Friday, June 5, 2015

More on India's power sector woes

Indian Express has this to say about the actual power generation,
Of the country's total installed generation capacity of 2,68,603 MW, the peak demand met on May 23 was less than half at just 1,34,892 MW... at last count, 57 base-load thermal units across India's northern and western heartland were faced with 'reserve shut-down', a technical term for a unit shut down due to lack of demand. Grid managers point to this being indicative of tepid industrial load compensating for a surge in mid-summer domestic demand. 
And Economic Times has this,
2014-15 recorded the lowest plant load factor in over 15 years with the country's power capacities operating at a mere 65%... There are no takers for all the generation capacity that is in place. There is demand but they don't have the money to pay for the power due to the health of the discoms (state distribution companies)... discoms across all states had incurred accumulated losses of Rs 2.51 lakh crore in 2012-13... The average gap between power generation costs and tariffs charged by state discoms is now 82 paise and makes generation unviable... no new power generation project has been announced in the past two years and the low PLFs as well as lack of clarity on bidding parameters for new ultra mega power projects has made investments unattractive for now.
Reflecting, the low actual off-take, the CERC data on traded power price shows a continuously declining trend since 2009. 
All these point to chronic distribution side weaknesses. Hobbled with massive debts and unable to even recover the full cost of service, distribution companies prefer the easy way out - load shedding or power cuts. The low capacity utilization is a reflection of this suppressed demand. Its impact on industries is debilitating. 

Distribution sector reforms bounce against two very formidable challenges - political economy and state capability. Tariff increases, to capture atleast cost-recovery, will require political commitment across states, which may not be forthcoming. After a small blip the cost-revenue gap has been rising. Distribution loss reduction efforts appears to have plateaued off in recent years, with discoms finding it difficult to bring losses down below 20%. Only a handful of discoms have the administrative capability to carry out effective distribution feeder-wise energy audits over a long-enough period with sustained intensity that is required to bring down losses to single-digit levels. 

There is more pain likely from the recent coal auctions for power projects. Promoters who have low-balled their bids, even quoting royalties to the government, in their eagerness to access fuel, have no option but to smuggle the fuel-charges into the fixed capacity charges. With the government firm on not allowing this, a face-off looks inevitable. Atleast some of the contracts are certain to unravel and others renegotiated. And this will all take up more time. 

Unless the distribution side issues get addressed, it is only a matter of time before the vast majority of the stalled generation side investments that have gotten off the ground due to auctions and other recent measures get stalled again. In any case, given these demand trends, new investments will not be forthcoming as lenders and investors would be wary of putting their money in a sector where the demand side constraints appear insurmountable. The lack of new investments in the past two years will start to bite four years hence, severely constraining economic growth. 

This is also a reflection of the difficult reform choices facing governments. Generation-side reforms, which are mostly decisional, are not where the constraints bind. The transactional challenges at the distribution side, involving managing the political economy and improving state capability, are where the real action is.

Solutions like selective feeder franchising skirts around the state capability problem but not the political economy one. However, it is possible that for certain categories of consumers, the political economy problem too can get addressed with a private provider. For example, industrial consumers, who currently suffer the brunt of erratic supply, are most likely to be willing to pay a higher tariff in exchange for reliability. Similarly, it may also be possible to get affluent consumers localized in certain pockets to agree for higher tariffs in return for reliability. The political economy as well as the credibility deficit with public distribution companies will come in the way of such a bargain by public entities.

The risk with this strategy is that it is likely to tip the system into another socially inefficient (albeit economically efficient) dual-market equilibrium, with reliable supply for certain (affluent) consumers serviced by private providers and erratic for other (poorer) consumers supplied by public discoms. But it is likely that the dynamics of competition set afoot by this would in turn force the discoms to become more efficient and also create the political environment for raising tariffs. But the transition can be disruptive and long-drawn. In the circumstances, the million-dollar question is whether the political establishment, across any Indian state, is willing to bite the bullet, and pursue this strategy, even if by stealth?

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