Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Structural reforms for India’s power sector

Greater power generation will not help unless distribution issues are sorted

Over the last one year, India has made impressive progress in adding to the size of its overall power generation capacity. Last month, power minister Piyush Goyalflaunted the achievements of his ministry citing an 8.4% increase in power generation in the last year. But recent news of India’s average plant load factor (PLF) dropping to a 15-year low of 65.1% should worry the government. More importantly, it ought to push officials in the policymaking circle towards undertaking long-pending structural reforms in the sector.

By expediting, although not through radical reforms, the clearance of supply-side bottlenecks, power generation is one front on which the government has indeed done well. The assurance of coal linkages in particular has brought life back to power generation units that were idle without fuel. Moreover, as mentioned earlier, additional facilities have been added to the nation’s total power capacity over the last one year. Given the increasing energy demands of the nation, this could not have come at a better time.

The same, however, cannot be said of the scant attention that the government has directed towards distribution channels. A paradoxical situation where state electricity boards (SEBs) lack the means to buy power from power generation units, leading to surplus power in the hands of power generators and a record low PLF, sums up the poor state of power distribution. In short, the inability of successive governments to implement crucial pricing reforms has remained the perennial Achilles’ heel of the Indian power sector.

For long, SEBs have been tasked with the role of procurement of power from power generators, and its distribution to consumers. Being under the control of state governments, they have served as tools of populism year after year. While free power to farmers has been the one example often in the limelight, the beneficiaries of subsidized power are a far larger group distributed across interest groups. Power theft is another major factor adding to the huge losses incurred by SEBs.

The result has been balance sheets severely dented by debt as SEBs have borrowed heavily to compensate for the lack of revenues from consumers. The total debt burden of SEBs has continued to increase at a rapid pace over the years, with several studies pointing out that the debt burden could even pose a systemic threat to the banking sector. The problem can be attributed to the fact that the can of pricing reform has been kicked down the road continuously owing to populist pressures.

The ad hoc solutions to the piling debt burden on SEBs have been periodic bailouts of SEBs sponsored, to different degrees, by both the central and the state governments. These include a plan costing 35,000 crore in 2001, and another bailout costing a much higher bill of 1.9 trillion in 2012. The present government obviously has the choice to opt for a similar bailout that provides more temporary breathing space to SEBs. It would also ensure that the power sector continues to be mired in debt and production inefficiencies.

The other way out is to open power distribution to private capital and free market competition. This can only happen through pricing reforms that allow distribution companies the freedom to charge market prices. The business of bailing out SEBs is not only a cumbersome one, but one that—by allowing inefficient public firms to remain on life support forever—hinders progress towards enacting essential structural reforms. These can be overcome only by completely de-socializing the power distribution sector.

Clearly, given the country’s tryst with shortages and even total blackouts, power distribution reforms cannot come a moment sooner. The exclusive focus on increasing power generation capacity though will not benefit consumers at the end of the value chain unless distribution is sorted out. Overcoming this barrier will require taking radical steps which go against the grain of populism that has dominated power policy till date. Whether the government at the centre will take such steps remains to be seen.

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