Power sector reforms might fall short of expectation

Sincere intentions could prove bad if not backed by credible alternatives, according to a recent UBS report

One of the promises that the Narendra Modi government made during their election campaign was uninterrupted power supply to the entire country. But within days of the new government assuming charge it became clear that the task was easier said than done. Modi government’s governance record will be on test in the next few weeks as thermal power plants are known to be sitting on less than a week’s inventory.

According to Central Electricity Authority, out of the 100 power plants it monitors, 56 are sitting on less than a week’s inventory of coal while 27 of them have less than four days of coal.
 

It is not that the government has been sitting idle. A number of steps have been announced by the government to see to it that the power sector is not starved of coal. A UBS Securities report titled ‘Can good intentions also lead to bad results?’ has analyzed the measures taken by the government to resolve the power crisis. According to Pankaj Sharma who has authored the report, sincere intentions could prove bad if not backed by credible alternatives.

 

As per UBS, government has announced many important measures to address key challenges in the sector. These include a cut in e-auction volumes for Coal India (to increase linkage coal availability for power plants); coal and gas pooling proposals (to improve the power plant utilization); requesting the Supreme Court (SC) that operational blocks should not be cancelled (to avoid production disruption) in the coal scam case; and continuing on the path of 24x7 power availability to all.

 

However, UBS feels that in case of e-auction, a cut in volume through this route will hit the SMEs hard, which is negative on a sum total basis. Further, coal or gas pooling is not really helpful since there will be one segment of users (especially existing ones) who will have to bear the cost of providing cheaper coal to the new users. Details on how pooling will be done and who will bear the extra cost is yet to be revealed by the government. In case of the coal scam, UBS says that government's stand in the SC led to a flip-flop on whether all the coal blocks should be cancelled.

 

As for increasing power generation, UBS believes that the government has missed out on the bigger picture. Higher power generation could lead to a bigger problem unless there is some balance between cost and price. UBS feels that the government has not taken cognizance of high power generation impact on all stakeholders. Electricity distribution is controlled by the states and the central government could do more to help the states address critical issues of tariff increases, reduction of losses and feeder separation. There is also an urgent need to fix the Financial Restructuring Package for state governments' distribution companies, which has been largely unsuccessful in bringing about operational improvements or efficiency.

 

Though the measures announced by the government have been well-intentioned, chances are that it might miss the target.