Can Uttar Pradesh emerge as a poster boy for India’s power sector reforms?
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The Bharatiya Janata Party’s victory in Uttar Pradesh, among other things, may accelerate power sector reforms in India.
The Yogi Adityanath-led government has signed an agreement to provide round-the-clock electricity in less than two years. That is a Herculean task for the state where eight-hour power cuts are a norm. But optimism is in the air.
Ground checks and interactions by IIFL Institutional Equities with state power distribution companies (discoms) show there is a “strong intent” to change the existing inefficient system. According to the broking firm, Uttar Pradesh is steering a turnaround of the electricity sector through change in working culture at the discoms, reduction in losses, costs and infrastructure improvements, with central government support.
Harshvardhan Dole, vice- president (research) at IIFL Institutional Equities, says the new state government is trying to effect the improvements through governance, a crucial change from previous regimes. The previous governments were unable to curtail rampant corruption in the electricity sector. This has raised inefficiencies crippling the power sector. In 2014-15, about 30% of the electricity sent out in the state was lost in transmission and billing (aggregate technical and commercial losses).
The new government is trying to address this through bringing about a cultural shift. It has given clear instructions to improve vigilance, eliminate power theft and clamp down on corruption. If successfully followed through and losses are cut, it can have a lasting impact on the functioning of discoms, says IIFL.
True, Uttar Pradesh faces immense challenges and the turnaround can be a long-drawn process. But as the broking firm points out, given the current state of the power sector, even incremental improvements can have notable implications not only for the state’s electricity sector but also for the country.
One impact will be on electricity demand. If Uttar Pradesh has to provide electricity round the clock, then demand from the state can rise by at least one-third from current levels by 2019, benefiting power producers.
JSW Energy Ltd, which has significant open capacities (but lacks long-term power purchase agreements) is pinning hopes on Uttar Pradesh to drive a demand revival. “This (UP’s round the clock electricity supply plan) should lead to a robust growth in demand, which has otherwise been subdued for the last two years,” JSW Energy said in its March quarter results statement.
Second, according to Elara Securities (India) Pvt. Ltd, grid augmentation and investments in infrastructure can create new business opportunities for power equipment firms like ABB India Ltd, Siemens Ltd, Transformers and Rectifiers (India) Ltd, KEC International Ltd, and others. The biggest impact may be felt by consumer durables and electrical products companies. Electricity availability and improvement in supplies can raise demand for products ranging from kitchen appliances to air conditioners.
The third and important implication is the impact it can have on larger policy and public perception. According to IIFL’s Dhole, if Uttar Pradesh manages to improve power supplies, keep costs low and the masses happy, then it can have a rub-off effect on other states, who may be forced to review their own workings. “Now this (round-the-clock electricity supply) is a very positive step and I am sure that UP cannot be the one-off state which does this and once UP has taken an initiative, the other states are bound to follow,” Sanjay Sagar, joint managing director and chief executive of JSW Energy, told analysts earlier this month.
Of course, many states have already signed up to the central government-sponsored reforms scheme and are pursuing them for some time now. But the scope for improvement is much higher in Uttar Pradesh. Given its size, precarious condition and central government support, the state can not only make material impact on its power sector, but also the Indian power sector. The only question is whether Uttar Pradesh will maintain the reform momentum.