Recent bids on power exchanges indicate electricity tariffs are at their lowest ever. In July, the Indian Energy Exchange saw a total 6.74 billion units put on sale, compared with purchases of 3.98 billion units at an average tariff of Rs.2.16 per unit.
Theoretically, this suggests India has finally become a “power surplus” nation, exactly 137 years after the first demonstration of electric light was given in Kolkata by P.W. Fleury & Co.
Yet, the stark reality is that many states are witnessing power cuts of 4-5 hours every day. In Uttar Pradesh, planned load shedding is as much as 11-12 hours in rural areas and 5-6 hours in urban, according to the Uttar Pradesh Power Corp. Ltd website.
What’s causing this anomaly? There are four reasons. The first is that while capacity addition has peaked, industrial and commercial offtake remains low. In the three years ended fiscal 2015, capacity addition was 74.72 gigawatts, the fastest in a decade. However, growth in industrial and commercial consumption—the highest-paying segment under the telescopic tariff structure followed—was only around 4.57%, as per a Central Electricity Authority (CEA) report, Growth of Electricity Sector in India From 1947 to 2015. Only the domestic consumer segment, which puts additional cost burden on the distribution utilities given lower tariffs, saw decent demand growth of 8.9%, as per CEA estimates. In some states such as Maharashtra, industrial and commercial consumption declined 0.73% while domestic consumption increased 7.81% in the three years.
The second is that cost of supply has increased, as have aggregate technical and commercial (AT&C) losses. Domestic consumers do not have the capacity to absorb all the incremental power produced, or pay higher cost. Distribution companies, or discoms, typically incur higher cost on supplies to this segment and earn lower revenues. Small wonder they are resorting to load shedding.
The practice of power cuts is more extensive in rural areas, where the cost of supply is significantly higher, demand density lower and AT&C losses higher than in urban areas.
There is also a limit to how much industrial and commercial consumers can be exploited to recover losses from electricity supplies to homes, or the so-called cross-subsidization. To boot, higher industrial and commercial tariffs are already impacting the competitiveness of domestic firms.
Third, local distribution continues to be a problem for want of infrastructure. In urban centres such as Noida, Faridabad and Gurgaon, inadequate distribution capacity has meant power cuts being extended beyond planned load shedding. Taking cognizance of this, the government has sharpened its focus on fund allocation under the Integrated Power Development Scheme to strengthen networks.
And fourth is the financial health of discoms and the challenges to their revival. Intermittent AT&C losses are a major reason—apart from the humongous debt burden—why discoms are in the doghouse. At the national level, AT&C losses are already high at 22.7%—meaning nearly a quarter of the electricity produced in India is wasted. That national average has been driven up because losses are significantly higher in five states: 46% in Bihar, 39% in Odisha, 32% in West Bengal, 28% in Madhya Pradesh and 27% in Rajasthan, according to a Power Finance Corporation report on the performance of state utilities.
While technical losses can largely be attributed to infrastructural issues and consumption mix at different voltage levels, the bigger problem is poor billing and collection efficiency. Additionally, disbursement of tariff subsidy by states is inadequate and irregular.
To be sure, the government has taken a number of initiatives, including initiating a road map to achieve reliable 24x7 power for all in every state, and improving the financials of discoms through the Ujwal Discom Assurance Yojana (UDAY).
UDAY has immense potential to cure discoms through initiatives proposed under four broad categories: improvement of operational efficiencies; reduction of cost of power; reduction in interest cost; and, enforcement of financial discipline through alignment with state finances. However, success hinges on relentless implementation by states.
In a nutshell, the ills plaguing the sector can be attributed to poor financials of discoms, inadequate investment in transmission and distribution infrastructure and lack of cost recovery from certain consumers.
Also such simple deductions of “power surplus” divert attention from the stark reality that there are more than 55 million households waiting to be plugged in. That latent demand is not part of any “surplus” calculus.
That’s why when measuring power sector growth—and planning to scale up for the future—using just the yardstick of “adequate availability of electricity” will be inadequate. A truer, holistic gauge would be 24x7 reliable power supply to all at an affordable price.
To achieve that objective, states will have to show strong resolve to reduce AT&C losses, invest in infrastructure development, ensure efficient commercial operation of discoms, make timely tariff revisions, and reduce the cross-subsidization that’s impacting the competitiveness of the industry and services sectors.
The time is also right, perhaps, to provide direct, targeted subsidies to electricity consumers who can’t pay much—if at all. The learnings from the LPG direct subsidy transfer project would be very handy here.
Vivek Sharma is director, energy and natural resources, CRISIL infrastructure advisory.
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