Weak distribution sector may short-circuit generation projects

With SEBs saddled with losses, the power sector emerges as one of the biggest bottlenecks in India’s growth story

As the Indian power generation sector struggles to meet bourgeoning demand, planners have been confounded by the worsening financial condition of power distribution utilities.

The power sector has emerged as the biggest bottleneck for India’s growth story amid the twin issues of adding power-generating capacity and trying to stem transmission and distribution losses on account of pilferage.

State electricity boards (SEBs) across India are saddled with losses running into crores of rupees due to power theft during transmission and distribution, billing inefficiencies and, more importantly, because they have to buy expensive power to tide over short-term deficits.

“So much so that SEBs have stopped buying power from our stations and we have to back down our stations,” said Arup Roy Choudhury, chairman and managing director, NTPC Ltd, India’s largest power generation utility.

A dependence on subsidies and the political compulsion of providing free power to farmers reflects poorly on the books of these state-owned boards. As agricultural power supply is unmetered, many utilities write off all losses from transmission and distribution as agricultural consumption. Some SEBs have also failed to revise tariffs for many years, adding to their losses.

This comes at a time when around 57% of rural households and 12% of urban households in the world’s second most populous country have no access to electricity.

“We are trying to impress upon the states to reduce their losses,” said P. Umashankar, India’s power secretary.

Widening deficit

Utilities in India face about 30% losses due to unmetered and unaccounted for sales—the highest in the world. No system can withstand such losses without coming under intense demand pressure. Combined annual losses of all SEBs add up to about 1% of India’s gross domestic product.

The health of the power distribution sector holds the key to the success of the generation projects. While consumer metering in eight states is below 80% of all households, metering of agricultural consumers in a majority of the states ranges from 5% to 50%.

The problem was highlighted by power minister Sushil Kumar Shinde​ at a power ministers conference last week where he urged the states to “devise a utility-wise turnaround plan and monitor its implementation at the highest level before the situation becomes unsustainable.”

Speaking at the same conference, Montek Singh Ahluwalia​, deputy chairman, Planning Commission, expressed concern over the mismatch between tariff and cost and underlined the need to reduce aggregate technical and commercial losses.

The Centre is worried as both the Accelerated Power Development and Reform Programme (APDRP) and the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) rural electrification programme have fallen short of targets.

APDRP—meant to upgrade the distribution system, minimize transmission and distribution losses, improve metering and assign responsibility for the realization of user charges—has not been able to bring down losses to 15% by the end of 2007, as originally targeted in 2000-01. RGGVY, which had a target of providing electricity to 125,000 villages and connecting 23 million below-poverty-line households across the country by 31 March, 2010, has also been faltering.

The Economic Survey for 2010-11 had recommended a revision in electricity tariffs and a reduction in subsidies and cross-subsidies.

India “has some of the lowest and most uneconomic average electricity tariffs in the world… The current tariff levels are unsustainable, cannot elicit needed investments, drain resources, and are not targeted at the poor,” the survey said.

Distribution is not the only area of concern. The transmission sector requires an investment of Rs. 1.4 trillion for increasing the inter-regional capacity from 23,800MW to 38,000MW by the end of 2012. However, given the financial situation of SEBs, tying up funds for transmission projects is difficult.

The problems for Power Grid Corp. of India Ltd (PGCIL), India’s central transmission utility, include getting the right of way for setting up transmission links and securing timely forest clearances. Law and order situation in areas such as Jharkhand, Chhattisgarh, north-eastern states and Jammu and Kashmir is also a problem.

“We have been grappling with these issues on a daily basis,” said a top PGCIL executive who requested anonymity.

Turnaround plan

Seized of the problem, India is planning to develop an inexpensive electricity meter that could cost as low as Rs. 1,000, or one-fifth of the cost of a similar device available in the market, that will help reduce electricity theft and distribution losses. The so-called smart meter may have features such as two-way, real-time digital communication that would make manual reading of power consumption redundant. It may also be able to terminate a connection remotely.

Sensing the enormity of the situation, the states have also agreed to get the accounts of the utilities audited up to 2009-10 and timely audits of the yearly accounts by September. Also, the states have committed to file their annual tariff revision petition every year by December-January of the preceding financial year.

The Union government is also trying to help SEBs access funds. The cabinet will decide this month on subsidizing the interest on loans taken by SEBs to cut distribution losses under the national electricity fund. The utilities are expected to avail loans of Rs. 25,000 crore in the first two years. The boards will get a 3-5% discount on interest rates depending on performance, which will be paid by the Union government to the lenders.

The other measures to facilitate funding include a mandatory rating system for 65 state-owned distribution firms to streamline lending to them and relaxing exposure norms for banks and state-owned firms Power Finance Corp. Ltd and Rural Electrification Corp. Ltd.

The government is also planning direct disbursement of power distribution subsidies to consumers such as farmers through a smart card linked to a unique identity card (UID) number. Various ministries of the government are toying with the possibilities of leveraging the UID project being implemented by the Unique Identification Authority of India (UIDAI) to ensure delivery of benefits promised by the government to the right target groups.