The Hindu : Opinion / Leader Page Articles : Reforms in the power sector

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Tuesday, Sep 14, 2004

Opinion

Opinion - Leader Page Articles

Reforms in the power sector

By V. Jayanth

The Centre has to clearly spell out the power policy. The Tenth Plan target is to add over 41,000 MW of generation capacity and time is running out.

IF THE Central Government is serious about infusing dynamism in the infrastructure sector, it cannot but focus on the core area of electricity. After a bright patch under the late Rangarajan Kumaramangalam, reforms in the power sector appear to have slackened. This is not just in the pace of the reforms programme but also in the critical area of power generation and capacity addition. Over two Plan periods — the Eighth and the Ninth — there has been a substantial slippage in capacity addition. Targets have fallen by the wayside and unless serious corrective action is taken in the next few months, even the Tenth Plan may end well short of expectations on power generation.

Without power neither industry nor agriculture can hope to contribute to achieving an eight per cent growth of the Gross Domestic Product (GDP). Just supply of electricity is not enough. What is essential is quality power and fail-proof distribution grids across the country. The new Electricity Act 2003 was seen as the bible of power sector reforms and the instrument to achieve the "power for all" goal set for 2012. But the Act, which ran into a series of problems in its formative stages, remains more on paper. In the face of opposition from trade unions and some political parties, and perceived gaps in the legal framework, it has not been fully implemented.

Basically, the Act seeks to consolidate and update laws relating to generation, transmission, distribution, trading and use of electricity. It looks at developing the power industry to promote competition, protect consumer interests, ensure supply to all areas, rationalise the tariff and to make the subsidy policy transparent. It has also put in place a new institutional framework of regulatory agencies at the Central and State levels and integrated the technical infrastructure for these purposes.

After an initial foray into power generation, the private sector is now diffident. Energy is categorised as "a risky investment" by most of the companies. Those already in the fray are finding it difficult to sustain themselves; those about to go commercial are being asked to revise or renegotiate their Power Purchase Agreements (PPAs); some project proposals have either been shelved by State Governments or challenged in courts of law. The Enron controversy seems to have come a full circle, with a Group of Ministers now trying to identify ways to revive the project.

True, some of the PPAs were negotiated by State Governments or State Electricity Boards (SEBs) without the required expertise and the Independent Power Producers (IPPs) demanded their pound of flesh. At a time when Governments found funds hard to come by and wanted to get the private sector involved in power generation, the IPPs got more than what they shared. Imagine an SEB producing power for anything from Rs.2.20 per unit to Rs.3.30 per unit all these years and suddenly agreeing to purchase electricity from the IPPs at anywhere from Rs.4.50 to Rs.7 per unit (in a few cases).

First of all, the SEBs just did not have the capacity to pay these producers. There was also the counter guarantee provided by the State Governments in all the cases and by the Centre in select projects. But when the SEBs could not even pay the Central undertakings for the power or coal supplied, how could they afford the tariff of the IPPs? Independent auditors have said that the tariff quoted by the IPPs in India was 20 to 30 per cent higher than even international prices. This is said to be one of the basic reasons for the private projects not taking off in a big way, and the States wanting to make the ground rules clear and the tariff more viable before giving their nod to new ventures.

But why is the health of the SEBs in such a mess? The subsidy in the power supply to most sections of consumers led to annual losses, which the State Governments were not compensating. The accumulated losses, estimated at Rs.26,000 crores a few years ago, virtually did the SEBs in. Adding to the problem was the pilferage or theft of power or what is euphemistically called Transmission and Distribution (T&D) losses. Against an international norm of about 10 to 12 per cent of T&D loss, it was as high as 30 to 40 per cent in some States. The Central Electricity Authority also estimated that nearly 50 per cent of the power consumed was not being metered or billed and this resulted in huge losses.

In a bid to enthuse the State Governments to accept power reforms and set the SEBs in order, the Centre then evolved the Accelerated Power Development and Reform Programme, which was later re-christened. Nearly 20 States signed a Memorandum of Understanding (MoU) with the Centre to implement this programme and avail themselves of the financial package that came with it. Further, the Centre also introduced a one-time securitisation scheme to enable the SEBs to pay off their dues to the Central undertakings.

But the acceptance of power sector reforms also brought with it certain commitments. The State Governments had to set up State Electricity Regulatory Commissions (SERCs), which took over the responsibility of fixing the tariff from time to time. This caused serious problems to some States, whose populist programmes came under a cloud. The rule was simple — any State could provide free power to farmers or other consumers, but it should also provide budgetary support to reimburse the SEBs. Despite this rule, States such as Andhra Pradesh and Tamil Nadu offer free power to farmers and the latter recently decided to subsidise domestic consumers as well.

With the new United Progressive Alliance Government, led by the Congress, assuming power at the Centre, the future of reforms is in question. It is the considered view of the alliance partners and the Left parties that reforms need to have a human face; they should not be anti-people and anti-labour. So now is the time for the Centre and the Power Ministry to clearly spell out the power policy. They have bought time for a year to do this by giving the States more time to comply with the requirements of the MoU. If the Centre wants to make headway in power reforms and ensure that at least the Tenth Plan target of adding over 41,000 MW is achieved, time is running out. As of now, the Central and State sector power projects continue to dominate the scene. The private sector, which was supposed to meet 49 per cent of the capacity addition in the Ninth Plan, for instance, could hardly reach double digits. What is the incentive, it asks. The Act provides for a minimum of 14 per cent return on investment, but the tariff that the SEBs want is between Rs.3 and Rs.4 a unit, beyond which they do not want to or cannot afford to pay.

One thing is clear. The future lies in hydro-power and perhaps nuclear energy. The first is available in abundance and the second comes with heavy investment and some in-built risks, though India has done fairly well in managing its nuclear power plants. Now that a national grid is taking shape and inter-regional power transfers have become possible at least in some areas, tapping hydel power wherever possible holds the promise of meeting targets and offering cheap and clean power. Though this has been the focus for some time, there has not been enough progress on the ground. Many States with hydel stations have not been able to generate power for want of water — the result of successive years of drought.

Another area that needs attention is non-conventional energy. This segment remains high-cost and out of reach of the ordinary consumer. Solar power, though available in plenty, remains too costly to harness as of now. Wind energy got a spurt because of too many incentives, without which it is not possible to tap this source. Ways to involve the private sector in renewable energy have to be identified. Perhaps the Group of Ministers on infrastructure will come up with the much-needed policy initiatives for the power sector before long.

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