As the Indian economy gears up for fiscal 2014, its sustainable development will warrant growth from all sectors, particularly power.
The power sector faced a quagmire of issues in 2012; from the worst grid collapse to critical issues surrounding fuel availability and pricing, and mega power projects hanging in the lurch. There are lessons to be learnt.
The most critical challenge is the dismal health of discoms, which has led to inadequate investments in the sector, in turn, leading to serious power shortfall as well as poor quality of supply.
The combined financial losses of all the distribution companies stand at a staggering Rs1.20 lakh crore, or nearly 1.5 % of the country’s GDP. These losses were due to the rising gap between average cost of supply and realisation; distribution companies lose Rs2 for every unit of electricity sold by them.
Timely tariff hikes are perhaps most politically sensitive issue in the sector. Many states have not revised tariffs in the last 5-6 years, and some for over a decade.
Today, distribution entities, whether in public or private sector, urgently require tariff hikes of 50-60% to meet their operating costs and supply reliable power. An increase of this magnitude will seem staggering to the political leadership and the consumer, but the fact is that this hike would still leave past accumulated losses due to irrationally-low tariffs unattended.
Purchase costs for power typically comprise up to 80 % of the total distribution costs. Since the ‘truing up’ process, involving a fix on the gap between power purchase costs and the revenues from sales, can take a few years, it is important to enable immediate pass-through of any variation in power costs. This will avoid build up of so-called “regulatory assets”.
There are other issues too, such as cross-subsidies..
About 24% of entire electricity supplied flows to the agricultural sector, but yields less than 6% of the total revenues. While it is laudable that the government is investing huge amounts in electrifying villages, but the question is, are distribution utilities in a position to supply power to these villages at zero net realisation.
More than subsidy it is round-the-clock and quality power supply that can transform rural India.
Investments in capacity building and modernisation are also needed.
Delhi has proven to be an example, where only five to six years ago a residents were exasperated by 4-5 hours of daily power cut. This has now reduced to a mere 4-5 hours of interruptions in a year. This is because of large investments in network and technology, along with streamlining of systems and processes. Yet all the improvements and the entire reform of the Delhi market is under risk for want of urgent tariff rationalisation.
To sum up, reforms at the utility level are vital for the overhaul of the sector, and will lead the way for its sustainable growth this year.
The writer is CEO, Reliance Infrastructure Views are personal