Reviving the power sector

Political will needed to rationalise tariffs

The Electricity (Amendment) Bill, which is expected to come up for passage by Parliament in the Winter Session, proposes changes to the 2003 Electricity Act. The changes are intended to increase reliability and reduce risk in the power sector. In particular, the problem of reneging on power purchase agreements (PPAs) is being taken up. It has been observed that PPAs are sometimes broken or renegotiated by distribution companies or discoms, and those have led to changes in the cash flow of power plants, rendering them unprofitable. In some cases, this has led to investments in generation turning into non-performing assets, which have contributed greatly to the ongoing bad loans crisis in public sector banks. The draft amendments suggest penalties for failing to honour PPAs, up to Rs 10 million a day, and the suspension or even cancellation of a licence. It is also proposed that cross subsidisation of power be phased out. This has led to a severe political backlash from the Opposition, which argues that it takes away powers vested in the state governments.

The idea behind the amendment is that ending cross subsidies — for example, of household consumers by industrial purchasers of power — will rationalise power consumption and pricing. It is certainly true that it will force an increase in the tariffs that are charged to lower-end households and to farmers. The political concerns about this change reflect the fact that, in the end, the problems in the power sector are primarily political. It has simply not been the case historically that Indians are charged the amount that their power costs. Until the pricing system is made fairer, more rational, and more predictable, it is hard to develop a sustainable power sector. As things stand, interventions in favour of generation or distribution companies at various points always end up having to be repeated at even greater cost further down the line because they do not address the central problem of ensuring that consumers are paying their fair share. It appears that the UDAY scheme, launched with much fanfare by this government earlier in its tenure, is no exception to this rule. Certainly, given that power companies are now major defaulters to banks and are desperately trying to avoid being sucked into the insolvency and bankruptcy process, it is quite impossible to proclaim UDAY a success.

It is clear, therefore, that there is no substitute for the political resolve to rationalise tariffs. Yet there are other alternatives that should also be looked at for medium-term stability, though they will all depend for their success on sustainable pricing in the long run. It is to be noted that organisations such as the Rural Electrification Corporation that depend on lending to the power sector are not so much at risk because they benefit from an escrow structure in which they are assured of access to their borrowers’ revenue. Something similar might have to be worked out by the Reserve Bank of India for the generation companies if the sector is to revive in spite of the discoms’ ill health.