State Of The Economy 2012

Dark days ahead

The power sector’s woes, far from improving, are worsening

Sanjit Kundu

When Shivani Sharma moved back to India after a decade in the US a few years ago, the decision about where to stay was, shall we say, a charged one. Sharma was chucking up her career as an investment banker to try her hand at organic farming, but rather than moving closer to her family in Haryana, she opted for a plot in Andhra Pradesh’s Anantapur district. Her reason? Free power. “I had done my homework. Andhra Pradesh had a corporate state electricity board (SEB); it had begun distribution reforms and it had independent power producers. It didn’t seem likely that the state would have to go back on its free power promise, unlike what had happened in other states,” Sharma says. Now, she’s not so sure.

And with good reason. If there is one state that exemplifies the convoluted twists that complicate the Indian power story, it would be Andhra Pradesh. The state is an oddball mix of potential oversupply and deliberate under-utilisation, of surplus power and massive load shedding. Not only does Andhra Pradesh already have operational Independent Power Producers (IPPs)  producing over 3,000 MW of power, there are several more in the pipeline.  And the corporatised SEB is only one of many pluses: AP also has a commendable blend of thermal and hydel power, a very large consumer base made up of agricultural, domestic and industrial consumers, and a regulator that’s been active for over a decade. Bravo, you would think, it has it all under control. 

Erm, not quite. Not only are power distribution companies (discoms) in the state planning to buy less power from the IPPs in FY13, but they are also planning a significant cut in their purchases from APGenco, the state power generation utility (See: Seeking alternatives). Meanwhile, because Andhra’s power requirement is expected to increase by over 7,000 million units, the discoms are proposing to meet a third of their power needs from ‘other sources’, a significant hike over the 19% they had proposed for the current financial year. Not surprisingly, then, there’s been a shift in the total expenditure towards power purchases as well (which is likely to go up by ₹6,000 crore), with the share of ‘others’ increasing significantly. 

Seeking alternatives

Andhra Pradesh’s discoms plan to meet their power needs from ‘other’ sources, reducing their purchases from state utilities

It’s still not clear why Andhra Pradesh’s discoms are taking such a step. Are they getting cheaper rates in the short-term market (or through the trading route), do they expect some of their own units to be out of action in FY13-14? The cut in IPP purchases could be on account of a shortage in gas supply from Reliance’s KG-D6 basin, but that’s only part of the issue. More worrying are the implications of such a move. If Andhra Pradesh’s discoms don’t have for whatever reason  enough power to meet the state’s needs, Andhra-ites can look forward to a sweltering summer as power cuts increase with the rising mercury. 

Already, two to three hours of load shedding a day is common across the state, including in capital city, Hyderabad. Aptransco managing director Ajay Jain admits there’s no other option, given the current supply-demand mismatch. Neighbouring Tamil Nadu, reeling under an acute power crisis, has also imposed severe strict restrictions on industrial and commercial establishments, plus daily load shedding in Chennai. What’s happening in Andhra Pradesh, till recently the model answer to India’s spiralling power problems, is a sign of things to come. There’s no proof yet that other states will also go through this kind of a scenario, but it does seem likely. 

Watt’s the problem?

In the past few months, the truly grim situation of the power sector has become more starkly evident. An old problem — the financial viability of discoms — continues to be troublesome, and it is estimated that accumulated loss will cross ₹2 lakh crore by 2016, which is more than double the current loss of ₹82,000 crore. Meanwhile, other problems have cropped up on account of fuel shortages. There’s a paucity of major fuels such as coal, with domestic coal supplier Coal India (CIL) not in a position to even guarantee adequate fuel supply. Imports of coal have also hit a major hurdle as countries like Indonesia and Australia have put riders on exports, making it expensive to use imported coal. The fuel shortage has already claimed casualties — Anil Ambani’s 4,000 MW Krishnapatnam UMPP (ultra mega power project) in Andhra Pradesh has been put on hold and the Mundra UMPP of the Tatas, which is to go online this year, has already started scouting for ways to blend imported and domestic coal to run the project.

But blending is not really a financially prudent option — at least, not at current tariffs. Using imported coal at prices set by Indonesia would eat into the economics of the project, which the Tatas won in 2007 with a bid of ₹2.26 per unit. For blending to be viable, the Mundra UMPP tariff would need to be around ₹3 per unit. Tata Power managing director Anil Sardana has already said on record that the project runs the risk of becoming a non-performing asset if the government does not revise the tariff.

In January this year, at a specially convened meeting, CEOs of power companies sought to impress upon the prime minister that the Indian government should ask the Indonesian government to nullify its decision of benchmarking coal exports to global rates. But India is only one of many countries that imports from the country and it’s unlikely that Indonesia will roll back the policy.

Pramod Deo, CERCStill, the meeting with the prime minister had at least one positive fallout: in a follow-up PMO meeting in February, the government directed CIL to ensure guaranteed supply of coal to power projects and to sign 20-year fuel supply agreements with projects that have been commissioned or will be by March of this year. It’s a step in the right direction but not enough to make a significant dent in the woes of the sector. “This move on CIL will take another two years to show effect on the ground,” says Pramod Deo, chairman of the Central Electricity Regulatory Commission (CERC).

Under the PMO order, CIL will have to meet at least 80% of the plants’ requirements, with a penalty imposed for shortfalls; if it supplies more than 90% of the requirement, it is entitled to an incentive. A SBICaps report warns that it is unlikely CIL will be able to ramp-up its production for meeting this steep demand directive by the PMO. Which means it will have to turn to imports to make good any shortfall. So the problem comes full circle. 

Distribution dilemma

Until four years back, the power sector’s new investor-friendly policies on merchant power and UMPPs presented a great opportunity for investments in the sector. Companies of the likes of India Bulls and the Adani group rushed to set up projects. In a power-starved economic scenario, the possibility of combining merchant power (open market sales but at a higher price) as well as power purchase agreements (PPAs) that meant assured sales albeit at a lower price made power the flavour of the season for investors seeking new investment opportunities. But enough attention hadn’t been paid to the financial viability of the retail sector. This, coupled with hurdles in environmental clearances, inflation and the depreciating rupee, has made the situation only grimmer. Indeed, even state power generation utilities aren’t being spared.

A large part of the blame can be put on the government, which awards subsidised power to the needy (especially those in the agricultural sector), but doesn’t always pay its subsidy dues to the retail companies. It doesn’t help that power supply to agriculture is often unmetered, making it difficult to track consumption and ascertain the subsidy component. Typically, the subsidy in the profit and loss (P&L) accounts of discoms is shown as income (though not received), while the amount outstanding is shown in the balance sheet. In other words, discoms have a major cash flow problem. In one southern state, the government owes more than ₹9,000 crore to its distribution companies.

According to the VK Shunglu Committee, set up in 2010 to understand the financial problems of state utilities and suggest corrective measures, insufficiency of tariffs is not the only reason for the mounting financial losses of the Indian power sector. The report says distribution losses “accepted and/ or camouflaged by the distribution utilities is an equally important reason for the financial misfortunes of distribution utilities.” It goes on to say that the results of the central government-sponsored accelerated power development and reform programme (APDRP) have only been “modest”.

Which explains why the committee expects the power sector’s losses to continue over the next few years. According to projections, the average realisation from retail consumers will remain unchanged at ₹4.21 (See: Losing it), which means a shortfall of 50 to 25 paisa in recovery. But this is with the subsidy included. Take that away and discoms will still be losing 75 paisa per unit of electricity sold, even in 2016.  

Taxpayer’s burden 

What it boils down to, then, is that power projects at some stage will be crippled because they are selling to  retail companies that can’t even recover their costs. Now, with rising fuel prices, the situation will become only tougher. P Ramesh, managing director of the energy division at Feedback Infrastructure, points out that the situation in Andhra Pradesh, especially, will worsen as, “the KG Basin gas production is set to drop further and, so, more merchant power will need to be purchased.” And if the incumbent empowered group of ministers raises the price of gas, the cost of buying power will only go up further. All of which only adds weight to the argument for raising tariffs.

Losing it

The power sector will continue to reel under losses, despite
declining power costs

As the pressure to increase tariffs rises, the real burden is expected to fall on domestic consumers. The logic is very simple: the industry is already overburdened and the tariff principles require states to gradually reduce cross subsidy. The agriculture votebank is just too precious to be asked to pay retail rates. By elimination, then, it is the relatively well-off domestic consumer (the one who has an air-conditioner at home, for instance) who will have to foot the increased bill. That’s a line of argument CERC’s Deo agrees with completely. But he also says that the Electricity Act empowers the state regulator to ensure no set of consumers is unduly burdened on account of other consumers. Regulators can ensure that state governments pay up subsidies in case they want to protect a set of consumers — as was done in Maharashtra in 2003-04.

However, the maturity seen in the power generation sector has not yet percolated into electricity retail, which remains directly or indirectly under strict governmentcontrol. Indeed, the privatisation of Delhi’s power supply remains the exception that proves the rule. Of course, Delhi was a unique case — not only is it the capital and, therefore, the subject of extra attention, it also has a very low percentage of consumers who use power for agricultural purposes, which makes it easier to manage. The Centre has been pushing for a franchisee model of power distribution, under which a distribution zone is auctioned with the state retaining ownership, but it is still to show results. 

So, where do power distribution reforms go from here? The government doesn’t seem too sure. Planning Commission member BK Chaturvedi admits that ushering in reforms for the power sector has proved to be more complicated than, say, reforms for the telecom sector. A high level committee under the Planning Commission declared late last year that “neither privatisation nor the franchisee model would deliver the desired outcomes. A well formulated PPP model could be the way forward.” 

Irrespective of the model, one thing is certain: if money is not paid for what is consumed, reforms won’t work, tariffs will keep rising and power cuts will keep happening. It’s unclear what route Andhra Pradesh will take — higher tariffs or longer power cuts. As a farmer, Sharma should be shielded from receiving electricity bills. But she is taking no chances with power cuts: she is buying a diesel genset.


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