Reforming India’s power sector

Source The Hindu

The December 11, 2011, edition of The Hindu carried an article “The coming Dark Age of India”, which inter alia said: “We need to cut down on transmission and distribution losses and untangle the environmental problems that coal mining has run into. Policymakers have to balance the needs of development with environmental considerations. But for some urgent steps from the government, the country may well return to the Dark Ages, literally.”

Prime Minister Manmohan Singh seems to have responded by convening a meeting of top power sector honchos on January 18, to discuss India’s power crisis and the stalled ‘power sector reforms’. The list of invitees reads like the who’s who of India’s mega-industry/business.

As usual, corporate big-wigs and government leaders are besieged only with the supply side of power sector. They are concerned with the issue of “uncertainty” due to shortage of coal and shortfall in the allocated gas from the Krishna-Godavari Basin, which had put a question mark on the future of many power generation projects. As proof, they have pointed out that 4,000 MW of power capacity was lying idle in the absence of gas supply.

TWO AILMENTS

In the perception of these decision-drivers and makers, just two things ail the power sector — first, a conundrum regarding fuel and second, the mess created by the inability of power utilities to charge consumers the right price for the electricity they consume, leading to losses. These two ailments have led to a major financial mess, and according to a CRISIL report, the total debt of state electricity boards and distribution utilities touched a huge Rs 3-lakh crore as of March 31, 2011, and is mounting. That report estimates that as much as a third of the 56,000 MW of thermal generation capacity is in trouble due to the combined impact of fuel and financial problems.

And ‘market-moghul’ Montek Ahluwalia has an instant reform-solution for this. In his recent report to the Prime Minister, he has sought revision of power tariffs to reflect higher international coal prices, as a large number of power projects, including ultra mega power projects under implementation, have run into serious ‘viability problems’. The report also suggests acceleration of ‘open access’ in the power sector.

Even in 2005, after a ‘reality-check’ on the power sector, the Planning Commission, headed by Mr Ahluwalia, had admitted that though there have been a number of experiments in electricity reform, including the one fashioned by himself in the mid-90s, none of them had established “a viable model”. The approach document of the 11th Five Year Plan said this: “Shortage of electric power and the unreliability of power supply are universally recognised as a drag on the pace of India’s development… If India is to attain 8.5 per cent growth in the 11th Five Year Plan, uninterrupted power supply is a must; so it is widely accepted that power reforms are urgently needed in the country”.

‘Power reforms’, unveiled by Mr Ahluwalia, envisaged dismantling and unbundling of State Electricity Boards (SEBs) to form several companies centred on Generation, Transmission and Distribution, and progressively privatise these unbundled organisations. This model has been a disappointing failure and the reasons identified are: ‘Single–buyer’ model; chain of monopolies; total absence of competition; non-separation of carriage & content; flawed regulatory framework, and cost plus year-to-year tariff setting.

TUNNEL VISION

‘Open access’ has been Montek Ahluwalia’s favourite panacea for all these evils, and he himself describes it: “Allowing generating companies to sell directly to distribution companies and bulk consumers, thus creating a competitive market where producers could take investment decisions based on demand, without relying on power utilities or the State Government. This would bring electricity at par with other goods and services, where competition and market forces determine efficiency levels, investments and pricing”. He had suggested that giving ‘open access’ and copious supply to miniscule bulk consumers of 1 MW and above would ‘empower’ the people and transform India’s power sector. What a ‘tunnel vision’!

Treating electricity at par with ‘other goods and services’ reflects a deficiency in understanding electricity as a commodity, and the profile of its consumers. Unlike telephones or civil aviation, where the consumers are well-heeled, electricity is a product, which even the poor use for basic comforts, as well as earning a livelihood. Furthermore, it is doubtful if the targeted beneficiaries of open access — large industries — would really benefit. Given the chaotic distribution system, acute shortage of power and poor system reliability, it is highly doubtful if the open access would remain open at all.

Given this situation, how can power utilities be reformed and enabled to emerge as a viable, credible, vibrant and professional entity making them perform the essential tasks of delivering adequate, reliable, cost-effective and good quality power to its consumers just by sorting out coal supply, augmenting generation, enhancing tariff and accelerating open access? This, indeed, is the tragedy.

UTILITIES

Even in the case of electric power, any increase in generation capacity is more than offset by inefficiencies and wastage at every stage — production, transmission, distribution and delivery. Without fixing these inefficiencies and wastage, increasing generation capacity and production is like filling a bucket full of holes! The first and foremost task should be to fill these holes, which is very much doable.

For this, the basic philosophy of power utility management should undergo a sea-change and move away from generation-led augmentation mindset to distribution/delivery-led optimisation alternative. Distribution refers to conveyance of electricity through wires, transformers, and some other devices that aren’t classified as transmission tools.

This is, by and large, an engineering function. Delivery services are to facilitate retail customers to receive quality electric power from the supplier, and include metering, meter reading, billing and collection. This is more of a commercial/consumer-related function. Between these lie the major ills that afflict the power utilities in India.

Power distribution/delivery network is full of constraints and is clumsy to the core. The ills of the system are many — ill-trained workforce, poor reliability, high line losses, low voltage profiles, overloading of transformers, poor maintenance, absence of conservation measures, power theft, haphazard layouts, whimsical load connection, inadequate clearance, etc.

These ailments can be remedied by creating a comprehensive consumption profile in each utility — shift-based industries, continuous process industries and industries having independent feeders; irrigation tube wells; peak load requirement; domestic connections; essential and emergency services. The next step is to design a state-of-the-art distribution system and streamline delivery mechanism to meet the specific need of each consumer category. Legal and regulatory compliance with regard to cost-to-serve and Transmission and Distribution (T&D) losses is another imperative.

Before its formal withdrawal from India’s power sector reforms in 2002 after spending billions of dollars, Mr James Wolfensohn, then President of WB, had specifically mentioned “uneconomical running of power plants” and high “line losses” as the main reasons for poor performance.

Even today, these two continue to be the ‘monumental realities’ of ‘inefficiency and wastage’ in India’s power sector. Merely tinkering with coal supply, open access and tariff increase, instead of confronting these ‘realities’ is like ‘missing the woods for the tree’!

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