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Policy changes key for revival of the power sector

The cash-strapped utilities pay their suppliers late and equipment makers also suffer from tardy payments

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The power sector’s dynamics are so obviously strange that the statistics are difficult to reconcile at first glance. Last year, more than 20,500 MW of generating capacity was added - this was a new record. However, plant load factors fell appreciably due to the shortage of coal and gas. Since roughly two-third of all capacity is thermal, this affected across state, central and private plants. PLF dropped by 5-6 per cent on average.

State distribution utilities registered over Rs 60,000 crore of losses. Estimates suggest losses across the entire sector amount to well over Rs 100,000 crore. Transmission and distribution losses rose to over 30 per cent in many zones.

While there was surplus power available on trade at power exchanges, state utilities were in no position to buy these units, due to their ruined financial position. Banks also started slowing down disbursals to the sector where there are many sticky loans outstanding.

None of the problems are new. But new stress levels are being recorded. At one end, generators are clamouring for more reliable coal supplies and also tariff increases. Distributors need to improve grids and metering processes. States need to allow easier open-access. They are reluctant to do this since high-value industrial consumers would move away. needs to improve production and distribution processes so as to fulfil fuel-supply agreements.

Investments will be required in almost every area. There’s a need to create more inter-regional transmission capacity. There’s a need to improve local distribution grids. The crux of the matter is political will. The problems in the can only be solved if there is political will.

Most of the key entities are government controlled. Coal India for instance, is a and it has monopolist control of domestic coal production. It has been extremely unwilling to commit to fuel supply agreements with penalties for non-performance. Nor is it easy to allot captive coal blocks to generators in practice, or to allow contract mining. Environmental issues would come into play. On the gas front unfortunately, with Reliance’s turning into a damp squib, there is a genuine shortage that won’t be resolved easily, if at all.

If various governments cannot make their own institutions fall in line in terms of delivering better performance, who else can? Various radical solutions have been mooted and there seems to have been some movement on reforms. Most states have unbundled - this gives a clearer picture of inefficiencies within the system. Most states have supposedly independent electricity regulatory commissions, which set tariffs.

The Accelerated Power Development and Reforms Programme (APDRP) and its successor, the Restructured-APDRP, have tried to implement carrot-and-stick methods of encouraging reforms with mixed success. Many states haven’t been able to integrate IT-based methods of energy accounting consistently or to achieve metering at transformer level. This means losses haven’t really come down.

If transmission and distribution (T&D) losses could be halved across the board, that would in effect, add about 15 per cent to national generating capacity. Given that peak shortages are in the range of 10-12 per cent, this would be sufficient to meet current needs. T&D losses are perhaps the area to be tackled on the most urgent priority basis since it could yield the quickest returns. This probably needs a combination of stiff penalties for power theft and smart grids to locate specific areas with high rates of offence. The sector has seen sporadic surges in investments. It has given very poor returns. Since the utilities are cash-strapped, they pay their suppliers late. Equipment makers also have have to suffer tardy payments.

In the past year or two, much of the investment interest has moved into renewables such as solar and wind. The problem is, solar is still very expensive and grids need to be better designed to handle intermittent power sources of this nature. Solar could be of great use is specific remote areas which are tough to connect to the grid. But for decades to come, India will remain highly dependent on thermal coal.

For many years, the policy has encouraged the addition of generational capacity without adequate attention being paid to T&D. One good thing about the past four or five years is that the problems in the T&D area are now receiving attention.

It would be great if T&D losses started climbing down and if PLF started climbing up. I suspect neither is terribly likely, given the political situation. General elections are due in 2014. As the recent Mayawati deal shows, political expediency will trump rational accounting when elections are on the horizon.

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