Underpowered reforms

Populistic pricing is holding back power sector's recovery

India’s chronically troubled power sector remains a potent symbol of the economic slowdown, with poor demand and the snail’s pace of reform contributing to the pile-up of bad loans in the banking sector. Currently, power projects worth 25,000 Mw are up for sale by private sector companies that are looking to reduce their debt burden. The point to note is that all these are commissioned units, yet buyers are hard to come by. Buyers who have shown interest demand steep write-offs of over 60 per cent of the book value. The reluctance to load their balance sheets even with operational power plants reflects the structural weaknesses within the sector. This, in turn, raises serious questions about the viability of another 60,000 Mw of power plants that are under construction, with the knock-on impact on banks’ bulging bad loan portfolios. 

Anaemic demand leading to lack of new investment is, admittedly, one element of the problem. Peak power demand is about 150,000 Mw against availability of 180,000 Mw and an installed capacity of 300,000 Mw. Indeed, the Central Electricity Authority has lowered its demand estimate through 2022 from 289 Gw to 235 Gw. Excess supply has already driven short-term tariffs down to Rs 2.5 a unit, half the rate of long-term agreements of Rs 5 a unit, which explains why many buyers, the financially strapped state electricity boards (SEBs), have been reluctant to lock themselves into power purchase agreements with new plants. Compounding this is the flawed approach to SEB tariff restructuring, which is a crucial element of the Ujwal DISCOM Assurance Yojana (UDAY) programme that the Centre launched on November 20, 2015. The programme required the state governments to take over 75 per cent of their respective SEBs’ debt as on September 30, 2015, to be converted into bonds, plus quarterly tariff revisions. Till December 2016, some 19 of the 22 states that had opted for the UDAY package have revised tariff structures but with limited results. The gap between average cost of supply and average revenue realisation was 27 per cent, and as high as 35 per cent in worse-off states such as Uttar Pradesh and Rajasthan, indicating some distance from the UDAY target of equalising the difference between the two. 

In many cases, too, the revisions are not reflective of the spirit of the reform measure, which requires state governments to bite the bullet on populist low tariffs. For instance, in at least 10 of the states, the burden of the tariff increase has been borne by industrial consumers, which cross-subsidise tariffs charged to farmers, rural residents and low-income and low-consumption groups. In fiscal year 2016-17, the cross-subsidy surcharges jumped sharply, from 500 per cent in Bihar to 146 per cent in Gujarat, suggesting that a major opportunity to fundamentally improve the financial and operational efficiency of the SEBs is being bypassed. These surcharges have also blocked the development of an open access retail market that would have created a uniform national power market based on transparent price discovery. Populistic pricing mechanisms, thus, remain the biggest stumbling block to the viability of a crucial segment of Indian infrastructure.