The state electricity boards [SEBs]/power distribution companies [PDCs] occupy a pivotal position in the electricity landscape of India. Besides owning generation plants and transmission infrastructure/lines, they are engaged primarily in supply and distribution of power [own plus quantity purchased from independent power producers (IPPs)] providing last mile connectivity to homes, farmers, industrial units and business establishments etc.
Maintaining SEBs/PDCs in a state of robust health is of paramount importance to ensure uninterrupted supply of quality power in requisite measure to the users, making timely payments to IPPs and suppliers of raw material such as coal [to keep their own generation stations running], ensuring proper upkeep and maintenance of the transmission/distribution infrastructure and timely servicing of loans taken from banks/financial institutions [FIs].
If, these companies are not in good health, this will have a debilitating effect on all stakeholders. While, consumers would face supply disruptions forcing them to install captive generators as a back-up leading to higher cost, IPPs will be saddled with liquidity problems hampering their ability to keep their plants running. The cash crunch with IPPs and SEBs/PDCs will in turn, lead to build-up of non-performing assets [NPAs] with banks/FIs.
So, what is the ground reality? The SEBs/PDCs have been consistently incurring huge losses for over two-and-half decades. There has been no let up despite the union government implementing several financial restructuring packages [FRPs]. During 2000s alone, three such packages viz. 2002/2012/2015 were given primarily aimed at extinguishing their debt so that they could start from a clean slate free from the burden of the wrongs committed in the past.
These cash strapped companies are unable to pay for the power they are committed to purchase from IPPs. Furthermore, they are not able to enter into fresh commitment [sign power purchase agreement (PPA) – as it is understood in jargon] leaving new projects in the lurch. As a consequence, 50,000 mega watt [MW] capacity is stranded leading to default in repayment of loans; currently, the NPAs from the power sector are estimated to be about Rs 200,000 crore.
The cash crunch has come in the way of SEBs revamping and modernizing their generating stations to improve efficiency and capacity utilization. It also resulted in a collateral damage by way of sub-optimal use [even non-utilization in some cases] of coal supplies linked to these stations even as other plants – mostly in private sector – face redundancy for want of coal linkage.
For users especially industries and businesses, this leads to a night mare as in a bid to cover up their losses, SEBs/PDCs at the behest of their masters [read: state governments] charge high tariff. The Electricity Act [2003] allows large users to change their supplier but this provision is of little use as the same law gives to the existing supplier [SEB/PDC] a leeway to collect a so called ‘cross-subsidy surcharge’ thereby rendering the enabling provision ineffective.
This lead us to a million dollar question as to why do the distribution companies face losses? What have successive ruling establishments done to rein in these losses? Has the much touted UDAY [Ujwal DISCOM Assurance Yojna] launched by Modi – government in 2015 made any difference?
An overarching reason has to do with states directing SEBs/PDCs to charge heavily subsidized tariff from farmers [in some states, this is even ‘free’] and poor households. Considering that these users account for a major slice of electricity consumption, this leads to a significant shortfall in revenue from overall sale vis-à-vis cost of purchase and distribution. High aggregate technical and commercial [AT&C] losses – a euphemism for theft – and high cost of purchasing power exacerbate the shortfall.
The FRP packages even while reducing their debt burden required the distribution companies to achieve certain milestones in regard to increase in tariff and reduction in AT&C loss. Unfortunately, under the first two rounds [2002/2012], the compliance in respect of these targets was poor even as they merrily enjoyed the benefit of exoneration of the debt. This resulted in build-up of loss all over again leading to an all time high debt of about Rs 400,000 crore.
Under UDAY [2015] however, that involved takeover of 75% of the outstanding debt of by states and for balance 25%, issue of bonds by SEBs/PDCs at concessional interest, there is some good news in regard to improvement in the key parameters in several states. For instance, in Rajasthan, AT&C losses were brought down from 23.8% in 2016-17 to 19.7% in 2017-18. In Madhya Pradesh [MP], these losses reduced from 37.3% in 2016-17 to 22.2% in 2017-18.
On the tariff side, Chhattisgarh, MP, Bihar, Jharkhand and Karnataka increased power tariffs by 31.4%, 27.7%, 22.9%, 20.2% and 18.6% respectively between 2015-16 and 2017-18. In Rajasthan, distribution companies hiked tariff by 9.5% in September 2016. On the other hand, the average cost of power purchase [from non-renewable sources] rose by only 1.2% in 2016-17 and 1.4% in 2017-18, compared to a sharp hike of 7.5% in 2015-16.
In states such as Maharashtra and Andhra Pradesh, shutting down of old and inefficient generating stations and transferring coal allocation to more efficient generators [albeit IPPs] located nearer coal pitheads – under a rationalized coal allocation policy – also helped in bringing about significant cost reduction.
As a result, losses of 31 entities who participated in the scheme, went down from about Rs 52,000 crore during 2015-16 to about Rs 32,000 crore during 2016-17. During 2017-18, it decreased by a steep 50% to about Rs 17,000 crore. Four states viz. Maharashtra, Haryana, Rajasthan and Andhra Pradesh which were in loss for several years and had a combined loss of over Rs 10,000 crore during 2016-17, registered a profit of Rs 1565 crore during 2017-18.
These developments [since 2015] are good omen for the future of power sector in India. These can herald a new era in which the hitherto weak link could turn into a springboard for catapulting this most crucial segment to an accelerated growth trajectory. This will require unflinching commitment by the political establishment in all states to completely eliminate power theft at all levels, doing away with the cult of populism and full bloated efforts to reduce the cost of power generation and distribution.
To get there, Team Modi will need to set its vision much beyond the UDAY scheme.