past, stocks of some power companies were downgraded to 'sell' on account of
weak 'merchant' tariffs. India has historically failed to meet its power sector
targets by a significant margin. Despite tremendous opportunities ahead to meet
the fast growing economic demand for reliable and quality power, the power
sector continues to be affected by the shortfall on generation as well as
inefficient use of resources. The biggest indicator of a poor track record is
the inability to meet targets on the power generation capacity addition and
inefficient demand-side management. A number of reasons have been cited for the
opinion, the most important concern is the irrational and un-remunerative tariff
structure of the distribution utilities. There continues to be a large gap
between their cost of supply and the tariffs allowed to be levied. The utilities
to curb their losses, therefore, resort to power cuts and load shedding despite
availability of power in the market at a competitive tariff. This suppressed
demand gives a distorted signal to the market. At one hand, you have power
projects that need to be backed down and rampant power cuts and load shedding on
the other. The market for short- term sale of power, though growing robustly,
still is not very deep. The prices in the short-term market spike seasonally,
and in certain periods, are attributed more to short-term considerations such as
elections or festivals than to the organic growth in demand due to fast growing
economy and changing lifestyles.
expected merchant tariffs has pushed project developers to rely mainly on the
long-term tie-ups of power. The market for long-term contracts, in turn however,
means tying up power primarily with distribution companies / State Power
Utilities (SPUs) through competitive bidding more often on long term basis
stretching to 25 years or more. The typical SPU, however, remains hamstrung in
its operations with limited ability in revising its tariffs that reflects cost
of supply. State Governments desire to provide power at heavily subsidized rates
to certain sectors especially agriculture and domestic consumers without
adequately compensating the utilities is adding to the woes. Only a part of this
subsidy is recovered by SEBs through cross subsidisation of tariff from
commercial and industrial consumers. As power constitutes a significant
component of input costs, such cross-subsidy tends to make the industries
uncompetitive in this era of globalisation.
power generation in the country last year was over 800 Billion Units. If the
average power prices were to increase by Re1 per unit, it would generate
additional cash of Rs.80, 000 Crore per annum. Compare this to the cash losses
of all SPUs, which are estimated at around
Rs. 68,000 Crore. What sounds like the panacea for the SPUs' ills, however, is
not easy to implement as an average tariff increase of Re1 per unit may subject
customers to tariff shocks. However, we seem to be no longer in a position to
avoid these tariff shocks. When prices of all inputs and for that matter, of all
essential commodities have increased substantially over the past few years, can
we avoid increase in electricity prices?
tariff settings by the regulators taking due cognizance of cost of supply and
demanding more efficient and reliable performance from the distribution
utilities would make the difference and set the sector on right course.
A recent judgement by APTEL directing State Electricity Regulatory Commissions
to suo-motu undertake revision of tariff, if utilities fail or delay in
filing tariff petition on time, is a progressive step.
of concern has been the competitive bidding process adopted by distribution
utilities for procurement of power. Competitive bidding under present guidelines
requires commitment to a firm price over a period of 25 years or more. Given the
prevailing uncertainties in fuel, environmental clearances, etc., and a higher
cost curve that is evolving due to rising input costs even as the project enters
its construction phase, how feasible is a firm price of this nature? In the
extreme scenario of cascading delays caused by various resource related issues,
the projects may even be unviable at tariff discovered through competitive bids.
First, Case-1 bids (bids which
are not specific to project location, technology or fuel) are few and infrequent
in number; and by now, experience on success rate is at best mixed. Second, the
developer, who already faces immense uncertainty on the resource fronts, invests
risk capital, and is under pressure to financially close projects and `get on
with it'. Quite often, the project developer may quote prices that will be
unworkable - all towards the end of a `winner's curse'. Therefore, in many
cases, project developers may have bid at near speculative price levels to win
competitive bids. In turn, it means that the evolving cost curve is ignored.
Alternatively, the prices discovered will be higher than
the possible levels; simply because the developers will `price' the risk faced
by the project on various counts.
The rising gap between tariff and
cost of producing electricity as well as aggregate technical and commercial
losses are the main factors for the losses, a report by ICF International with
assistance from Federation of Indian Chambers of Commerce and Industry (FICCI)
and the power ministry stated. The report said, "Consumer tariffs need to be
revised annually by all the states. Increase in fuel cost should be transferred
to the consumers regularly (preferably every quarter) across all states." The
programmes initiated by the government to improve health of discoms so far focus
on reducing AT&C losses, but it alone cannot pull out the discoms from red.
Tariffs must also be revised.
Moreover, the tariff hike has to be substantial. Past data shows that
tariff was hiked at a CAGR of ~5 % by the SEBs, but it has not kept pace with
the rising power costs (~8 % CAGR in the same period) which constitute a major
portion of the total expenditure of SEBs. Also, better demand side management
can save substantial amount of power. If current situation continues, lenders
will stop lending money and generators will stop supplying electricity to the
discoms. Even from political point of view, which State Government can afford no
supply of power to consumers?