Powering up discoms

Reforms at the power utility level will lead the way for its sustainable growth in 2014
As the Indian economy gears up for a more optimistic 2014, its sustainable development will warrant growth from all sectors, particularly the power sector, which will play an instrumental part in catalysing India’s growth. Moreover, any rationalisation and modernisation of the policy regime in the power sector will set an example for other infrastructure sectors.
The clear lesson from the recent Indian experience is that the most critical challenge faced by the power sector is the dismal health of discoms, which has led to inadequate investments in the sector. This has, in turn, led to serious power shortfall, as well as poor quality of supply, which are both very serious constraining factors on overall economic output.
The combined financial losses of all the power distribution companies stand at a staggering ` 1,200 billion (`1,20,000 crore or nearly 1.5 per cent of the country’s GDP). These losses were due to the rising gap between average cost of supply and the average realisation; going by which distribution companies lose ` 2 for every unit of electricity sold by them.
Timely tariff hikes in the power sector are perhaps its most politically sensitive issue. Many states have not revised tariffs in the last 5-6 years and some for over a decade. With average cost of supply growing at over 7 per cent CAGR in recent years, the situation has become untenable.
Today, distribution entities across the country, whether in public or private sector, urgently require tariff hikes to the tune of 50-60 per cent to meet their operating costs and serve the economy with reliable supply of power. An increase of this magnitude will seem staggering to the political leadership and the consumer, but the stark fact is that this hike would still leave unattended the subject of past accumulated losses due to irrationally low tariffs.
It’s important to note some positive signs initiated by the government and policy makers in this regard. Calendar year 2012 witnessed tariff hikes in 30 Indian states and UTs, averaging between 10 per cent and 37 per cent. This is for the first time that almost all states have issued tariff orders.
Of course, rationalisation of power tariffs has to happen on a perennial basis. It’s critical to understand that purchase costs for power typically comprise up to 80 per cent of the total cost of the distribution function. As the ‘truing-up’ process, involving a fix on the gap between power purchase costs and the revenues from sales, can take a few years for reasonable estimation, it’s important to institute and implement mechanisms that enable immediate pass through of any variation in power costs. This will avoid build-up of so called ‘regulatory assets’.
There are other bedevilling issues too. One of these is the need for reduction in cross-subsidies between diverse consumers. One testimony to the twisted deal in such arrangements is provided by the fact that 24 per cent of entire electricity supplied flows to the agricultural sector but yields less than 6 per cent of the total revenues. While it is laudable that the government is investing huge amounts in electrifying villages under the RGGVY program, but the question is: are financially distressed distribution utilities in a position to supply power to these villages at zero net realisation that is after accounting for cash expenses.
Very often, we find that cash constrained SEBs prefer selling power outside the state to paying customers rather than supply to non-paying farmers. With the average cost of supply at over ` 5.0 per unit every 10 per cent increase in agricultural supply will add ` 7,500 crore to the deficit. Decision makers and people in governance fail to realise that more than subsidy; it is round the clock and quality power supply that holds the potential and promise to completely transform life in rural India. A beginning has been made in Tamil Nadu, which has increased tariff on electricity supplied to its agricultural consumers by 589 per cent to ` 1.75 per unit.
Investments in capacity building and modernisation are also key requisites for improving the health of the sector. Delhi has proven to be a shining example in this regard, where only 5-6 years ago, a typical resident was exasperated by 4 to 5 hours of daily power cut. This has now reduced to a mere 4 to 5 hours of interruptions in the entire year. This dramatic improvement in quality and reliability of supply has been possible due to large investments in network and technology (` 6,500 crore) along with streamlining of systems and processes. A true testimony of the fact, that reliability levels in Delhi are now comparable to international benchmarks. Yet all the improvements and the entire reform of the Delhi electricity supply market are under risk for want of urgent tariff rationalisation.
As serious bottlenecks have emerged, it’s important to identify and implement solution as soon as possible. The debt restructuring package for state utilities is one of these positive developments, yet only for the short term. Its long-term benefits will actually depend on the discoms’ ability to lower AT&C losses, hike tariffs and limit operational costs.
To sum up, reforms at the power utility level are vital for the overhaul of the Indian power sector and will lead the way for its sustainable growth in 2014. It is a welcome sign that government has recently shown some resolve in this direction.
Disclaimer: The views expressed are of the author and may not reflect the views of Reliance Infrastructure.

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