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Ourview | Cross-subsidy needs to be cut

Ourview | Cross-subsidy needs to be cut
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First Published: Tue, Sep 06 2011. 10 49 PM IST

By Jayachandran/Mint
By Jayachandran/Mint
Updated: Tue, Sep 06 2011. 10 49 PM IST
The desire to escape the tyranny of the state’s clutches lurks deep inside the hearts of several Indians. This sentiment has swelled enough to overflow onto the streets—the recent Lokpal-Hazare agitations are a reflection of this. Corruption is the key rallying point—it hurts everyone.
Populism hurts equally as much. But then, as a rallying point, it is a divided house. There are some gainers. Hence, the reaction of losers is often that of flight. However, when populism entails cross-subsidization, it ends up hurting the gainers over time.
This is being witnessed in the power sector.
By Jayachandran/Mint
Commercial establishments and factories cross-subsidize farmers and domestic consumers. The pace of the reduction of cross-subsidy has retarded over the last few years owing to nil or negligible increase in tariffs. Industries have attempted to bring down their power bills by seeking alternative power producers. However, the law allows the state to charge such consumers a cross-subsidy fee on every unit bought from “outside”. This shuts the window of opportunity to access cheaper power.
While the fee was meant to offer a soft landing approach for states to eliminate cross-subsidy over a period of time, it has turned out to be a perfect excuse for stagnation.
But it appears to be not quite so perfect. The law does allow a way out of the fee-trap: Consumers can get together and set up a power plant that feeds their power needs. What makes this proposition attractive is that they don’t need to own more than 26% equity and don’t need to draw more than 51% plant capacity. This makes room for sponsors who are in the core business of power production to lead the venture. Further, 49% power can be sold in the marketplace at profitable rates.
Consumers in Maharashtra, Rajasthan and Tamil Nadu are now looking at this possibility.
To be sure, it might not prove to be the most efficient answer—electricity from a large-sized plant is cheaper, owing to economies of scale. In this model, the capacity cannot exceed twice the power purchased by the consumer group.
However, this is a serious wake-up call for the distribution utilities to reduce the cross-subsidy. And, this is a familiar lesson: Since the mid-1990s, several large factories have chosen to set up their own captive units owing to poor-quality, expensive power supply. As a result, captive power constitutes around 10% of total generation capacity in the country. Now, smaller consumers are getting together to do the same.
Will the government get to grips with lowering the cross-subsidy? Tell us at views@livemint.com
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First Published: Tue, Sep 06 2011. 10 49 PM IST
More Topics: Ourview | Subsidy | Farmer | Commodity | India |