Rising power tariffs result of populist measures: Saurav Jha

Updated: Apr 24, 2014, 13:24 PM IST

Saurav Jha

Arvind Kejriwal’s 49 day government in Delhi may now be history, but the very real question of rising electricity prices faced by domestic and industrial consumers in India remains. In fact few politicians actually have a credible plan of lowering electricity tariffs beyond offering outright subsidies and as additionally in Kejriwal’s case, of threatening distribution companies (discoms) with comptroller and auditor general (CAG) audits. Truth be told there are deep structural issues plaguing the electricity sector in India that are difficult to address and any remedy will require both the political capital to balance competing interests as well as the will to facilitate steady investment in infrastructure.

Populism has seldom fixed problems related to the provision of public goods such as electricity. Indeed, one of the reasons why we see appreciably rising tariffs today is because they were deliberately held down in the past. Long have discoms in India been forced to subsidise domestic and agricultural consumers through a mix of overcharging (i.e cross subsidising) industrial customers and/or simply absorbing the losses from pricing below cost. Such schemes, unsustainable at the best of times have really come unstuck now because of rising fuel costs for generators in recent years.

Perhaps the greatest failure of the incumbent UPA regime has been its mishandling of the domestic coal sector as almost everybody now knows thanks to the soot generated by ‘coalgate’. Many Indian generators today are heavily dependent on costly imported coal, which can be up to twice as expensive as the notified price issued by Coal India (CIL) for domestic coal and this has served to increase the average cost of electricity generated by thermal units (the mainstay of domestic generation) by anywhere between 40-60 percent in the last three years accounting for calorific value differences. As a result ‘downstream’ players in the electricity sector i.e the discoms who have in place multi-year long term power purchase agreements (PPA) with these generators are now unable to find any further ‘direct’ or ‘cross’ subsidy ‘wriggle room’ given their power purchase costs. Past populism has left many of these discoms with huge debt burdens thereby leaving no slack for them to offset rising generation costs. Of course, discoms continue to overcharge their ‘cream’ bulk customers but now they are not in a position to keep subsidising domestic users to the extent they did in the past as the sheer size of the subsidy component is now too big to either shift to someone else or absorb it themselves. This is a key reason behind tariff hikes in a state like Delhi which is wholly dependent on central generating stations using a greater amount of imported coal than before which has led to average tariffs being raised by 26 percent in 2012 alone followed by another five percent hike in 2013.

Now many bulk consumers frustrated by high prices as well as the performance of discoms in terms of making power available have looked towards the ‘open access’ (OA) route for succor. OA introduced in the Electricity Act of 2003 (EA 2003) is a ‘Non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission’. Basically it allows any consumer with a load of 1 MW and above to purchase power from the power exchanges or even directly from a producer with the power being wheeled through the existing grid network on a pre-agreed schedule at a competitively negotiated price.

However further growth of OA in India, which is seen as a lodestone for a truly competitive wholesale electricity market in India, is far from clear. Obviously, cash starved discoms are not really keen to let their best clientele bypass them to buy power from elsewhere especially when these clientele have to first secure approvals from them for availing the OA route. Indeed, discoms have been known to delay issuing such approvals to their ‘cream’ customers.

But approvals have to be granted eventually anyway as per the provisions of EA 2003, and the key market entry barrier to OA lies in the multitude of charges levied on consumers by discoms and transmission companies (transcos) on power procured through the OA route. Discoms in particular actively lobby state regulators to keep these charges close to levels that would tend to equalize the cost of electricity purchased through OA with their rates for industrial consumers. In fact in Maharashtra, the key additional levy on consumers i.e the cross subsidy surcharge (CSS) was pushed late last year beyond prohibitive levels having been raised from between Rs 1.18-1.60 per unit to Rs 2.30-2.75 a unit. When transmission and other charges were added to this new CSS band it made the cost of OA power at least two percent more expensive than the average tariff charged by Maharashtra’s discom MSEDCL. Even a two percent difference when spread over billions of units of power naturally becomes a market destroyer.

In fact this difference is most acutely felt by companies that have grown through OA trading in the last decade. Navjeet Singh Kalsi, Managing Director of Manikaran Power Limited, currently India’s largest OA trading company believes that ‘ad hoc CSS and transmission charges are the biggest impediment to further efficiency in the Indian wholesale electricity market given the very low margins at which traders operate’.

But market efficiency in electricity requires infrastructure, something which has been severely underinvested in thanks to losses due to populism. In fact ‘congestion’ in the network has been frequently cited as a reason for sustaining high OA charges in India or even for outright denial of OA facility. Case in point would be the recent order by Gujarat , a state known for low OA charges to actually put a moratorium on purchase of power from out of state units.

Now the other reason for this move is the fact that some 2500 MW of capacity in the state is lying idle on account of OA procurement from generators outside the state and Gujarat been paying fixed charges to the tune of Rs 8000 crores on account of its long term PPAs without actually drawing any power. Indeed one of the reasons OA can be potentially cheaper for consumers provided OA specific charges are reasonable is on account of the fact that they have to pay for power that is actually delivered and not simply face the burden of transferred fixed charges from a discom’s PPAs even for units of power they don’t actually consume. Indeed even discoms at some level would have been better off if they had signed a lesser number of PPAs with thermal generators at the moment partly dependent on expensive imported coal. But sans PPAs, coal based generating stations in India would not get subsidized coal linkages from CIL at all thereby reflective of an incentive structure favouring long term PPAs that discoms also accept given the draw of cheaper power for at least a part of the power procured.

Ultimately a longer term fix can only come from diversifying India’s electricity generation sector to incorporate technologies with a small or negligible variable cost (chiefly fuel) component such as nuclear, hydro, and even intermittent renewables like solar and wind. Indeed seen from this perspective the current state of OA politics in India essentially acts as a deterrent to independent power producers (IPP) in the hydro and wider renewables sector who can potentially deliver cheaper per unit power than imported coal using plants. Small hydro and certain wind units definitely fall in this category.

However many renewable energy IPPs are actually not even eligible for long term OA on account of the Central Electricity Regulator Commission(CERC) stipulations on minimum plant size for being allowed to sell power through this route. “Some 30-40 new generators in the hydro sector are currently sitting idle right now on account of being denied OA facility since they are below the CERC’s 50 MW size requirement”, says Kalsi. “In the long term both renewable IPPs and trading companies like mine need multi-year OAs to grow given business development costs”, he adds.

Saurav Jha, the author of `The Upside Down Book of Nuclear Power` is a commentator on energy and security.