Privatization in Power: Less gain, more pain!



Privatization in Power: Less gain, more pain!Ajay Vaishnav, Rohit Joshi & Ravi Tripathi/ZRG

Last Tuesday’s (June 26) hike in power tariffs – a 20.87 per cent rise in all categories and 24.15 per cent for domestic consumers – by Delhi’s electricity regulator is steep yet desirable. It factors in the demand of the power distribution companies (discoms) currently reeling under rising input costs and unsustainable debts. Mounting dues with power generation firms was threatening to disrupt power supply to the discoms. Given power is a politically touchy issue, the regulator’s move is as usual, being dubbed anti-people.

It’s been almost a decade now that the Delhi Vidyut Board (DVB) was restructured to privatise the transmission and distribution of power to solve issues such as power shortages, outages, load shedding, poor quality power supply and soaring transmission and distribution losses. But, has that really happened? More importantly, has privatisation taken place in real sense?

For starters, while privatisation has helped the sector to stem transmission and distribution losses and reduce instances of power theft, the sector has failed to diversify and enhance power generation capacity across the country. Moreover, populism continues to shape and influence power sector policies.
Delhi: A Case Study

A Zee Research Group (ZRG) analysis shows that privatisation of the national capital’s power sector has yielded mixed results. While Delhi’s discoms have been able to stem losses from power theft, the recovery of stolen power hasn’t translated into lower tariffs as promised by them initially. For instance, the ratio of power theft has come down to 15 to 18 percent in 2012 from a whopping 65 percent in 2002. But the consumers haven’t benefited from the discoms’ virtual gain of Rs 90 crores per percent of power theft reduced as claimed by the Delhi Electricity Regulatory Commission.

Likewise, discoms claim to have brought down power cuts from 2.29 percent in 2002 (translates into 2-3 hours of power cut) to 0.30 percent in 2012 (30 mins to 1 hour). But, a Zee News investigation reveals that situation has hardly improved in many areas of Delhi like Ashram, Okhla, Najafgarh and parts of East Delhi which continue to experience 2002 load shedding levels. The huge gap between power demand and supply further lends credence to this. Between 2002 and 2012, Delhi has only added 52 Megawatts (MW) to its generation capacity from 995 MW to 1047 MW. During the same period, power demand sharply rose from 2879 MW to 5500 MW. The gap in supply is being met with power supply agreements with other states and independent power generation firms like Damodar Valley Corporation (DVC). Of late, however, they threatened to cut power supply to discoms in Delhi for their failure to pay up dues. Rather state-run NHPC cut supply of 200 MW power to BSES Rajdhani Power for failing to pay up dues of over Rs 225 crores. The discom also owes around Rs 330 crore to the DVC, which has threatened to stop power supply.
Incongruous Tariffs

While it is easy to blame discoms, can we ignore the fact that the situation worsened due to the absence of a cost-reflective tariff structure. Consider this: between 2002 and 2012, per unit tariff in Delhi rose by just Rs 1.75 i.e. from Rs 1.25 in 2002 to Rs 3 in 2012. This holds true for India as a whole. According to a Crisil Infrastructure Advisory report, over the second half of the previous decade, power tariffs in India grew by under 5 per cent per annum. Against this, per capita income in the country grew by 13.4 per cent per annum while household expenditure grew at 10.6 per cent. It means that the share of energy expenses in Indian households declined for the first time in two decades, during this period.

The message is clear that power tariffs have failed to keep pace with inflation. “Indian consumers can bear higher tariffs, and policy makers may have more flexibility to increase tariffs than they are currently exercising,” explains Roopa Kudva, managing director and CEO, Crisil. She also adds, “Had power tariffs been hiked to keep pace with other household expenses, power utilities would have earned additional revenue of about Rs 950 billion in this period. Instead of making aggregate losses of Rs 870 billion, they would have made an aggregate profit of Rs 80 billion.”

A ZRG comparison of per capita income of Delhi and major states vis-à-vis their power tariff structure points to an absence of cost-reflective tariff structure. A state like Tamil Nadu with a per capita GDP of 72993 demands merely Rs 3.5 for per unit of electricity consumed.

Need To Diversify

The matters have been further compounded with rising fuel costs. The Indian power sector is heavily dependent on coal-based thermal energy production. However, coal production in the country has remained stagnant in the last 4 years at 400-440 million tonnes (MT) due to many factors including lack of reforms and environmental issues. This has increased dependence on imported coal from 7 percent in 2007 to 15 percent in 2012. Not only imported coal is priced at 1.6 times over domestic coal, but it also enhances the cost of transportation by 1.5 times that of domestic variety.

“The key reform would be to devise a mechanism to enable an automatic pass through of fuel price increases to power tariffs”, says Razak Khatri, Director, Crisil Infrastructure Advisory. The power sector cannot become financially viable in the future unless tariffs keep pace with inflation. Simultaneously, the government will have to carry supply side reforms to ensure a continuous supply of coal in the short-to-medium term. In the long term, India needs to diversify its energy basket. The country needs to reduce its dependence on coal and shift to cleaner energy sources including nuclear power.