The uninterrupted supply of requisite units of power at competitive rate to industries helps them reduce the cost of production. This along with lower cost of other infrastructure such as transport, storage and handling etc can give them the strength to compete in the domestic and international markets.
This will also enable them temper their resistance to multilateral trade agreements such as the Regional Comprehensive Economic Partnership [RCEP] – between the 10 members of ASEAN plus 6 countries outside the group viz. Australia, New Zealand, Japan, South Korea, China and India – which promise manifold increase in access to markets but are stymied by fear of low cost import consequent to elimination of customs duty mooted under these agreements.
Yet, making power available at low tariff poses a huge challenge. This is primarily because the power distribution companies [PDCs]/state electricity boards [SEBs] which procure the electricity from various sources including independent power producers [IPPs] besides self-generated power and supply to consumers/user industries suffer from huge financial disability.
This is due to these PDCs/SEBs being forced to supply power to poor households and farmers at rate much below the cost of purchase and distribution [even free in some states] and aggregate technical and commercial [AT&C] losses – a euphemism for electricity units for which revenue is not realized due to theft and pilferage.
To make up for resultant shortfall in revenue, PDCs/SEBs charge exorbitant tariff from industries. Despite this, a substantial portion of deficit remains uncovered resulting in losses which are funded by borrowings. Happening year-after-year, they piled up debt to unsustainable level Rs 430,000 crores [end 2016].
In November 2016, Modi – government came up with Ujwal Discom Assurance Yojna [UDAY] which on one hand relieved PDCs/SEBs from the debt burden and on the other goaded them to address the causes behind losses. As regards the former, 75% of the debt was taken over by the states and for balance 25%, they were allowed to issue bonds backed by sovereign guarantee. As for latter, the distribution companies were required to bring down their AT&C losses to 15% and eliminate the gap between the revenue realized from sale of electricity and cost of purchase and distribution by 2018-19.
PDCs/SEBs have failed to deliver what was expected of them. For 27 states and UTs [out of a total of 36] covered under the scheme, the AT&C losses during the current year are 22%. For Bihar, Jharkhand and Uttar Pradersh, these are in excess of 30%. Likewise, the gap between revenue and cost of purchase and distribution continues to be significant at 27 paise per unit; for some states, it is much higher: Jharkand Rs 1.85 per unit; UP/Haryana/Telengana around 50 paise per unit.
In view of significant shortfall in achievements vis-à-vis the target, they can hardly claim being on the recovery path. True, the financial loss of PDCs covered under UDAY at the end of fiscal 2017-18 were Rs 17,000 crore – nearly half of the previous year level. But, this is misleading as their outstanding dues to power generators increased by 150% to about Rs 32,000 crore during this period.
Clearly, very little is being done to countenance the fundamental factors behind the ailing PDCs/SEBs. Given the scale of populism that has invaded India’s political landscape [indeed, elections are won on promises of subsidies/sops], supply of heavily subsidized power or even free is unlikely to go away too soon. Even power theft on a massive scale is not possible without political patronage.
On the supply side also, despite UDAY mandating more choices to be given to distribution companies [discom] to procure power at cheaper rates, there are hardly any pressure generators to bring down tariff. In fact, the admissibility of fuel cost as ‘pass-through’ [a jargon for building it in tariff on actual basis] in power purchase agreements [PPAs] has made the supply inherently costly.
Even in respect of power supplied from ultra mega power projects [UMPP] where tariff is shielded from increase in fuel cost [courtesy, tariff-based competitive bidding] in a recent order [October 29, 2018], the Supreme Court has directed the Central Electricity Regulatory Commission [CERC] to amend their PPAs with Tata Power Ltd [TPL] & Adani Power Limited [APL] – promoters of UMPPs – to facilitate pass-through of future fuel price escalation.
Often, cost push due to irregularities in the functioning of generators get loaded on tariff. For instance, a draft report by Comptroller and Auditor General [CAG] on audit of three PDCs in Delhi revealed that the consumers were charged excess tariff by around Rs 8000 crores and an equivalent amount of ‘inflated’ regulatory assets [RAs] – a euphemism for previously incurred losses that can be recovered from consumers, if allowed by the regulator.
Likewise, investigations by Finance Ministry and Directorate of Revenue Intelligence (DRI) have revealed over-invoicing of coal imports by 40 companies — both in the public and private sector — to the tune of ₹35,000 crore during the past two-three years. Since, coal costs are pass thru under PPAs, this increases tariff.
Under the new tariff policy, the discoms can hike tariff to cover their losses only up to 15%. This is an arbitrary restriction and does nothing to help them improve their working. Likewise, capping the cross-subsidy to consumers to 20% immediately followed by complete elimination within 3 years – as contemplated in the proposed amendment to the Electricity Act [2003] – is not capable of being implemented.
The moot point is that till such time, the political establishment musters the will to do away with subsidized/free supply of power to farmers/households, rein in theft and put a stop to letting generators get away with hike in cost, the discoms will continue to be haunted by shortfall in revenue from sale vis-à-vis the cost.
Till then, the industries will have to wait for any significant relief from present high tariff and resultant improvement in their cost competitiveness.