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Massive Expansion of Power Sector: Its financial sustainability, Shri R V Shahi, Former Secretary, Ministry of Power

Post Electricity Act 2003, power sector has indeed attracted meaningful interests, not only among public and private sector investors and developers but also among lenders. Never before we could have thought that we could get financial closures for projects aggregating to more than 75,000 MW in one Five Year Plan, nor could we have expected that we could get developers interested to implement more than 90,000 MW in the Twelfth Five Year Plan. At this point of time 1,10,000 MW of projects are under implementation and all are duly financially closed.

Towards the end of Ninth Five Year Plan that is around 2001-02, the financial health of the State electricity sector presented such a dismal picture, with an annual loss of the order of Rs. 30,000 crores, that neither private sector was keen to come into power sector, nor the lenders were interested nor were even the public sector companies in a position to mobilise internal resources as also finances from outside so as to make and implement any significant expansion programme. Structure of the industry was also so restrictive in nature that the Single-Buyer-Single-Seller Model hardly inspired any confidence, in fact, this Model raised the level of investment risks even higher.

Radical overhauls of the industry structure, based on Electricity Act 2003, distancing of tariff determination process from Governmental interference, reorganisation State Electricity Boards, shifting the thrust of power sector reforms from generation to distribution, Agreements between Government of India and State Governments to introduce reforms in distribution and take actions so as to make the distribution business commercially viable, have, to a great extent, changed the picture. This has enabled, in last few years, the State electricity distribution companies being to be in a position to meet their working capital requirements, pay for the electricity that they buy from the generating companies and arrest the increasing trend of annual losses. The loss that increased, in a ten year period, from Rs. 3,000 crores to Rs. 30,000 crores by 2001-02, in fact, declined, though marginally, by 2005-06. The trend in the last few years, however, is disturbing. Again, the losses in many States have started increasing. Reform initiatives on distribution, though in policy exist, in action they have gone, in many cases, on the back burner. The impact of accelerated capacity additions, even with modest achievement of targets during Eleventh Plan, would mean more than double of the capacity that was added in any previous Plan. Larger amount of electricity generation would require servicing of larger amount of capital invested. If the distribution business is not made to function effectively and quite away from the business-as-usual approach, increased electricity generation and supply will only mean increased losses.

So far, we have been able to convincingly articulate, with important stakeholders viz. domestic and international investors, project developers and lenders, that starting from 2003 there have been absolutely no case of default in payment by electricity distribution companies which buy power from various generating companies. This has been true for private sector as well as for public sector power companies, which have, by and large, received payments of their bills regularly. But, apprehensions are now being raised by investors and lenders that in view of distribution reform sliding to back seat, and massive in flow of power that would be sold to the same distribution companies, it is doubtful that this situation may continue. This apprehension is not entirely misplaced. But to say that power sector reform is a gone case will also not be true. So far it has, by and large, remained on track. Actions needed, if taken, will ensure that it will remain on track. The following suggestions would need careful consideration:


The Central Government may consider linking the benefits to the State Utilities which are available under various Schemes of the Government of India with the extent of commitment, action and outcome on distribution reform. The highest level in the State Government, viz. the Chief Minister must recognise and realise on the basis of such actions that the benefits would be curtailed, if distribution reforms are not seriously pursued by them. In an indirect way, during the Tenth Plan a successful attempt was made to convey this message. And, it did work in most cases.


The size of benefits under various Schemes of the Government of India have, over the years enlarged. The estimates in respect of APDRP and rural electrification programmes have increased considerably in the Eleventh Plan. Through direct and indirect actions, including policy changes, if required, State Governments may be made to realise that they would be deprived of a major share of benefits under theses Schemes if they did not bring commercial viability of distribution sector in the centre - stage of policy interventions. As a matter of fact, both APDRP and RGGVY have definite provisions to ensure that these actions are appropriately taken by the State Utilities and State Governments. While APDRP provides for specific financial benefits if the aggregate technical and commercial losses are reduced, RGGVY obliges the State distribution utilities to put the rural electrification under Franchisee arrangement. Franchisee arrangement has to be power input based and not only for Bill collection.


Delhi privatisation of distribution, though after some initial teething problems, has proved itself to be successful. It is necessary that more such initiatives are duplicated and replicated. During 2005-06, there was a consensus among various States that if the distribution losses in any towns and cities were on excessively high side, say beyond 25% or so, such towns and cities would be brought under Franchisee Scheme. Bhiwandi in Maharashtra is a success story, Nagpur has followed and so also this has been adapted in Agra and Kanpur. This type of the initiative to Franchise distribution in large towns and cities could be, in a planned manner, targeted and monitored by the Ministry of Power. States which do not comply with these requirements, both under the RGGVY and APDRP, could be conveyed a clear message that flow of fund under these Schemes could be affected.


Unallocated share of power from central generating stations is another important lever under the control of the Central Government which could also be deployed to enforce specific distribution reform initiatives. This would be fully justified because if the State Utilities would be unable to be commercially viable even for allocated share of power, where is the case that they could desire to have more power from the unallocated quota? This action would go a long way in conveying that Central Government means business in so far as commercial improvement of the sector through distribution segment revival is concerned.


Rating of the State Utilities, which was started in 2003, by CRISIL and ICRA focused on bringing out various aspects of loose ends and gaps in all areas of power sector. It identified gaps in Government actions, regulatory interventions and inefficiencies in generation, transmission and distribution. Particular emphasis was laid on how all the concerned authorities and agencies performed to bring about financial revival of the sector. Rating created uneasiness among distribution utilities, and that is what was intended, inasmuchas their concerns about deficiencies made them to take initiatives to improve and reform. This exercise, which has been stopped, should not only be restarted, but also follow-up actions need to be taken on specific areas of deficiencies.


Reorganisation of State Electricity Boards, as stipulated under the Act, is not just a structural change for the sake of change. It aims at focussing accountability on the managing companies which are entrusted with generation, transmission and distribution, as opposed to diffused and confused responsibility in a monolithic SEB structure. Initially extensions were given to some of the States for couple of years on the ground that they needed to prepare for change. Unending extensions is not conveying a correct message. This is further eroding the objective of distribution sector reform.


There are various provisions in the Electricity Act, National Electricity Policy and Tariff Policy, with specific focus on reforming distribution, from the point of view of quality and reliability of supply as also for improving commercial viability. These include specific measures on theft control, Open Access on distribution, multiple distribution licensees in the same area of supplies, compulsory metering, reducing the band width of cross-subsidy and bringing it to plus and minus 20% of average tariff etc. It is necessary that, in co-ordination with CERC, Forum of Regulators, State Utilities and State Governments, these important provisions are properly implemented. Failure to implement should lead to denial or curtailment of benefits available under various Government of India Schemes.


It is necessary that Agreements which were signed between Government of India, State Utilities and State Governments, which covered a large number of specific actions related to distribution sector reform, are reviewed regularly to ensure implementation of targeted actions.

Therefore, unless immediate attention is re-focused on distribution, without, of course, ignoring generation, the sector may go back to the period which existed prior to 2002 - increasing losses and sagging interests of developers and lenders. We need to ensure that this is not allowed to happen. It is doable on the lines suggested above. During the course of specific actions, many new areas requiring attention may emerge. Appropriate response to these emerging challenges would be necessary. India is poised to achieve, on a sustained basis, a 9 to 10% growth. Power sector holds the key. Gratifyingly, interests of all the stakeholders have not only been created, in fact, they have been aroused to overwhelming level. What is needed is that we take all possible steps so that, on a sustained basis, power sector continues to attract investments and financing.