Crisis in the power sector

A realistic look at the power sector reveals that distribution companies (DISCOMS) are in bad shape and new power purchase agreements (PPAs) are far and few in between.  

Nonperforming assets (NPAs) in power generating companies (GENCOS) are mounting. Yet again, there is shortage of coal. A number of power generating units are critical for want of coal.  

The DISCOMS owe more than Rs 36,000 crore to GENCOS, who in turn have to pay more than Rs 10,000 crore to Coal India Limited.

Problems of the power sector are primarily linked to the poor health of DISCOMS.  The Ujwal DISCOM Assurance Yojana or UDAY, launched in 2015, was to provide much-needed relief to these DISCOMS.  

However, the relief has proved to be temporary. UDAY was undoubtedly a brilliant idea, which turned the power sector around in Gujarat. It was a model to be implemented in the rest of the country.  

But it didn’t happen in the manner it was expected to.  

States were to take over 75% of DISCOM debts as on September 30, 2015, under UDAY. This was to provide fiscal space to the DISCOMs and “improve” their balance sheets.  

However, certain key aspects of the plan were not pushed. These included crucial activities like reduction of AT&C losses, elimination of ACS-ACR gap, feeder metering, DT metering and price rationalisation, among others.
The debt transfer was supposed to provide time to revive the DISCOMs in the medium term. They got a temporary reprieve by utilising the facility of transferring the debt to the state government. This brought about an improvement in the financial health of DISCOMs, with some of them even showing profits.

However, this transfer of the debt burden is likely to hurt them in the near future. Last year’s Economic Survey revealed that “due to these bonds, the State’s Gross Fiscal Deficit to GDP Ratio got increased by 0.7%”.   

Most DISCOMs failed to carry out mandates relating to reduction of AT&C losses, elimination of ACS-ACR gap and the like. Ironically, out of all UDAY states, 13 have actually reported higher AT&C losses, as compared to the previous year.    

Many DISCOMs continue to be in trouble. On account of poor financial condition of DISCOMs, no new PPAs are being floated even though there is demand for power (Incidentally, India’s per capita consumption of power is one of the lowest in the world, equivalent to the consumption in the US of late 19th and early 20th century).

DISCOMs do not have the money to buy power. The pricing of power leaves DICOMS in a peculiar dilemma. The more they sell, the more they lose. Consequently, this “lack of demand”, in turn, is impacting the health of power generating companies.

Poor financial conditions have resulted in mounting dues that have to be paid  to GENCOS. DISCOMS have failed to articulate the demand for electricity in the form of PPAs.  

GENCOS have been unable to service their debt. Around Rs 1.7 lakh crore could soon become NPAs. This would impact both the coal and banking industry. As GENCOS are not getting their dues from DISCOMS, they are unable to pay regularly to Coal India Limited.

The banking industry, already under pressure, is saddled with the additional problem of potential NPAs on account of non-performing GENCOS.

There is, thus, a vicious circle that has hit the energy sector and if the issues are not addressed expeditiously, there could be a serious crisis at hand, which can impact the entire economy.  

Without improving the financial health of the DISCOMS, not much can be achieved. Issues like separate feeder lines, auditing, strong action against defaulters and pricing will need to be addressed.  

These plans cannot be “made” or “monitored” in Delhi. Intensive discussions will have to be held with all stake holders to get their “buy-in”.  Coal production will have to be ramped up substantially. This can be done, as was achieved during 2015 and 2016. The Coal Project Monitoring Group will need to be activated. This will help facilitate faster clearances. Interaction will have to be increased with the states because that is where the action lies. Value proposition will have to be conveyed to states, as was done in the past.  

The revival of such GENCOS, which are likely to become “sick” (some even before commencement of generation), is necessary. A high-level empowered committee should be set up to examine each stressed project and work out a rehabilitation package.  

Financial restructuring alone will not help. It has to be a comprehensive package. This could even entail change of ownership/management and/or adequate sanction of funds that are required for the projects. The committee should also be empowered to settle disputes, if any.   

Until and unless such a central mechanism is created, the issues will not be resolved. The GENCOS should also not be saddled with burden of cross subsidising the renewable energy sector. Promoting renewable energy is laudable, but it has a cost.   

This has to be borne by the society (through taxation) and not by entities that are already in trouble. The enormity of situation needs to be recognised forthwith and correctives put in place and pursued or else we are staring at a “powerless” future. It can be done, as is evident from some states. Others need to learn from them and get moving.  

Author is former Union Secretary, government of India