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Monday, 23 May 2011 00:00
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With 9,600 MW of power generating capacity set up last year, and 60,000 MW over the entire 11th Plan ending 2011-12 (that’s triple the capacity set up in the 10th Plan and 10% more than the capacity in the last three Plan periods), you’d be pardoned for thinking the power sector is doing well—at the Express Group’s Idea Exchange a few months ago, the power minister too contributed to the all-is-well belief. So what are we to make of the 13th Finance Commission’s projection that state electricity board (SEB) losses are all set to rise 4.3 times, from R27,317 cr in 2008-09 to R1,16,089 cr in 2014-15?

Actually, one should have started getting suspicious when, some years ago, the government stopped giving the annual losses of the power sector in the Economic Survey. Till then, almost regular as clockwork, SEB losses used to rise a bit each year, hardly a matter of concern given the pace at which the economy was growing. In 2000-01, SEB losses were R25,400 cr, and these rose to R25,700 cr by 2007-08. It’s after this that the problem really exacerbated, according to a recent paper by Saugata Bhattacharya (an FE columnist) and Urjit Patel (http://www.brookings.edu /papers/2011/01_india_power_patel.aspx), very largely based on data from the Power Finance Corporation (PFC).

According to the duo, commercial sector losses jumped from R26,400 cr in 2008-09 to over R40,000 cr in 2009-10, and FE has reported the losses in 2010-11 could be as high as R70,000 cr. Financial sector losses, of course, are higher as they take into account interest, depreciation among others, and these rose from R32,060 cr in 2007-08 to a whopping R52,620 cr in 2008-09. As a result, the return on equity is around minus 14% in the sector.

One obvious reason for the rise in losses is the average technical and commercial (ATC) have stopped falling at the pace they were some time ago. If you buy 100 units at R1, and have ATC losses of 50%, you have to sell the power at R2 to just break even. If ATC losses fall to 25%, however, you can sell at R1.33. So, a fall in ATC losses is a big reason for power tariffs to fall, or to at least remain stable at a time when power purchase costs are rising.

The biggest reason for the sharp deterioration in the power situation is the rising gap between power purchase costs and the cost of selling power. According to Bhattacharya and Patel, the correlation is the highest between ATC losses and the gap in purchase and selling costs of power. Electricity costs are rising dramatically for two reasons—one, since around a third of the capacity is less than five years old, the costs are higher than for older plants which have been heavily depreciated already; two, while around 8% of the total power sold in the country is through a bidding route—on power exchanges or through what’s called unscheduled interchange (UI)—this is at a higher price, so the total power sold through this is probably around 15% in value terms. Last year, when spot prices were higher, this ratio was around 20%.

Things are not as bad, it is true, as they were in 2001, when the SEB dues were R41,500 cr, or around 2% of 2000-01 GDP. That situation was resolved through huge haircuts by the state government, the central government and central power utilities. The problem also looks smaller as GDP growth has also risen, but we could be getting there once again. Financial losses, as Bhattacharya and Patel point out, were around 0.9% of GDP in 2008-09, exactly the same as they were in 2002-03. Utilities aren’t defaulting in their payments as yet, but as the latest PFC report points out, state governments are delaying paying their share of subsidies to power utilities—against the R29,665 cr of subsidies they had to compensate the SEBs for in 2008-09, the states shelled out only R18,388 cr. Some of the big defaulter states are Maharashtra and West Bengal, where no payments were made in 2008-09 and 2009-10. And, subsidy payments in states like Punjab are as high as 1.9% of GSDP.

The other big problem is that while costs are rising—due to the plants being new, energy prices rising or simply buying more power in the spot market—utilities aren’t raising consumer tariffs as fast. While the gap was 39 paise per unit of energy in 2005-06, this rose to 78 paise in 2008-09. Indeed, the power secretary told FE that he had approached the Appellate Tribunal for Electricity to ask various regulatory commissions in the states as to when they last raised tariffs on their own.

Interestingly, while the rising costs of power are causing SEB losses to rise, some problems are also arising on the supply side. Thanks to prices rising the way they are, firms are increasingly wanting to renege on contracts. In February, the Haryana Electricity Regulatory Commission (HERC) gave a ruling where the Power Trading Corporation and Lanco wanted to get out of an agreement to sell power to the Haryana Power Generation Corporation as the tariff was no longer lucrative—the HERC ruled against it. There are several other such instances.

So why are firms like ADAG still raising capacity? Since a large part of the capacity will come from Ultra Mega Power Plants (UMPPs), where tariffs are quite low, the merit order despatch system ensures their power will have to be bought first. At the end of the day, however, if ADAG’s Sasan power is bought as it is cheaper, some other power plant will have to back down—not because there’s no demand, but because SEBs can’t pay for the power. A new bailout plan may be in the offing—Planning Commission is doing work on this—but a lend-bailout-lend cycle is hardly conducive to the sector’s overall growth.

The only solution then lies in raising tariffs. With capacity growing so fast, even a slippage of a few years in raising tariffs can lead to a disaster. In Delhi, for instance, the regulator didn’t raise tariffs and chose to create ‘regulatory assets’—essentially amounts owed to BSES and NDPL and to be paid in the future. With the regulatory assets at R8,300 cr and the total annual sales of power adding to R8,000 cr, this means tariffs in Delhi have to be more than doubled to clear the backlog!

By 2014-15, when the 13th Finance Commission projects SEB losses rising to R1,16,089 cr, India will have a new government in power. By then, the way things are going, large swathes of the country won’t have any power.

 

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