A Critical Weakness

The power sector now looks good. There is a surplus. Village electrification is getting completed. All households could get electrified within two years. Renewable sources of electricity are becoming cheaper and competitive. Last year renewable energy capacity that was added exceeded that of conventional thermal power.

Yet the sector continues to be a cause of serious anxiety financially. It constitutes a substantial portion of the stressed asset/NPA problem of the banks who have lent to private sector power projects. The sums involved are very large, about 2 lakh crores. Notwithstanding annual subsidies from the state government budgets of about 50,000 crores to their Distribution Companies, the huge bailout through the special bonds of around 2 lakh crores under the UDAY Scheme became unavoidable for the outstanding loans from Banks to the Power Distribution Companies which had been borrowing to bridge the gap between costs and revenue, year after year. Not many may readily recall that a similar bailout was provided in 2001-02 with conditionalities for a financial turnaround. Reform MOUs were signed with almost all the states.

The Electricity Act, 2003 was a major reform legislation enacted after considerable effort, stakeholder consultation, and consensus building by the then NDA government. It received the support of the Congress which was necessary to get it through the Rajya Sabha. It was supposed, among other things, to fix the problem of the financial health of the sector. It mandated the creation of independent Electricity Regulatory Commissions in the States which would set tariffs and progressively reduce cross subsidies. The state governments were required to give subsidies from the budget in case they wanted any class of consumers to get electricity at rates lower than what the Regulatory Commissions determined as being reasonable; a provision designed to take care of political decisions to, say, subsidise, or, even give free electricity to farmers. Fourteen years have gone by since the law came into effect.

What has happened? Why has the Electricity Act not had the intended effect? Here the diversity in outcomes across states is really striking. So at one end of the spectrum, Gujarat, West Bengal and Delhi have profitable undertakings and the Electricity Act seems to have brought about the expected turnaround. At the other end, the four states of UP, Rajasthan, MP and Tamil Nadu accounted for 80 % of the losses when UDAY was set in motion. If the political leadership prevents the Distribution Companies from seeking necessary tariff increases for years, as was the case in Tamil Nadu,the state regulatory process becomes irrelevant. It took persistent efforts of the Power Ministry over some years to get the elementary principle accepted that increase in power purchase costs due to increase in fuel prices should be an automatic pass through in consumer tariffs.

Giving farmers free, or, practically free electricity is now accepted as an unavoidable political necessity. The notable exception is West Bengal which not only charges farmers but is also able to raise their tariffs. The Power Ministry, however, has given up on trying to persuade the states to charge farmers. It is now pushing for feeder(supply lines) separation so that hours of supply for agriculture can be restricted and village households can get 24 hours supply. Gujarat was the first to do this and actually give 24 hours of supply to village households. However,technology has since evolved and feeder separation now appears an unnecessarily expensive and sub optimal solution. Direct cash transfers are now under implementation in other areas.  Affordable smart prepaid meters are in the market. Smart grids with real time automated management abilities are being introduced in the country and are turning out to be cost effective. The time is, therefore, just right to switch to cash transfers to farmers for irrigation and put in place pre-paid metering. The advantage would be that the farmer would have an incentive to use more efficient pumps and to use water more economically and as a result even have some cash savings. The substantial cost investment in feeder separation would be avoided. What is even more important is that with 24 hours reliable power supply, the next phase of modernisation of agriculture would get enabled. Globally, agriculture is now as technology intensive as manufacturing.Productivity keeps rising. However, 24 hours reliable electricity is a prerequisite for this. With direct cash transfers to farmers, the Distribution Companies would no longer be able to hide inefficiencies on account of free unmetered supply to agriculture. The states may even find that with a lower level of subsidy, the farmers may be better off and the next phase of productivity gains in agriculture would begin. The quality of governance is obviously critical. Where governance is weak, large scale theft of power takes place with corresponding levels of corruption and poor quality,erratic power supply. For far too long, the Center has been complicit in weak governance of the power sector in the States.
The writer was special secretary, Government of India