Financial Daily from THE HINDU group of publications
Sunday, Sep 08, 2002
Industry & Economy - Power
Power: High-voltage reforms, the key
VIABILITY is the watchword in the power sector today. The single-point agenda of all concerned, including the Government, is to make the sector a commercially viable proposition, both for existing players and new entrants.
Fortunately, more than a decade after reforms first began, the government appears to be finally getting its focus right.
The 1990s were wasted over attempts at attracting private investmentin capacity creation without creating a conducive environment for the same.
Realisation has finally dawned that any attempt at attracting private investment in generation is impossible unless the investor is assured of returns on his investment.
Given the solvency levels of the state electricity boards (SEBs), which are the main consuming utilities for any generator, it would be impossible to attract private investment unless reforms are unleashed at the SEB level.
The last couple of years have seen the government change course, and rightly so, to focus on the critical aspects of reform of the transmission and distribution (T&D) segment, solvency of SEBs, and on elimination of outstanding dues.
There has been some forward movement on each of these issues, albeit in a torturously slow fashion.
Scheme of one-time settlement
The most significant event in recent months is the framing of the one-time settlement scheme for SEBs.
The Rs 41,473 crore outstanding dues of SEBs to central utilities will be securitised with the concerned State government issuing 8.5 per cent tax-free bonds to the central utilities for the outstanding amount.
The entire scheme has been designed around a system of incentives and disincentives aimed at cleaning up the mess with the SEBs and making them financially viable once again.
About 14 States have already signed this agreement with the concerned utilities and six more have given their "in-principle" consent for the same. The success of the one-time settlement scheme may well determine the future health of the power sector.
The average generation cost of central utilities, National Thermal Power Corporation (NTPC) and National Hydroelectric Power Corporation (NHPC), is just Rs 1.60 per unit and Rs 1.40 per unit, respectively.
The generation costs of stations owned by SEBs would also be around the same levels or maybe even lower, considering that most of their capacities are old and depreciated.
However, the average tariff paid by domestic consumers is in the region of Rs 4 per unit in most States, while it is still higher in the case of industrial consumers.
Why is the consumer paying more than double the cost of generation to his supplier, the concerned SEB? The simple answer: He is paying for the inefficiencies, subsidies and pilferages in the system between the generation of power and the supply at his doorstep. Of course, there are expenses and margins in T&D that have to be added to the generation cost. Yet, the final tariff is artificially higher than what it ought to be.
There are several reasons for this the chief one being T&D losses which, technically, is energy loss in transmission. The standard norm for this is 6 per cent while T&D losses in India range from 20 per cent to as high as 55 per cent.
Everything ranging from unmetered energy, agricultural subsidy, pilferage of power and energy loss due to sub-standard or faulty equipment is passed off under this head. It is estimated that of the total energy generated only 55 per cent is billed and worse, only 41 per cent is collected.
The losses due to theft of power alone is estimated to be about Rs 20,000 crore annually, which is equivalent to the total turnover of NTPC in 2001-002! How can a sector with such inefficiencies be viable?
Adding to inefficiency is the populist polices of State governments. All State governments supply power either free for agricultural use or bill it at less than 50 paise per unit, which is not even half the cost of generation.
The subsidy is loaded on to the tariff of other consumers just as the T&D losses are. Small wonder then that the final cost of delivered power is more than three times the cost of generation.
However, with the pressure from the one-time settlement scheme, it is doubtful if these practices can continue for long. The States would have no alternative but to introduce user charges for agricultural supply and also tighten the distribution segment.
Some States have already unbundled their SEBs into generation, transmission and distribution utilities with an eye on their eventual privatisation. Of course, there are bad examples such as Orissa where the unbundling and privatisation experience has failed. The problem is that unbundling is not the end in itself, it is only the means to the end of reforming the SEBs. However, SEBs, such as Orissa have attempted to continue with the status quo even after unbundling and privatisation which have proved to be the main cause for failure.
DVB privatisation an acid test
In this context, the unbundling and privatisation of the Delhi Vidyut Board (DVB) is being closely watched. Three distribution companies (discoms) of DVB have been privatised with 51 per cent of their equity handed over to BSES (two discoms) and Tata Power.
The two private players have been assured a 16 per cent return on their equity if they succeed in their commitment to reduce the aggregate technical and commercial (AT&C) losses, which ranges 48-57 per cent, by 17 per cent each over a period of five years.
AT&C losses include technical energy loss and also loss due to power theft and doles. The Delhi experiment is critical because the lessons from the Orissa experience have been incorporated.
Besides, DVB is a carbon copy of the plight of the other major electricity boards. It has a chronic shortage, generating as it does just 450 MW against a demand of 3,400 MW.
Others waiting in the wings to enter the distribution business must be watching the Delhi experience closely as the terms cannot get better than this. If Tata Power and BSES fail to come good, it could sound the death knell for reforms in distribution.
Inadequate focus on hydel
The country's river systems are projected to yield a potential 1,50,000 MW of hydel power while pumped storage projects are estimated to yield a further 94,000 MW. However, just 15 per cent of this has been harnessed till now. This, despite hydel being the most economic and environment-friendly mode of generating power. The underdevelopment of hydel power has also skewed the hydel:thermal mix from an ideal 40:60 to 25:75 now.
There have been several problems ranging from technical and financial difficulties to inter-state river water disputes and terrorist disturbances that have affected development of hydel power. Setting up hydel projects is relatively more capital-intensive with costs estimated at about Rs 6 crore per MW (against Rs 4 crore/MW for thermal power) and initial per unit cost of power is very high.
However, once the fixed costs are fully absorbed, the cost of power drops to ridiculously low levels as the raw material, water, is free.
The Centre framed a National Policy on Hydro Power Development a few years ago but it has not had much impact on the ground.
One area where definitely some forward movement is seen is in small and mini hydro projects ranging from 50-75 MW. NTPC is actively considering such mini-hydel projects, in addition to the 800 MW Kol Dam project that it is now implementing.
Hydel projects have to be explored vigorously in future as the other alternatives liquid fuel and gas have proven to be unsuitable for the country.
While the volatility in oil prices makes liquid fuel projects unviable, the non-availability of adequate natural gas sources within the country makes gas-based projects unworthy of consideration.
NTPC's experience with gas-based projects has been none too good with its average PLF hovering in the 60 per cent range due to inadequate gas supplies.
Hydel projects are also important because the country's peak energy deficit is about 12 per cent while base-load deficit is 7 per cent only.
Hydel plants are ideal for meeting peak loads as they can be cranked up in a matter of minutes.
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