Back Revamping power management —Key to attracting foreign investment
S. Padmanabhan
| The process of buying electricity needs to be shifted out of the States. A corporate body with this mandate should be set up, suitably empowered by the Centre. All State, Central and private sector generators should sell the power they generate to this body, which will then distribute it to the States. Such orderly functioning will lead to the growth of generation facilities, and draw foreign investment back into the sector, says S. Padmanabhan. |
The power sector and the approach of the States must be such that Dabhol kind of debacles do not happen.
This is to meet the demand for electricity over the next eight to ten years, during which the economy is poised to grow at 8-10 per cent compounded per annum.
Capacity addition (MW) in the last three years has been, overall and (in the Central sector):
Thus, capacity in the State sector has been steadily decreasing in the last three years.
There have been major slippages in meeting capacity addition targets during the Eighth and Ninth Five-Year Plans. During the Tenth Plan too, only about half of the target of 40,245 MW is likely to be achieved. The Government has directed the Central power public sector units to build 43 per cent of the target in this period (against the 23 per cent envisaged) due to lack of performance by the States.
Private investors have been wary of entering the sector because of the lack of confidence in the States meeting their commitments, both in payment for the supplies and in lifting the contracted generation. The payment security measures taken till now have not yielded the desired results. The sector has to be made financially strong internally to attract external investments.
There is a need to structure an alternative payment security mechanism for the investors as an interim resource mobilisation strategy. In the long run, however, we need to restructure the electricity sector so that reforms ensure its efficient running while looking after social obligations such as ensuring that the poorer sections continue to be assured of easier access to reliable power even while providing a safety net for the employees.
The major roadblock stalling power sector development has been the poor financial health of the State Electricity Boards (SEBs) which, in turn, is mainly due to the poor performance on the distribution front. This is because of the skewed tariff structure leading to unsustainable cross-subsidies, huge T&D (transmission and distribution) losses (largely a result of theft) and un-metered supply. It has been estimated that theft alone causes a loss of about Rs 20,000 crore annually.
Of the total energy generated, only 55 per cent is billed and just 41 per cent realised. No effort has been made to reduce this gap over the last four years. The annual losses of the SEBs have exceeded Rs 26,000 crore. Consequently, they are not able to make full payments to the independent power producers (IPPs) and Central Power Sector Utilities (CPSUs) for purchase of power and coal.
This has resulted in outstandings accumulating to over Rs 40,000 crore payable by the SEBs to the CPSUs alone. The poor creditworthiness of the SEBs has blocked investments from the private sector despite the enabling and encouraging framework laid down by the Centre.
The credit rating exercise for 2004 assigned the following scores for the States:
None of the States was found economically viable for accepting guarantees for power purchase agreements (PPAs). Over the last 14 years, the record of the States in promoting private investment in power has been dismal. The Maharashtra Government opted out of the only IPP to its credit — the Dabhol project. Gujarat, Tamil Nadu and Kerala have a few liquid fuel and gas-based projects, all of which are owed crores of rupees for power supplied and commitments made for offtake.
Orissa started with a bang by privatising distribution and generation, but ended with a whimper. Andhra Pradesh made reasonable progress, after natural gas was found along its coast — but the future of all gas projects depends on the continued subsidy on natural gas. Once the gas prices are brought on a par with international levels, these projects would become uneconomical due to high variable costs that cannot be sustained by the public.
It is surprising to note that none of the IPPs promoted so far is based on imported or Indian coal — the reason being the absence of international players besides the reluctance of Coal India or the Railways to commit to an assured coal supply.
The States have also been slow to reform. There are genuine problems such as continuance of subsidies to the poor and the needy, greater participation by the Centre in sharing the subsidy burden, reducing the losses arising out of inefficiencies and corruption, and the other baggage arising out of the political compulsions of the last five decades.
The civil services and the politicians do not want to lose their hold over this sector. Even the States that did take initial steps towards reforms slowed down when it came to privatising distribution or offering open access.
It appears that the States have no economic or political capability to achieve the additional generation capacity of 1,00,000 MW to meet the deficit targets and achieve GDP growth of 7-8 per cent.
There is a serious need to discipline the States to adhere to reforms and the privatisation process while recognising that they need the support of the Centre in finding answers to associated the socio-economic problems.
What is the solution? The process of buying electricity needs to be shifted out of the States and a corporate body set up (suitably empowered by the Centre). All State, Central and private sector generators must sell all the power generated to this body which will then distribute it to the transmission companies (Transcos) in the States.
The reform process necessitates segregating the SEBs into generation, transmission and distribution companies. Under a long-term tariff agreement, the Transcos should be made to buy this electricity and pay for it on commercial terms. Politically this is feasible as electricity comes under the Concurrent List, and the Centre is empowered by the Constitution to undertake the business of electricity.
This will force the Transcos to maintain commercial discipline and pay the power seller promptly. Upon any delay or default, the selling company will need to be empowered to advise the RBI to deduct the delayed and defaulted amounts from the State's budget and immediately compensate the seller from the share of the Central allocation to the defaulting State.
If there is a need for deficit financing, the RBI should be advised to resort to the same, subject to the condition that deficits be set off in the ensuing Annual Plans of the defaulting State. This will make the State monitor the Transcos and ensure the commercial viability and efficient functioning of the electricity sector — both Transcos and distribution companies (Discoms) — since the civil servants and the political class will not be able to withstand the effect of a cut in the State budgets.
This will also ensure that the generation companies in the State, Central and the private sectors are paid on time to ensure smooth functioning of the generation sector. This will stimulate growth by continuous expansion of the generation facilities.
International investors will return to the sector as a viable payment mechanism would have come into existence without the need for any guarantees from the Central or the State governments. This can be a medium-term initiative — perhaps for the next seven to eight years — till the time the target of 1,00,000 MW is achieved.
This would leave certain issues to be resolved through a consultative process. These include: tariff determination and preparing a viable long-term electricity policy; subsidies needed to continue supporting the needy; creating a safety net for the employees; and reduction of thefts and pilferage.
One can expect the States to come forward with greater eagerness for a resolution on these issues and reforms once the Centre unveils a plan to build the desired additional capacity and a system to share the burden.
(The author, a power consultant, can be contacted at paddy8@vsnl.com)
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