do would be to fix the bucket. Most initiatives in the power sector are nothing but ways of pouring more water into the bucket.” The quantum of leakage is shocking. According to one study, the cumulative losses for the distribution companies, pre-subsidy, were an estimated Rs.80,000 crore in FY 2012, up from Rs.63,500 crore in FY 2010.

With this kind of losses, the banks are beginning to take a dim view of the pleas of these companies for continued borrowings. There is no way that India’s power sector can be nursed back to health unless ameliorative steps are urgently taken to “fix the bucket”. Distribution reforms, then, is the way forward for the power sector. Once distribution is commercially viable, funds will be available for sustaining and expanding generation and transmission.

Consumers too stand to benefit. Financially healthy distribution companies will be better placed to provide optimal service across all parameters. Ultimately, it is the tax-paying consumers who are subsidising the discoms. Any decrease in the subsidy bill eases the pressure on tax-payers.

The single most important reform in power distribution is the introduction of cost-linked tariff growth. If that is done, then power utilities will be able to meet generation and transmission costs as well as address the vagaries of the fuel market, currently the bane of the generating units. Politicians see red at the prospect of tariff increases because they fear these would antagonise their support base. Hence they feel obliged to help the electorate by stonewalling tariff increase. Instead, they could find smarter means to provide subsidy to the under-privileged than keep tariffs low for all sections of society.

Equally important for distribution companies and their principals (in most cases the governments at the state level) is the need to look within and fix the distribution system. The problem really is rampant distribution losses. The equipment is old and inefficient and the commercial issues include power theft, shoddy metering, faulty billing and poor collection.

The challenge for the discoms here is to have the will and the wherewithal to stem the rot. Private players always do much better than publicly-owned utilities on this score. A way out has been found by many state governments by going in for Private-Public Partnerships. Privatisation of  distribution, where the state government holds a stake in the new entity, has had mixed results. Odisha was a pioneer in this area, but the results have not been encouraging so far. The report card is much better in Delhi.

Another model for private sector participation is the distribution franchisee route (outsourcing). Here ownership remains with the government, but certain aspects of distribution, particularly commercial aspects (like metering, billing and collection) in specific areas are handed over to a franchisee. At least two states are experimenting with this model: Maharashtra (Bhiwandi, Nagpur, Aurangabad) and Uttar Pradesh (Agra, Kanpur). The results are positive so far and this may be an unintrusive and politically acceptable route to increased private sector participation in an area where the government has singularly failed.

Load segregation between agriculture and non-agriculture connections in rural areas can produce dramatic results in distribution. This is implemented through feeder separation and if implemented efficiently, results in a win-win for both categories of consumers. States like Gujarat, Haryana and Rajasthan have moved in this direction. Encouraging results have come in from Gujarat.

Industrial consumers, can profit from the greater spread of the open access systems, whereby they are free to choose the power supplier by comparing tariffs and service delivery standards. Similar considerations weigh in with consumers in Mumbai, where they can choose their distribution utility.

Two other initiatives that can prove beneficial to the distribution sector is Demand Side Management (DSM) and decentralised generation & distribution (DG&D). DSM can be implemented through the use of more efficient technologies, adoption of energy conservation measures and consumer education. DG&D initiatives are really off-grid solutions, where the intent is to obviate the expense incurred in providing grid connectivity to remote or inaccessible geographical regions.

What is required is the necessary political will and a sense of extreme urgency in policy makers and policy implementers. The good news is that the “leaks in the bucket” are such today that they will soon become unmanageable, forcing the hand of the reluctant actors. Then, the lights will come on again.

Photo: Peter Kaminski


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