Electricity conundrum

Lots of cheap electricity, few takers, large power cuts

Power minister Piyush Goyal’s regular afternoon tweets on power being available in the country’s power exchanges at reasonable rates of around R2.5 per unit come as more than a bit of a surprise considering the long power cuts in most areas of the country every day. While it is true the Central Electricity Authority (CEA) took everyone by surprise when it said that India would be power surplus in FY17 with a peak surplus of 3.1%—the east, north-east and north, though, have a deficit—what is not clear is whether Goyal’s tweets imply India has licked its power problem or whether they are symptomatic of a deeper malaise. As FE reported on Wednesday, with an average of 1,621 million units of power available on the spot market every month, this can more than cover the deficit of most of the big states. Uttar Pradesh, which has the largest deficit of 846 million units per month just buys 22 million units per month. Kar nataka, with a 239 million unit shortage purchases a mere 5 million units; Rajasthan with a 27 million unit shortage buys just 3 million units. It is only Bihar which has a shortage of 21 million units that buys 309 million units from various power exchanges.

While the improved coal situation—local production, which is far cheaper than imports, was up 42 million tonnes, to 536 million tonnes in FY16—has played a big role in electricity availability rising, the collapse of industrial demand is probably a bigger factor. The larger reason, though, is a near complete mismatch between demand and supply creation. Buoyed by the growth of earlier years, generating capacity has increased 105% between FY09 and FY16 while demand has risen just 39%—to that extent, even increased industrial demand may not reverse the power surplus situation, more so if there is more gas available for power plants; indeed, the reason why spot power is priced so low is that generating fir ms are desperate to sell so that at least part of the capex can be amortised.

Despite this, the main reason why state electricity boards (SEBs) do not buy much spot electricity is that it is just not viable to do so. For one, most have expensive PPAs already tied up, so the actual cost of buying spot power is not the R2.3-2.5 that Goyal tweets about, but has to include the capital charge that will have to be paid to generating companies being asked to back down. In many areas, there is a shortage of adequate transmission and distribution capacity, so while it is profitable to buy spot power and supply it to customers, the grid simply cannot handle it—this is where Goyal’s Deendayal Upadhyaya Gram Jyoti Yojana and Integrated Power Development scheme comes in, but it will take at least a few years for it to be fully rolled out. While the UDAY scheme has played a big role in reducing SEB debt, in cases like Uttar Pradesh, there are still huge outstandings to suppliers which makes further borrowing to buy spot power difficult. By far the biggest reason, though, is that with 40-50% power theft levels, the real cost of the spot power works out to around R5 per unit, a rate which is much higher than that paid for by a very large proportion of customers—in which case, SEBs are being rational in preferring to restrict supplies instead of just generating more losses. Piyush Goyal would do well not to declare victory till UDAY actually fixes these issues—right now, the only progress to report is that banks have been armtwisted into taking a 5-6 percentage point hit on SEB loans.