Policymakers and politicians should wait a while before bending over backwards to build consensus on allowing higher foreign investments into sectors like multi-brand retail, aviation and insurance.
Two massive grid failures this week have made it clear that the economy can be brought to a halt when power fails. Higher FDI limits can do little to draw larger investments in a country that is still trying to provide electricity for all, not to mention power for factories and cold storages.
We need to build a consensus and show grit to reform the power sector, and do away with free power. It is unfair for politicians to blame it on consumers. There are many examples of how users are willing to pay for quality and reliable power.
Blaming it on vote banks will also not work. Consumers are willing to pay for quality, regular power. But in many cases, these payments do not reach utilities but line the pockets of local vested interests. Today, about 28% of power generated is lost in transmission and distribution; of this, about 18% is due to theft. Another Rs 80,000 crore is lost because tariffs have not been revised.
No sector can thrive with this sort of loss. The failure of the power grid, affecting 600 million people, is the biggest grid collapse in the world. Not surprising , given India’s large population, despite the fact that each Indian consumes a mere 700 kilowatt hours (Kwh) of power every year, compared to China’s 2,631 Kwh. About 35% of households in the country do not have access to electricity.
The power sector was among the first to be opened for private investment in the 1990s. But it put the cart before the horse, emphasising generation instead of transmission and distribution. This is still true after two decades . A grid failure is neither unique nor unheard of. But what is peculiar in India is its inability to check it as it has more to do with political decisions than technical snags.
The grid failure has brought the focus back to the important point of increasing demand and supply lags. The demand-supply mismatch comes after the power sector recorded impressive numbers in 2011-12 adding almost 17,000 megawatts (mw) of new capacity in one year. But just adding capacity will not help.
An estimated 40,000 mw of installed capacity is lying idle. While about 10,000 mw is for technical reasons or maintenance, a regular feature in any system, 9,000 mw of gas-fired stations are idle and around 21,000 mw of coalfired stations are operating at sub-optimal levels. India is unable to produce enough coal domestically and has done little to import it as the government still dithers on tariff revisions.
Higher costs for fuel, as with imported gas or coal, have to be added to the tariff and consumers have to make a choice to either pay higher bills or stay without power. The generation story too is now at risk, because there is no new source of fuel. Power companies have been disallowed to build future gasbased power capacity.
Work on new coal-based capacities remains doubtful. At least two of the imported coal based ultra-mega power projects , India’s feeble answer to China, are stuck because there is no clarity on how the cost of costly imported fuels can be adjusted.
Tied to a fixed tariff, the basis for winning a project, these power companies wait as the government decides how to deal with escalated costs. Imported coal is now at least 45% more expensive than what it was when these projects were bid for. While one of the companies has gone for arbitration, another is awaiting the decision from the appellate authority.
State utilities, various versions of erstwhile state electricity boards, which had become a bad word, are bankrupt and have huge debts on their book. At last count, the dues of state utilities were over Rs 1,00,000 crore. This could be partially waived and part restructured to get state power companies back to the black. But such financial adjustments are cosmetic and do little to improve the liquidity or cash availability for state power companies.
Cashstrapped power companies, normally the transmission companies that buy power from the grid and supply it to the distribution companies, have little choice but to under-book when it comes to projecting demands at the load dispatch centers.
The reason is simple. Despite knowing of rising demand , the state transcos prefer to ask for a lower quantity of power and overdraw instead from the grid, because they are allowed to defer payments for overdrawn power. While a state utility has to pay upfront for any power demand placed, it gets some time before the bill for excess drawn power shows up.
On the flipside, states have to pay a penalty in case it fails to draw the power it has booked. A tariff structure that existed unchanged for years in many states until recently, coupled with no subsidies provided by state governments , has driven most of these companies into bankruptcy .
The Electricity Act allowed subsidised tariffs, provided the loss was given to the utilities from state coffers. Politicians forced tariffs lower without providing subsidies , while regulators turned a blind eye as they continue to be largely political appointees who need to keep their bosses happy.
Finally, it is time for distribution companies to adopt smart grids. Proof of this comes from one of India’s oldest power utilities, CESC in Kolkata. CESC detected trouble early from its sensors. The company decided to cut itself out of a collapsing grid. Afterwards , it managed to keep power flowing, while lights went off in 20 other states.
