Power play

The sector needs urgent pricing reforms

The government is making yet another attempt to improve the state of the power sector and has come up with a new draft National Electricity Policy with objectives such as promoting clean energy, developing an efficient market for electricity distribution, and revitalising distribution companies. The Electricity Act allows the Union government to review and revise the electricity policy from time to time. India has made significant progress in recent years in terms of capacity addition with the increasing role of renewables. But the contribution of coal is likely to remain significant in the coming years. As the draft notes, coal-based capacity addition may be required because it remains the cheapest source of power generation, though the focus should be on adding more renewable capacity. In this context, it is important to note that state-run distribution companies would need to be more flexible in buying power and should honour purchase agreements.

Apart from generation, transmission and distribution also need significant policy attention. As the draft notes, the sector is affected by a number of issues such as high aggregate technical and commercial (AT&C) losses, poor upkeep and maintenance, and inadequate system planning, which ultimately affects the consumer. While it suggests a number of changes, the sector will remain under stress till the basic issue of transparency in pricing is addressed. The AT&C losses currently stand at about 24 per cent, which is not very different from when the Ujwal DISCOM Assurance Yojana (UDAY) was launched. Unsurprisingly, the state of state power distribution companies has not improved. Another scheme to revamp the sector was announced in the Union Budget 2021, but things are unlikely to change till the underlying issues are addressed.

The distribution companies’ dues to power generators amounted to about ~1.5 trillion at the end of last fiscal year, while state governments owed ~1.13 trillion to distribution companies. The debt of distribution companies is expected to cross ~6 trillion by the end of the current fiscal year, which is much higher than the PRE-UDAY level. The current state of functioning is simply unsustainable. State government finances are stretched and will remain under pressure in the foreseeable future because of pandemic-related disruption. Underpricing of power is also pushing up off-budget liabilities for state governments. Besides, cross-subsidisation makes power more expensive for the industrial sector, which affects competitiveness.

This is not to suggest that states should not provide power subsidies to deserving households. But it should be done transparently. As proposed in the past and also noted by the draft policy, regulatory commissions should ensure that all costs are accounted for in the tariff. If state governments intend to give relief to certain sections of consumers, it should be in the form of direct benefit transfer. This will not only increase transparency in pricing but also reduce subsidy outflow because state governments will have to pay consumers from the Budget. This can fundamentally improve the balance sheet of distribution companies and enable them to make the necessary investments to improve operational efficiency. The government has done well in recent years by achieving 100 per cent electrification and is working to connect all households. But providing uninterrupted power will become increasingly unsustainable if pricing reforms are delayed further. Another financial package or shifting of liability will not work.