Energy/ Power Sector

Punished for performance

Print edition : February 05, 2016

NTPC Limited's Simhadri super thermal power station near Visakhapatnam, Andhra Pradesh. NTPC meets more than three-fourths of the country's power needs. Photo: C.V. Subrahmanyam

The Uri-II hydel project in Jammu & Kashmir, was one of the power stations temporarily shut down last year due to construction faults. Photo: Nissar Ahmad

A demonstration against Southco in Khalingi village in Odisha on July 12, 2011. In March 2015, the Odisha government cancelled the distribution licences of Southco, Nesco and Wesco, all Reliance Infra discoms. Photo: Lingaraj Panda

PSEs such as NTPC have turned in a stupendous performance despite handicaps imposed by a government favouring non-performing private players. Divesting their shares will expose them to market vulnerabilities.

Ever since the Electricity Act was implemented in 2003 by the National Democratic Alliance (NDA) government headed by Atal Bihari Vajpayee, the power sector has seen sweeping changes. With the slogan “Power to All by 2012”, the government set for itself the target of electrification all rural areas. The new Act trifurcated the power sector into generation, transmission and distribution systems. While making generation and distribution competitive sectors, the government retained with it the responsibility to transmit electricity to distribution companies. The government hoped that the new Act would help India meet its increasing power demands. In effect, the legislation paved the way for the privatisation of the sector as more and more private players got into generation and distribution.

While complete electrification of the country still remains a distant dream, the new Act engendered new problems at every stage of its implementation. The process of decentralisation suffered a setback as successive governments—of both the NDA and the United Progressive Alliance (UPA)—colluded with private capital to eventually chart the decline of dependable public sector enterprises like NTPC (National Thermal Power Corporation), which accounts for more than 80 per cent of India’s electricity needs, and NHPC (National Hydroelectric Power Corporation).

In the last decade, the sidelining of the two biggest power generation companies has had a direct impact on consumers. Rate increases, erratic services, corruption and increased power thefts are some of the problems that have cropped up in the last few years. The coal scam during the UPA-II government opened up a can of worms. It brought to light how the government bent the rules to grant coal blocks to private companies, some of which had no capacity to generate electricity. As a result, a great amount of coal was mined by the private companies, but commensurate electricity was not generated.

Since the government relaxed many accountability norms to attract private capital to the power-generation sector, private companies harvested huge profits without having to fulfil their basic responsibilities. A Frontline article (“Pits of sleaze”, May 31, 2013) said: “The Electricity Act (2003) facilitated the entry of private companies into power generation, which required thermal power. The NDA regime provided extraordinary facilities to the new players and at the same time disinvested in public sector power plants. Coal blocks were allocated to power companies, cement plants, steel factories, and so on, within the same region so that they could dig out coal for their primary businesses at a minimum cost of transportation. This meant that many companies without having any expertise in the area were allocated mining licences. It worked like this: a company chooses a ‘coal block’ and submits an application to the Ministry to mine there, in a process called ‘linkage’, and the Coal Ministry allocates mining rights to the company after getting environmental clearance from the Ministry of Environment and Forests.”

The privatisation of the power sector, which started in 1991, gifted away India’s biggest thermal power resource—coal—to undeserving private companies. The Parliamentary Standing Committee on coal allocations wrote in its report: “In fact, Atal Bihari Vajpayee’s government made coal allocation in a much greater way than the Congress had done before. As many as 218 coal blocks were allocated from 1993 to 2010. While only five and four blocks respectively were allocated under Prime Ministers P.V. Narasimha Rao and H.D. Deve Gowda, Vajpayee took an unguarded approach while allocating coal blocks. Thirty-two blocks were allocated during the NDA government. The Congress, of course, took this rash approach further by allocating 175 coal blocks from 2004 to 2010.”

Undermining NTPC, NHPC

At the same time, NTPC and NHPC, which were earning high revenues, became important go-to organisations for the government to cross-subsidise various other sectors and meet the need to reduce fiscal deficit. As a result, a slow process of disinvestment, or what is now called divestment of shares, became a routine feature.

The NDA government has approved the divestment of 5 per cent of NTPC shares and 11.36 per cent of NHPC shares. It plans to open up the two companies to merchant bankers who trade in the stock market. This means that companies interested in power generation need not make additional investments and that NTPC and NHPC will be exposed to the vulnerability of the market. While the government claims it will earn Rs.8,247 crore from divestment, the sidelining of the two companies has resulted in the value of its shares dipping much below their real value. This has happened because of the nonchalant attitude of the government to the functioning of the two companies. For instance, three power stations of NHPC (Uri-II (240 MW) in Jammu and Kashmir, Parbati-III (520 MW) in Himachal Pradesh and Teesta Low Dam-III (132 MW) in West Bengal were temporarily shut down last year owing to electrical and construction faults, which caused a loss of around 900 MW. This capacity is large enough to meet the peak power demands of Jharkhand.

Success & new burdens

Both the public sector enterprises (PSEs) have been handling the crisis really well and have not registered losses. NTPC still generates more than three-fourths of India’s power. NHPC also remains the biggest hydropower producer despite the fact that many State governments have started new hydropower projects under private sector leadership. Industry reports indicate that hydropower generation by private players has backfired in most cases. Some estimates suggest that the controversial Maheshwar hydropower project in Madhya Pradesh may sell power to the State government at Rs.12 per unit of electricity. Similarly, small hydroelectric projects in States like Uttarakhand, Arunachal Pradesh and Himachal Pradesh have grossly underperformed. The environmental risks associated with these projects are also high.

Despite so much attention to private players, the NTPC’s story has been one of silent success. Its latest annual report, for the year 2014-2015, states that the company has registered a 10.8 per cent growth in power generation, taking its total production to 61,014 MW, exceeding the 11th Plan’s estimates, and constituting 68.9 per cent of the 12th Plan figure of 88,537 MW. NTPC has led the way in power generation and has been successfully delivering more than what is expected of it. A qualitative and quantitative analysis of NTPC’s performance belies the government’s reasoning that private capital is necessary for India’s power needs.

Despite such a stupendous performance, the trifurcation of the power sector has created additional liabilities for PSEs. The debt-equity ratio of the NTPC has, for the first time, become negative. From 0.78 in 2013-2014, it has fallen to 1.05 in 2014-2015. This is because the Navratna company has to bear the losses brought out by the trifurcated system.

Private Discoms’ failure

In the new decentralised system, NTPC and NHPC are forced to sell electricity at cheap prices so that transmission agencies can sell it to the state and private distribution companies (discoms) at affordable rates. The government’s failure to boost discoms by spending more on them has led to a situation where the discoms have been incurring losses. Some estimates peg their losses at around Rs.5.5 lakh crore, an amount bigger than India’s fiscal deficit. In such a situation, the government believes more in privatising discoms than catering to their actual needs.

The experiments in Delhi, Odisha and Chhattisgarh have shown that private discoms have failed to reduce costs and losses. The discoms run by the Reliance group have been making more and more losses and are constantly asking the government to increase the price of electricity. In March 2015, the Odisha government cancelled the power distribution licences of Nesco, Southco and Wesco (all Reliance Infra companies) under Section 19 of the Electricity Act “for their gross failure in raising their performance and financial health, reducing distribution loss, preventing theft of energy and running the organisation in a financially viable manner”.

A commission appointed by the Odisha government said: “One of the major objectives of the privatisation of distribution business is to run it in a viable, efficient and commercially sustainable manner. It was expected and rightly so that a private investor should be able to infuse capital to make necessary investment in network so as to reduce transmission and distribution loss. The present distribution companies took over the distribution business from 1.4.1999. Even after 15 years of operation, the licensees have consistently failed to run the enterprise in a commercially sustainable manner.” Interestingly, Odisha was the first State to privatise its discoms as a pilot project even before the new electricity Act came into effect.

The discoms in Chhattisgarh have registered huge losses. The Delhi experience is also similar. Reliance-run discoms have been facing charges of artificially inflating costs and passing the burden on to the consumer.

Clearly, power reforms have come full circle. The experiments with privatisation have only created additional problems for the government. In a centralised model, cross-subsidising all the wings of the power sector helped the government to distribute the losses evenly and keep the market valuation of its companies at an optimal rate. However, the decentralisation of the power sector has resulted not only in a greater debt burden for the government but has also encouraged corruption and crony capitalism.

Repeating mistakes

Instead of undertaking a complete review of the power sector, the NDA government is repeating the same mistakes that the UPA government committed.

First, it is relying on gradual divestment of the shares of the two most trusted PSEs to meet its need to reduce the fiscal deficit instead of boosting their growth by increased budgetary allocations.

Second, in the name of diversification of the power sector, the government is planning to open up more nuclear energy plants. Most estimates show that even if nuclear energy is fully realised, it will not account for more than 4 per cent of India’s energy demand.

Third, in order to rejuvenate discoms, the government recently came up with the Ujwal Discom Assurance Yojana (UDAY), which is effectively a debt-restructuring programme. Signing up for UDAY would mean that the State governments, which own the discoms, will have to take over 75 per cent of their debt and pay back lenders by selling bonds. The discoms will issue bonds for the remaining 25 per cent of the debt. UDAY, though comprehensive, is essentially a bailout plan for the discoms. It must be noted that the last two bailout schemes of the UPA government miserably failed to revive the power sector.

Fourth, the NDA government has gone one step further. In the States of Goa, Uttarakhand and Meghalaya, the government has initiated more power-sector reforms, which include rate increases and debt restructuring. Under this pilot project, the Centre will stop funding the States’ power sector, forcing the latter to fund its projects. The government believes that the “autonomy” given to the States will help it run its power sector better. Lastly, and most importantly, there is unanimity in the NDA about going ahead with the privatisation of the power sector, a model which has failed.

Uneven playfield

In a legal dispute, NTPC has accused Reliance Industries Limited (RIL) of reneging on its deal to sell natural gas at $2.34 an mBtu (million British thermal unit) for 17 years to two of its plants in Gujarat. RIL benefited from the UPA government’s controversial decision to increase the RIL gas price to $4.34 an mBtu within one month of inking a deal with RIL on the Krishna-Godavari D6 block, making a mockery of the original contract.

The government, then, accepted the Rangarajan Committee report to increase its price further to $8.4 an mBtu. RIL now has the advantage of saying that it can sell the gas only at the government approved rates and not according to the deal made with NTPC. Since the NDA has made no efforts to correct this, NTPC has to sell subsidised power to the government and yet buy thermal resources at market prices from private companies such as RIL.

Similarly, in many instances in the last few years, NTPC power plants have been forced by the government to back down to make room for private companies. This has created an unequal situation for NTPC and NHPC in which despite being bigger companies they are being asked to back down in favour of private companies.

Ashok Rao, patron of the All India Power Engineers Federation, told Frontline: “When the need of the hour is to go back to the centralised system and have a comprehensive planning, the governments are going deeper inside the rot to find the solution. One must understand that there is a direct correlation between energy and the economic security of a nation. Therefore, it needs comprehensive planning. Without this planning, we are in a situation where our power plants are lying defunct because they have no gas. Even in the national capital, three power plants are not working because of the lack of thermal resource.”

The inefficiency caused by decentralisation of the power sector is all-pervasive. Power plants have a shortage of thermal resources. At the bottom end of the sector, discoms are so bankrupt that they are hardly in a position to buy the power they actually need. As a result, power plants are producing only 59 per cent of their installed capacities on an average.

In addition, successive governments have created a situation where banks have become term-lending institutions and have been overexposed to the vulnerabilities of the infrastructure market. “Bank loans for infrastructure have gone up 100 times in the last 13 years. For instance, in 2000, bank loans for infrastructure was Rs.7,243 crore but in 2013 it was Rs.7,86,045 crore. During the same period, non-performing assets (NPAs) of the 30 top banks rose by 95 per cent. There are other problems too. For instance, another PSE, Bharat Heavy Electricals Limited [BHEL], provided equipment to NTPC. It had manufactured boilers specifically meant for Indian high-ash coal. But the government’s decision to import coal in the last decade has forced NTPC to import its equipment too, scaling up the liabilities for both BHEL and NTPC,” said Ashok Rao.

Experts in the power sector believe that only a thriving state-supported indigenous industry can improve the power situation. “China and Russia can provide cheap electricity because they have standardised everything in the power sector. But India is following a path that discourages standardisation. We have to think in terms of long-term fuel linkages, carefully plan our load centres and pitheads, standardise our voltage and unit sizes. The more reform you see, the more of the same nonsense is repeated by every government. Every government in the last decade has tried to make power costly through legislation. In the 1960s, we had a plan, but that has been systematically destroyed without a genuine replacement. India was the only country in the world which ensured that the government paid 3 per cent rate of return to the electricity board. This helped the electricity board. However, this norm was always violated. The Planning Commission kept writing about the violation, but the government did not pay any heed. The 2003 electricity Act replaced this clause and the electricity boards are on the verge of bankruptcy today,” said Ashok Rao.

He further said that multiple agencies in the power sector had created additional costs and liabilities, such as huge amounts of digital control and instrumentation. In the current scheme of things, private companies will benefit, but the power sector will collapse in the near future. “The tail cannot wag the dog. Private players cannot run the power sector. Something in the power sector will definitely collapse if we don’t get our act right soon,” Ashok Rao said.

The Enron debacle in Maharashtra in 1991 had raised similar concerns. However, governments have refused to learn from the Enron experience. “One must remember how NTPC stepped in to raise money from the capital markets after the Enron fiasco. If we look at the figures, we can easily conclude that it is the private companies that are sick and not the PSEs. Companies like Jindal and Vedanta have huge outstanding loans. In a situation which demands further boosting of public sector units, the governments often asks them to bail out the private sector. Such is the reality. We are going towards a situation where shortage of power will see competing consumers, and not competing private companies,” said Prabir Purkayastha, a New-Delhi based energy expert.

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