Depoliticise power

Power sector's structural problems are revealed again

When the Ujwal DISCOM Assurance Yojana (UDAY) was rolled out by the government in 2015 to revive the power sector, many observers pointed out that it was merely pushing the problems down the road, rather than providing an effective solution. This had been done twice before when power distribution companies (discoms) had been bailed out and then found themselves back in trouble. As predicted, UDAY’s benefits have ceased to operate, and the power sector is once again in trouble. Although the UDAY scheme had moved discom debts to the states’ balance sheets, it had not done enough to address the fundamental imbalance between the cost (average cost of supply, or ACS) and the sale price (average realisable revenue) of power in many states. Thus, discoms are once again weighed down by losses (in FY19, the figure has nearly doubled from the previous year) and are struggling to buy power in the open market or meet their obligations. Discoms were also given the goal of reducing their transmission and distribution losses to 15 per cent by 2018-19, but failed to meet the target. 

The problem with the UDAY scheme was that it relied on compliance by discoms and state governments even though it had become amply clear over the years that such compliance was not in their interest. The incentives built into the scheme for the utilities to address their funding gap were simply not structured well enough — and, as a consequence, discoms were more willing to miss payments to generation companies than to address their own structural problems. The problems then ripple upstream to generation companies that find themselves short of their planned revenue, and then miss interest payments. This has led most recently to a crisis in India’s renewable energy sector — solar and wind power companies are owed around Rs 70,000 crore by discoms. Attempts are being made to address this problem directly. Mandates to pay in advance have not worked, so suggestions are being made regarding escrow mechanisms. But, again, this does not necessarily fix the structural problems in the sector, which will undoubtedly recur.  

There were certain basic principles that underlay the planning of the Electricity Act, 2003, and these principles should be revisited and operationalised. First, constraints on open access should be revisited. Currently, discoms are unhappy that some large consumers switch from their tariffs to the open power market depending upon relative prices. This issue can be easily addressed by enforcing time limits on open access choices. But all state utilities should then ensure that wheeling and other charges are within reasonable limits. Second, the issue of stranded assets in power, including high-cost legacy thermal power purchase agreements, should be addressed centrally. If recent technological changes have rendered past power purchase agreements unprofitable, then rather than states being burdened or unilaterally reneging on contracts, a consistent and transparent mechanism for renegotiation or buyouts should be adopted. And, finally, the promise of depoliticising tariffs should be actually operationalised. State electricity regulators have effectively been captured by politicians, and tariff choices are too often determined by political requirements rather than technical and economic constraints. The method of selection of such regulators, currently dominated by government nominees, will have to be changed.