Noteworthy effort

A candid and comprehensive chronicle of India’s power sector reforms since the mid 1990s, which also offers constructive suggestions to deal with the complex challenges posed by this sector.

Published : Sep 13, 2017 12:30 IST

OVER the past two decades, structural reforms in India’s beleaguered power sector have been the subject matter of intense scrutiny and analyses by a spectrum of stakeholders, including journalists, scholars, policymakers and practitioners. Reams have been written, innumerable brainstorming seminars have been held and further reforms introduced, yet the industry seems to be sinking hopelessly into an ever-deeper morass. And now comes Prayas’ latest primer on the theme, Many Sparks but Little Light . It is a meticulous and comprehensive chronicle of the roller-coaster ride that the power sector has been on since the mid 1990s. It is the first effort by a group of professionals with invaluable insights into the working of a sector that touches the lives of virtually every citizen.

The first wave of reforms in India’s electricity sector, launched at the behest of multilateral institutions in the early 1990s, made the cardinal mistake of confusing the symptoms for the cause. The focus then was to attract investments in an ailing and unbankable sector, even if it meant that the government guaranteed payment security to investors. In the process, electricity itself got insidiously transformed from a development input to a market commodity. The restructuring of State electricity boards that followed the initial independent power producers’ programme was an accessory to facilitate investments in the sector, but it did bring a level of hitherto unseen transparency.

Insidious centralisation

Since electricity is a concurrent subject in the Constitution, piecemeal reforms undertaken by some States were consolidated and brought under the umbrella of the Electricity Act, 2003, an insidious centralisation of a sector hitherto administered mainly by State governments.

The new law mandated the unbundling of State electricity boards and the establishment of independent regulatory commissions in every State, which resulted in the Centre wresting control of the sector from the States. But it did have the salutary effect of opening up what had been a black box and ushering in a modicum of transparency in the working of the industry. Transparency, unfortunately, is a necessary but not sufficient condition for achieving the objects of reform. As measure after miscalculated reform measure failed and the sector sank further into the quicksand of unviability, transparency was a useful lens to focus on what had gone wrong with the sector. Prayas has wielded this lens constructively to show how things could have been done better in each of the segments that make up this complex industry.

The chapters of the book are organised functionally: generation from thermal, hydropower and renewable sources of energy, followed by distribution and transmission reforms, supplemented by two separate chapters on coal and natural gas, the principal fuels that go into thermal generation. The failure to synchronise reforms in the power sector with those in coal and natural gas has been a critical factor in the failure of reforms, a fact that is obvious to every observer, although the government seems to have turned a blind eye to this critical aspect.

The problems of the generation sector, after many snakes and a few ladders, are less about availability and more about affordability, sustainability and viability, a point that is well argued in the book. However, it is not clear why the authors are aggrieved about hydropower promoters making windfall profits from the carbon credits claimed by developed countries. To the extent that Clean Development Mechanism (CDM) credit makes hydropower projects attractive in India, the country is a net gainer in terms of generation capacity. The additionality of carbon saved by hydropower projects is the concern of the registering authority, not the Indian government. In fact, the Indian government has been smart in encouraging hydropower projects to take the CDM route. All one can argue is that the financial benefits accruing from carbon credits must be passed on to the consumer, something that is provided for in Central Electricity Regulatory Commission (CERC) regulations but can be fine-tuned further.

Much of the analysis has already been well documented by several industry-watchers, including Prayas, albeit in different contexts and not quite as comprehensively. What this book does is to present the analysis in a cogent and comprehensive format that gives the reader an idea of the overall trajectory of reforms and their impact on the sector. The book scores brilliantly in its expose of the botched-up coal sector reforms, probably the first chronological, authoritative and comprehensive record of developments in the coal sector impinging upon the performance of the power sector.

So where does India’s power sector stand after a quarter century of reforms? Statistics show that the proportion of households without access to electricity has been halved. But in absolute numbers 5.8 crore households still await connectivity, as compared to 6.4 crore in 1991. Complaints about unreliable power supply, high electricity bills and poor grievance redress remain unaddressed. Voltage fluctuations are a daily feature. Public funds still finance the sector, and distribution companies’(discoms) balance sheets are still splattered in red. The environment continues to be a casualty, and distribution losses refuse to go away.

Drawing strength and support from the government’s own statistics, the book exposes the lack of commitment to real reforms despite several loss-reduction programmes—such as the Accelerated Power Development Programme (APDP), the Accelerated Power Development and Reforms Programme (APDRP), the Restructured APDRP and the Integrated Power Development Scheme—that have utilised huge amounts of taxpayers money to clean up discom balance sheets. The reduction in ATC (average technical and commercial) losses, the main reasons why reforms were initiated, has been modest during the last two decades. The reform years have also been one of spiralling power purchase costs, despite the dwindling costs of renewables, particularly solar and some very competitive tariffs quoted by ultra mega power projects (UMPP). Discoms prefer expensive short-term bilateral power contracts, usually with related businesses to purchasing power through power exchanges at market-discovered prices. Such incestuous arrangements are a clear conflict of interest, and yet stakeholders seem to turn a blind eye to them.

The book rightly lays the blame at the door of the sector watchdogs, the State Electricity Regulatory Commissions (SERCs), which through their acts of omission and commission have failed to stem the rot in the distribution segment. The SERCs, whose primary task is tariff determination, have taken the course of least resistance, waiting for utilities to file for tariff revision instead of proactively directing them to do so. Typically, utilities wait for the political bosses to decide whether they should file for tariff revision or not even as their expenditures balloon far beyond their revenues. In a federal polity like India, elections are always round the corner in one State or another, and the government in power is reluctant to risk a tariff increase.

Regulatory failure

If tariffs cannot be revised to recoup the increasing costs, there are other dubious means to compensate discoms. Regulatory commissions do not balk at compensating discoms through fuel surcharge, and so on, which bypass the structured process of regulatory and public scrutiny that regular tariff determination entails. Finally, State governments seldom fork out the subsidies they are committed to providing, to meet at least part of the widening gap between revenue and cost of supply, driving discoms to borrow from public sector banks. In 2014-15, 60 per cent of the non-performing assests (NPAs) of the entire infrastructure sector was accounted for by the power sector alone. Prayas concludes that increasing short-term borrowings by cash-strapped defaulting discoms can crowd out priority infrastructure investment. Banks lend to discoms without adequate due diligence and, according to Prayas, in anticipation of bailouts, which have become alarmingly frequent. Regulatory failure is at the core of the mess in which India’s power sector finds itself today.

Regulatory commissions were set up as a core reform agenda, ostensibly to “depoliticise” decision-making without considering the ground realities of the intensely political nature of the electricity industry. As a result, despite being armed with extensive powers, regulatory commissions have failed to instil commercial sense into the discoms. As the book points out, no regulatory commission has devised a road map for the financial turnaround of the sector, much less conduct a comprehensive review of power and systems requirements with a view to optimisation of investments. Public interest has seldom informed regulatory decisions.

Further, the SERCs have signally failed to true up the tariff proposals of their respective discoms to correct for avoidable costs incurred in the past because of poor performance and/or other inefficiencies. Performance accountability is the casualty. A huge number of infructuous litigation cases arising from ambiguous regulatory orders has also hampered the functioning of discoms. Finally, the unacceptable levels of regulatory assets piled up by virtually every SERC over the years has seriously impacted the viability of discoms. As the book rightly points out, the success of the Ujjwal Discom Assurance Yojana (UDAY), the latest bailout scheme, will become apparent only when tested against election or drought years.

Rural situation

Nowhere is the failure of power reforms more evident than in the story of rural electrification. Seventy years after independence, we are still aspiring for Power for All, wherein every household in the country will get power supply 24/7. Although statistics claim high levels of village electrification, household access has remained poor, and even where households have been connected, hours of supply leave a lot to be desired. Village electrification has focussed mostly on energising irrigation pump sets and not on household access. But even in regions where penetration of household access is good, actual supply of electricity has been intermittent at best. Prayas’ own monitoring of supply in 250 locations across the country revealed shocking figures of frequent interruptions, low voltage and restricted hours of supply even in urban areas in megacities, leave alone rural supply.

Even if governments succeed in connecting all households, affordability will pose challenges to the rural poor. Prayas’ prescription of earmarking cheap power from UMPPs or fully depreciated plants specifically for supply to rural households is old wine in a new bottle. The idea was first mooted by the energy expert and former bureaucrat T.L. Sankar but was never considered seriously by any government. Stable and assured electricity supply to rural households is probably a silver bullet that could at one stroke provide livelihood opportunities to the rural poor and check mass migration to urban areas, but successive governments have failed to bite that bullet.

Coal mess

Appropriately titled “A black past and a grey future”, the chapter on coal is a scathing commentary on how the mishandling of the sector over the past several decades has dragged the electricity sector down with it; after all, currently, coal fuels two-thirds of all electricity produced and consumed in India. From the days of coal linkage and captive mines to the comprehensive New Coal Distribution Policy (NCDP) announced in 2007 at the behest of the Supreme Court, the coal industry’s knee-jerk response to contingencies has been unsparingly documented.

The promulgation of the NCDP was only the beginning of further mismanagement of the coal sector wherein coal linkages were handed out indiscriminately to all and sundry by the coal linkage committee without regard to Coal India Limited’s (CIL) ability to honour the commitments. Substantial power generation capacities came up in the wake of these paper linkages, only to languish for want of physical supplies of coal. These power generation capacities were funded by financial institutions primarily because of the assured coal linkages, and the attendant implication from the stranded asset was the ballooning NPAs of banks. The government compounded the complications by getting a presidential directive issued that ordered CIL to honour all its linkage commitments, as if this could be done by mere fiat.

Salvaging the situation required CIL to supplement its own production with imported coal without clarity on who would bear the cost of high-priced imports. Issuing fiats to regulators to pass on fuel cost increases in the tariff met with huge protests and has since been struck down by the Supreme Court, albeit in a different case and context. As Prayas rightly points out, consumers cannot be punished for “ambiguous drafting of NCDP by the government, overly generous linkage allocation… and convenient interpretations of the various documents by the power generators, their financiers and coal companies”.

The illegalities and procedural irregularities in the allocation of coal blocks unravelled when what is termed the “Coalgate” scam was unearthed by the Comptroller and Auditor General of India in its scathing report tabled in Parliament. Eventually, the Supreme Court struck down the allocations. Now the sector is back to square one. With the passage of the Coal Mines (Special Provisions) Act, 2015, auctioning and allotment of mines for captive use as well as the possibility of commercial mining should put the sector back on the rails, although this would happen at a time when coal itself is becoming a dirty word and the 2016 Paris climate accord foretells a decisive move away from coal.

Weak plans

Most of the above factors are well-known to stakeholders and industry-watchers. The book lays the blame squarely on five factors: poorly conceived objectives, weak plans and design flaws, weak institutions, entrenched interests and absence of competition except in the solar photovoltaic segment. But it rightly argues that the solution is not to abandon reforms and go back to government ownership and control of the industry; after all, it was government ownership of companies such as CIL and the State electricity boards that created the problems in the first place.

The trick lies in acknowledging the type of reforms appropriate to each segment. For instance, the natural monopoly character of transmission and distribution activities warrants better regulation under state ownership. Good governance across the sector irrespective of ownership is key to turning around the industry. This should go hand in hand with clear prioritisation of social and environmental objectives such as universal access to affordable modern energy, reliable supplies, equitable treatment of competing uses and users of common resources such as water or common land and better treatment of project-affected peoples. Instruments to achieve these would include appropriate policies and pricing and robust frameworks to assess competing needs. Above all, credible monitoring and tracking of implementation of policies and compliance with regulations, under the glare of public scrutiny, will go a long way in putting the sector back on track. Additionally, planning for the sector should incorporate agility and nimbleness since future developments cannot be fully anticipated, a recommendation that cannot be stressed enough. Formulating clear and implementable policies through transparent and extensive stakeholder consultations would avoid the pitfalls of future litigation.

Drawing up appropriate policies and programmes and prioritising social and environmental objectives is the easy part. How to incentivise policymakers and regulators to implement these objectives, enforce and monitor progress, make the actors concerned accountable, and improve governance are questions with which we all grapple, without satisfactory answers.

Where this book scores is in its disarming candour, the complete absence of rancour and the constructive suggestions to deal with the complex challenges of this sector. Our policymakers would do well to heed this sane voice from Prayas.

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