How low prices prevent India from supplying power 24×7 to all homes

India mined more coal, built more power plants, and distribution companies connected millions of homes to the grid over four years to 2019. But those

Top 10 biz headlines: Auto sales down 23.5%, direct tax code delay & more
CIL to meet 1-billion-tonne output goal, offer 10,000 new jobs: Minister
NSE asks trading members to safeguard investor data amid rise in frauds

India mined more coal, built more power plants, and distribution companies connected millions of homes to the grid over four years to 2019. But those companies are now saddled with a record debt that hinders a key government promise.

“24×7 power” is the government’s priority, India’s new power minister Raj Kumar Singh said on May 30, 2019. His predecessor, Piyush Goyal, declared India “power surplus” two years ago, and a government dashboard says 99.99 per cent of rural homes–which account for nearly 7 in 10 Indian homes–now have grid power.

At the root of the contradictions between almost-universal electrification, “surplus” electricity and the inability to supply it around-the-clock to Indian homes is a debt that burdens state-owned electricity distribution companies (DISCOMs) nationwide, impairing their ability to build and maintain power grids and equipment.

The inability or refusal of state governments to increase power bills, as we explain later, has led to more borrowing and power shortages and made DISCOMs reluctant to buy available electricity, which means continuing blackouts and erratic

This debt will reach Rs 2.6 per cent ($37 billion) by 2020, according to a May 2019 study by Crisil, a market research agency. When that happens, the debt will be the same as in 2015, which is when the Ujwal DISCOM Assurance Yojana (UDAY), the government’s bailout programme for DISCOMs, began.

“The much bigger need [other than inefficiencies] is to address the large amount of free power that is distributed for irrigation and for rural households in the country,” Vibhav Nuwal, director, REconnect, a Bangalore-based energy solutions company, told IndiaSpend. Only if this electricity is metered and billed will losses reduce, he said.

We sought comment from Vishal Kapoor, director, UDAY, at India’s power ministry over email and followed up with phone calls over two weeks, but there was no response. His office declined a request for an appointment. If and when there is a response, we will update this story.

The looming debt of Rs 2.6 trillion will be more than the Centre’s combined 2017-18 spending on: highways; national railways; metro-rail systems; national food subsidies; cash transfers for national social-security schemes (direct benefit transfers); cooking-gas subsidies; capital expenditure for the defence services; space technology, applications and satellites.

India’s “traditional model” of managing the electricity distribution sector, warned a May 2018 paper by Prayas, a nonprofit that advises government, “is on the verge of collapse”, which means much of India’s electricity gains are threatened.

“Crucially, it is not just the fate of DISCOMs that is at stake—as electrification accelerates and millions of newly electrified households join the grid, also at stake is the fate of all the small, rural, and agricultural consumers,” said the Prayas paper.

The return of DISCOM debt to pre-UDAY levels does indicate the failure of UDAY, but this borrowed money, said experts, also allowed India to build more power plants and expand India’s electricity network, which is why many states now have “surpluses”.

The expansion costs could have been offset, if UDAY had kept to its other aims, such as getting states to increase power bills by 6 per cent a year for four years till 2019. But the average increase over the period was half that, and supply losses by October 2018 were 25 per cent instead of 15 per cent as they were supposed to be by March 2019.

We sought comments from Aparna U, managing director, Uttar Pradesh Power Corporation Limited, an amalgam of seven state-owned DISCOMs, over email and followed up with phone calls over two weeks. There was no response. Other officers from UP DISCOMs refused comment. We will update this story as and when we receive a response.

Does India have surplus power?

By the end of March 2019, India would have a 4.6 per cent electricity surplus and a “peak power”–the maximum electricity demands–surplus of 2.5 per cent, India’s Central Electricity Authority (CEA) predicted in July 2018.

Despite surpluses in some states and Goyal’s 2017 claims, India is not a power-surplus nation officially, although it has hoped to be one for three years since 2016.

India’s “power deficit”–the difference between the demand and supply of electricity–is not zero. India’s electricity deficit in the financial year ending March 2019 was 0.6 per cent, and the “peak power deficit”–shortfall from the maximum electricity demand in a year–was 0.8 per cent.

“Power deficit is primarily due to the reluctance of debt-laden states’ DISCOMS in buying more power,” said Prateek Aggarwal, an expert on the power sector at the Council on Energy Environment and Water (CEEW), a Delhi-based think-tank.

India currently has around 356 gigawatts (GW) of installed generation capacity against a peak demand of about 177 gigawatts.

The nub of the issue: Power generation cannot be increased unless DISCOMs pay their dues.

It is also difficult to calculate how much electricity India needs for the 24×7 promise, said Aggarwal, “because most of rural and agricultural connections are not metered, and India does not really know how much power it needs to supply 24×7 electricity to all its connected homes”.

Despite UDAY, darkness

When Prime Minister Narendra Modi began his first term in 2014, 70 per cent of India’s homes had been connected to the grid. His government accelerated that programme and connected 26 million more homes over 16 months to December 2018.

But thousands of Indian villages receive 12 hours or less electricity a day–because of DISCOM inefficiencies, as we said–and India’s per capita electricity consumption was 14 per cent of the average per capita consumption of the rich countries that comprise the Organisation for Economic Co-operation and Development (OECD), IndiaSpend reported on November 3, 2018.

In 2015, India’s DISCOMs collectively recovered less than 80 per cent of their operational costs, we reported. On March 2015, DISCOMs had accumulated losses of about Rs 4.3 trillion.

So, DISCOMs borrowed money from banks (with interest rates as high as 14-15 per cent) to cover their costs, their cycle of losses cancelling out India’s other gains: more coal, more power plants and more transmission lines, IndiaSpend reported on April 13, 2017.

Under UDAY, the power ministry, state governments and DISCOMs signed memoranda of understanding that said state governments would take over 75 per cent of DISCOM debts–outstanding as on September 2015–through bonds with a maturity period of 10-15 years.

DISCOMs were given goals: reduce power and interest costs, monitor and reduce transmission losses and power theft, and fix faulty meters. By charging more, DISCOMs were to wipe out the difference between the cost of supply and average revenue by 2018-19.

In 15 states that account for 85 per cent of national aggregate technical and commercial (AT&C) losses, despite the debt takeover, UDAY failed, said the Crisil report we cited earlier.

National AT&C losses were 25.41 per cent on October 2018, or more than 10 percentage points more than they were to be by March 2019, and instead of hiking tariffs by 5-6 per cent every year, the 15 states increased bills by 3 per cent, said the Crisil study.

How success drove failure

Why could UDAY not help DISCOMs be more profitable?

The answer, said experts, lies in the success of India’s electrification drive.

In 2016, a year after UDAY began, the Indian government launched another flagship programme to connect all the villages and households to the grid and to provide them with around-the-clock power.

“The time-bound objectives [of electrification drives] and UDAY were converging and diverging on certain aspects, which resulted in a haywire situation for the implementation agencies, such as the DISCOMs,” said Aggarwal of CEEW.

The government electrified 26.30 million rural households to achieve 99.93 per cent electrification over 16 months to January 2019, a “mammoth exercise” whose implementation created problems for DISCOMs: higher costs and reduced revenues from the newly connected households, mostly rural, paying low or no bills, said Aggarwal.

The blackouts continue primarily because DISCOMs are reluctant to buy more power, either because they do not have the money or are afraid consumers will not pay, said Aggarwal.

Your bills don’t reflect costs

Another reason why UDAY could not bailout DISCOMs is infrequent tariff hikes.

“Consumer tariffs are still not cost reflective,” said Vibhuti Garg, a senior energy specialist with the Global Subsidies Initiative at the International Institute for Sustainable Development, a think-tank.

India’s electricity regulatory agency allows DISCOMs to recover “regulatory assets” (the cost of power consumption) at a “later stage” from the consumer through higher bills.

Due to sporadic tariff hikes, India’s consumers owed DISCOMs Rs 76,963 crore by March 31, 2019, since DISCOMs were not allowed to raise tariff.

DISCOMs in three BJP-ruled states—Uttar Pradesh, Jharkhand and Maharashtra—are responsible for 87 per cent of the outstanding amount, said a May 20, 2019 study, by the India Ratings and Research, a market research agency.

The inability of DISCOMs to recover unpaid bills has been a long-standing concern for the government, which blames state regulators for not raising tariffs to cut losses, The Indian Express reported on May 27, 2019.

The DISCOM mess is often caused by populist measures. In many states, successive governments have kept electricity prices low for political gain, keeping DISCOMs in the red, IndiaSpend reported on April 2, 2018.

Better meters will also help, said Garg.

“The poor levels of metering across various electricity categories [mostly domestic and agricultural consumer], the lower billing and collection efficiencies resulting in limited fund inflow for DISCOMs will have to be fixed, if DISCOMs are to progress towards financially stable balance sheets,” said Aggarwal.

What can the government do?

If the government wants to fulfil its promise of “24×7 power”, said experts, it must accelerate the process of installing electricity meters in all homes, replace defective meters, ensure unpaid bills are paid and end electricity theft–which is easier said than done, as one UP police officer found on June 9, 2019.

The government will also need to address the problem of ensuring power stations are profitable before building more, or reducing “stranded assets” and “low utilisation”, as Aggarwal put it.

Since 2010, India has seen the cancellation of proposals to build power plants worth 573 gigawatts—1.5 times current national capacity—according to a 2018 report by Global Coal Plant Tracker, the End Coal advocacy group’s global repository of information on coal.

The lack of “long-term power-purchase agreements” was cited as one of the leading causes for this “financial stress”, said the report.

First Published: Mon, June 17 2019. 07:50 IST