Govt must reform power sector on Gujarat model
India's power sector has over Rs 5 lakh crore in outstanding debt, amounting to roughly 4.5 per cent of GDP. It has nearly Rs 3 lakh crore in accumulated losses and it racks up Rs 60,000 crore more in losses every year. There are multiple stalled projects. Roughly one-third of India's official power capacity is sick.
A collapse here could cascade into a financial crisis apart from completely stalling growth. Many things have been tried in attempts to turn the sector around. There has been new legislation. States have unbundled utilities to identify weak elements in generation - transmission-distribution chains. Electricity regulatory commissions have been set up in states and at the Centre to set independent tariffs. Privatisation and franchising have both been tried.
The RBI has brokered tripartite deals between central utilities and states to try and ensure that the latter pay the former. Massive bailouts have been organised for state-run utilities. Incentive schemes like the APDRP (Accelerated Power Development and Reforms Programme) and the Restructured APDRP have been introduced.
The losses have just kept mounting. To add to the sector's issues, coal is permanently in short supply. The monopoly coal producer, Coal India Ltd (CIL), has not been able to meet demand. To do CIL justice, the Indian Railways also finds it difficult to deliver coal in the required quantities because rail links are clogged. CIL itself has receivables of over Rs 8,000 crore because its customers are in dire straits financially.
At the moment, most thermal generation plants have less than a week's supply of coal in stock. The largest part of India's power generation capacity is thermal and most of the thermal part is coal. Imported coal fluctuates in price and is vulnerable to external policy action. Indonesia, for example, has imposed export duties.
For a while, it was hoped domestic gas would significantly change the energy mix. In particular, Reliance Industries' KG-D6 was supposed to help make India nearly self-sufficient in natural gas. Large commitments were made in gas-based thermal capacity based upon such projections. Unfortunately, KG-D6 has run into problems. Imports of LNG are much more expensive and difficult to transport. It is very likely the price of domestic gas will soon be linked to international rates and raised. So gas-based capacity is also under a cloud.
What can be done? Most of the affected institutions and agencies are government-owned, which means it is clearly a question of political will. Public sector banks have the largest share of exposure, with specialised PSUs like PFC, REC, and IDFC also carrying exposure. Most of the loss-making institutions are owned by state governments.
Unit tariffs are on average 20-30 per cent less than the cost of generation. In addition, there is rampant theft. For political reasons, many consumers are allowed to use electricity without paying. States are reluctant to implement open access for fear that high-end customers will migrate. They are afraid to raise tariffs to reasonable levels or to crack down on theft for fear of a political backlash. The sector also has a classic case of moral hazard -- everybody assumes that the Centre will organise another bailout every so often.
The Centre would have to take action on several fronts simultaneously. It would have to reform CIL and, more broadly, reform the mining industry to solve supply issues. It would have to free up electricity tariffs and force open access in order to get more efficient private sector players to invest. It would have to force states to clean up their act. It would have to find ways to restart stalled projects.
None of this will be politically easy, which is why the situation has been allowed to fester for nearly 15 years. But the matter has become increasingly urgent. This government was voted in with a big mandate and the first majority in 30 years, in the hopes of reform. One of Mr Modi's major bragging points on the campiagn trail was that he had turned the power sector around in Gujarat. He must replicate that turnaround on a national scale to justify his dynamic reputation.
The sector has dozens of listed players and it needs massive investments. There is a big demand-supply gap in that there would be takers for more electricity everywhere. The investment would be forthcoming automatically if the finances became more stable.
A collapse here could cascade into a financial crisis apart from completely stalling growth. Many things have been tried in attempts to turn the sector around. There has been new legislation. States have unbundled utilities to identify weak elements in generation - transmission-distribution chains. Electricity regulatory commissions have been set up in states and at the Centre to set independent tariffs. Privatisation and franchising have both been tried.
The RBI has brokered tripartite deals between central utilities and states to try and ensure that the latter pay the former. Massive bailouts have been organised for state-run utilities. Incentive schemes like the APDRP (Accelerated Power Development and Reforms Programme) and the Restructured APDRP have been introduced.
The losses have just kept mounting. To add to the sector's issues, coal is permanently in short supply. The monopoly coal producer, Coal India Ltd (CIL), has not been able to meet demand. To do CIL justice, the Indian Railways also finds it difficult to deliver coal in the required quantities because rail links are clogged. CIL itself has receivables of over Rs 8,000 crore because its customers are in dire straits financially.
At the moment, most thermal generation plants have less than a week's supply of coal in stock. The largest part of India's power generation capacity is thermal and most of the thermal part is coal. Imported coal fluctuates in price and is vulnerable to external policy action. Indonesia, for example, has imposed export duties.
For a while, it was hoped domestic gas would significantly change the energy mix. In particular, Reliance Industries' KG-D6 was supposed to help make India nearly self-sufficient in natural gas. Large commitments were made in gas-based thermal capacity based upon such projections. Unfortunately, KG-D6 has run into problems. Imports of LNG are much more expensive and difficult to transport. It is very likely the price of domestic gas will soon be linked to international rates and raised. So gas-based capacity is also under a cloud.
What can be done? Most of the affected institutions and agencies are government-owned, which means it is clearly a question of political will. Public sector banks have the largest share of exposure, with specialised PSUs like PFC, REC, and IDFC also carrying exposure. Most of the loss-making institutions are owned by state governments.
Unit tariffs are on average 20-30 per cent less than the cost of generation. In addition, there is rampant theft. For political reasons, many consumers are allowed to use electricity without paying. States are reluctant to implement open access for fear that high-end customers will migrate. They are afraid to raise tariffs to reasonable levels or to crack down on theft for fear of a political backlash. The sector also has a classic case of moral hazard -- everybody assumes that the Centre will organise another bailout every so often.
The Centre would have to take action on several fronts simultaneously. It would have to reform CIL and, more broadly, reform the mining industry to solve supply issues. It would have to free up electricity tariffs and force open access in order to get more efficient private sector players to invest. It would have to force states to clean up their act. It would have to find ways to restart stalled projects.
None of this will be politically easy, which is why the situation has been allowed to fester for nearly 15 years. But the matter has become increasingly urgent. This government was voted in with a big mandate and the first majority in 30 years, in the hopes of reform. One of Mr Modi's major bragging points on the campiagn trail was that he had turned the power sector around in Gujarat. He must replicate that turnaround on a national scale to justify his dynamic reputation.
The sector has dozens of listed players and it needs massive investments. There is a big demand-supply gap in that there would be takers for more electricity everywhere. The investment would be forthcoming automatically if the finances became more stable.
