Crisis in Indian power sector

Indian power sector is facing a three-fold crisis – rising tariffs, lack of coal and a huge  debt of  companies in the power sector. Let us look at the dimension of the crisis first. This year, many of the regulators have raised the tariffs by more than 20%. Bihar,Rajasthan, Chandigarh, Assam, Karnatka, Delhi are just a few examples. The continued levy of fuel surcharge (FCPPA) in Bihar has hiked the tariff in actual more than 50% with utter confusion in billing process- an agony to public beyond saying as BERC is only concern with tariff issue.  The BIA has raised issue of fuel surcharge with CERC. Obviously, power tariffs are a sensitive political issue – if the tariffs rise, industry, domestic consumer and the farmer are all hit and are going to protest. In theory, the state can say the power tariff has been raised by an independent regulator and we have nothing to do with this. In practice, the people will hold the Government answerable, the legal niceties notwithstanding. Therefore, if the state governments had believed that restructuring of the sector as the had been pressed by both the NDA and UPA central governments would relieve them of the tariff issue, the people on the streets will convince them otherwise

However, the current rise of tariffs is only a precursor of things to come. By some estimate, the tariffs have to rise substantially for the power sector to break even, a rise that is politically impossible to achieve. If this scale of tariff rise is to be avoided, the state governments will have to bear a huge burden of underwriting the cost of power. With state governments almost all in the red, and already huge accumulated losses of the state distribution companies touching about Rs. 75,000 crore, (2008-2009 figure presented in Forum of Regulators, June 2011) the ability of the states carry more losses is also limited.

The coal situation has become critical in the country. 33 power stations have reported that they have only 7 days or less of coal stocks with them. While there is a temporary dislocation due to the Telengana agitation and strikes in some of the coal mines, the much larger issue is that there is a bottle-neck in moving coal through ports, railways and roads and also the ability of taking coal out of the ground. What is missing today is a thrust to remove these bottlenecks by investing in ports, railways and in mining.

India does not lack for coal reserves – it has the 4th largest reserve of coal in the world. Today, about 30% of coal consumed in India is being imported. Obviously, this links Indian coal prices – and therefore with power generation costs – to international price of coal. This has been one of the reasons that Indian power tariffs are being forced up.

The question is what  the  government guiding factor about the coal sector – is it create a crisis so that a justification is built to privatise the coal sector? Or is it just incompetence and poor .

Underpinning all these issues is the larger framework within which the Indian power sector is operating. After independence, State Electricity Boards were created with the responsibility of generating and supplying electricity. This was the 1948 Electricity Act, which was piloted in the Indian Constituent Assembly by Babasaheb Ambedkar. His vision was very clear – electricity was the backbone of a modern nation. It must be the responsibility of the Indian state to provide electricity to all parts of India and provide it at reasonable costs. It was with this objective that it was decided that the electricity sector will not make profits, later on changed that it will make only a nominal profit.

All this might have contributed to the power sector becoming another bone of contention between the states and the centre. However, the economic reforms starting in the early 90’s gave an altogether different direction to the power sector

The power sector reforms advocated unbundling of the sector – generation, distribution and transmission were all to be separated. This, we were told will lead to competition between generators and would bring down the prices, or so the neo-liberal economic theory ran. The argument was that crisis of the SEB’s would be solved if they were unbundled. Sheila Dixit in 2004 when unbundling and privatising the Delhi Vidyut Nigam claimed how through more efficient running and generation competition, tariffs would become lower.

What these set of reforms did, even where privatisation was not done for distribution companies after unbundling, is that NTPC and private power companies became increasingly more important in the grid. The states had now no control over generation prices as more and more generation passed into the hands of the centre and private generators. Increasingly, the interests of the central government and the private players became aligned – both of them were essentially what are called Independent Power Producers (IPPs), companies that produce power but do not distribute it. The state governments now have to distribute power at costs that are reasonable for the consumers but have no control over it. The Central Government agencies – NTPC, NHPC, etc are all IPP’s and the central government interests are now aligned to those of private power companies.

When these reforms were introduced via the 2003 Electricity Act, most state governments did not understand the deeper game plan. This was large scale induction of private power into the grid which needed that private power tariffs be removed from political control of the states. The so-called independent regulator would create a “market” and would also remove the all the subsidies for the poor and the farmers, so hated by the neo-liberal establishment. The removal of the subsidies and that the state governments would have no role in setting the tariffs are all a part of the 2003 Electricity Act. From electricity being fundamental the country’s development, we had now come to the point that it is just another set of goods, like soap or vegetable oil, to be bought and sold like any other commodity.

The consequences of this unbundling and induction of private generators is now partially with us. Currently, the private sector has an installed capacity of 23% in the grid. This is one major element in driving up costs. The states have now less than 45% of the generation, a fraction that is bound to come down even further with time. With another 30,000 MW of private power about to enter the grid in the next few years, costly private power is going to push up the cost of electricity steeply.