The power paradox

States' electricity policies are unsustainable

Prime Minister Narendra Modi’s recent campaign against the freebie distribution culture in electoral politics found its strongest articulation on Saturday at the launch of the Rs 3-trillion Revamped Distribution Sector Scheme. Alluding to Rs 2.5 trillion worth of states’ dues to power generation (gencos) and distribution companies (discoms), Mr Modi said clearing these bills was not a case of rajniti (politics) but rashtra-niti (nation building). The PM’s statement is an unwitting acknowledgement of the fact that the power sector has remained one of India’s most distressed areas mainly on account of the states’ long-standing, unsustainable policies to distribute power either free or heavily subsidised to powerful farm lobbies or to ignore wilful theft by designated vote banks. This crisis is evident from the fact that the sector has been the recipient of five bailout schemes from the Centre in the past two decades, three by the Modi government alone, of which the Revamped Distribution Sector Scheme is the latest.
 

The scheme will offer discoms financial assistance to modernise and strengthen infrastructure based on pre-qualifying criteria. A loss-making discom will not qualify for this assistance unless it scores 60 per cent on an evaluation matrix on its plans to reduce these losses. The overall aim is to reduce pan-Indian aggregate technical and commercial losses to 12-15 per cent from the current 21.73 per cent and the gap between the average cost of supply and average revenue realised to zero by 2024-25 (it is currently Rs 0.39 per Kwh). By linking financial assistance to specific performance criteria, the latest scheme somewhat toughens bailout terms compared with the Ujjwal Discom Assurance Yojana, or UDAY, of 2015-18. Under this scheme, states took over 75 per cent of the discom debt, and earned an interest rate reduction on the remaining 25 per cent by way of state government-backed bonds on the understanding that power tariffs would be streamlined. Yet, under UDAY, discom losses jumped steeply, even as subsidies (read the provision of free power) more than doubled. Today almost 85 per cent of the states’ power dues fall in the “overdue” category with defaults of 45 days or more. Unless tariffs are raised sharply, these dues will burgeon with the Centre allowing generators to import expensive coal to meet the increasing electricity demand.

Mr Modi’s appeal to states may reflect a tacit recognition that the latest scheme could be another failure unless the states start pricing power at rational rates. The fact that no ruling dispensation has yet displayed the political courage to do so — since it invariably provokes vociferous protests — it remains to be seen how the new scheme works. But rationalising rates is now becoming critical to discoms’ own survival too. The advent of rooftop solar projects, as part of India’s green energy targets, is likely to encourage more and more paying users to transition from inefficient state grids to captive power, depriving discoms of the cross-subsidies that have sustained them. In short, political parties urgently need to understand the weak link between freebies and job-creating economic growth.