Huge Capacities Notwithstanding, Electricity Shortage Will Continue Until India Finds A Political Solution To Weak Health Of DISCOMs

Over the last eight years, the Narendra Modi government did an outstanding job in strengthening India’s energy infrastructure, increasing energy options and ensuring their availability.

Together they should ensure the energy security of the nation vis-a-vis volatility in foreign exchange, crude prices, sea freight etc.  

As a base energy source, coal is crucial to India. The sustained policy push to the sector is reflected in the dramatic rise in the availability of domestic fuel.

The production will gain momentum in the next few years as more private mines will come into operation. 

Higher domestic production means less dependence on imported fuel for power generation. India currently imports one-sixth of its thermal coal requirement. 

This, coupled with surplus generation capacity and huge improvements in electricity transmission and distribution infrastructure, sets the ground for an assured supply of electricity at an affordable price, which is crucial for attracting investments. 

However, limited growth of the electricity market and the poor health of state electricity distribution utilities (DISCOM), due to irresponsible state-level politics, might spoil that opportunity. 

These were the factors behind the power shortage in some states, last year. The same situation may recur this summer and thereafter. 

Structural Issues

The structural end of the problem is rooted in the half-baked generation sector reforms. 

From a need-based generation model, India moved to abundant capacity creation beginning 2007. In the next 15 years, the country’s installed capacity grew three times from 132 gigawatts (GW) to 409 GW. 

However, actual generation, which is a factor of demand, increased by 84 per cent (683 billion units) in 13 years from financial year 2010 (FY10) to FY22. 

The mismatch between installed capacity and generation lead to spare capacities, which is key to energy security. This is reflected in falling plant utilisation (PLF) from 77.5 per cent in FY10 to 58.87 per cent in FY22. 

Low PLF is common in matured economies. On the flip side, a rise in the average cost of power is unavoidable. This is over and above the inflationary impact and the cost of increasing green restrictions in power generation. 

The success of this policy, therefore, depends on the creation of an efficient marketplace which barely exists in India. Power exchanges account for only 5 per cent of the electricity trade. There are many reasons behind the failure. 

First, The UPA (United Progressive Alliance) government failed to implement the policy roadmap to create a common electricity market. State-owned generators, like NTPC, kept operating under a long-term cost-plus tariff model with take-or-pay clauses. 

The private sector was pushed to a competitive tariff regime with as ill-devised instruments like 25-year PPAs (power purchase agreements) at a flat tariff. 

Unholy competition was a definite outcome of such policies in an oversupply situation and both the buyers and sellers suffered from it. 

While sellers took refuge under force-majeure clauses to survive the cost impact; the mood of the consuming states too changed with the change in power. Many states later created pressure on private generators (IPPs) to change the PPA. 

Pressure is also felt by NTPC. From Assam to Odisha or Punjab — many states forgo fixed charges to deny delivery of costly power vis-a-vis those available on the open market. Such incidents peaked during the pandemic.  

In a recent reply to a Parliamentary Standing Committee, the Power Ministry said that it  has initiated steps towards a shorter duration PPA regime, with provision for states to exit the existing PPAs with central generating agencies like NTPC.

A good step indeed. But it is questionable if that will solve the problem of under-recovery and the resulting weaknesses of DISCOMs, which is another major barrier to the market trade of electricity.  

Under recovery in electricity is not exclusive to India. South Korea’s sole power distributor, Korea Electric Power Corp reported $16.4 billion operating loss in the first nine months of 2022 due to insufficient rise in electricity tariff vis-a-vis cost-push. 

Though Beijing established market mechanisms in both the coal and electricity front, Chinese electricity companies often run into struggling phases for the mismatch between cost and recovery. 

However, the Indian scenario is distinct due to its federal structure (that offered states the right to distribute power) and the ingenuity of Indian politics in devising ways to rig the system at the cost of the financial vulnerability of the states. 

The federal structure is failing to rein in states for not maintaining a balance between revenue, expenditure and promises. Politics of all hues are taking this advantage to offer quick freebies and win votes. 

Unfortunately, the trend is only gaining momentum and the electricity sector is the biggest victim. Punjab offers a textbook example of the problem. 

Political Problem

According to India’s central bank, Punjab and Rajasthan are the two most financially stressed states. Both are champions of freebie politics. 

According to a recent media report, Punjab has shelled out Rs 1.18 lakh crore in power subsidy in last 25 years. This is 45 per cent of the Rs 2.63 lakh crore debt burden on the state.

The story began in 1997 when Rajinder Kaur Bhattal government announced free electricity to agriculture. Since then, successive governments kept expanding the list of beneficiaries. 

Charanjit Singh Channi of Congress, who headed the state for barely six months, waived unpaid electricity bills worth crores. 

By the time, the Bhagwant Singh Mann government of the Aam Aadmi Party came to power in March 2022, Punjab was offering free electricity to farmers, Scheduled Castes, industry and others. 

AAP upped the stake by offering 300 units of free power to all, over and above the existing concessions. Consumers took full advantage by splitting bills into multiple connections. Some districts saw a 100 per cent rise in new applications. 

Meanwhile, from Rs 604.57 crore in FY98, the subsidy bill kept ballooning. But the state didn’t have as much money, so the DISCOM kept starving of cash. When Mann took over, Rs 7,117.86 crore was due to the DISCOM from unpaid subsidies. 

It is estimated that the subsidy bill will reach a record Rs 22,962 crore (nearly $2.8 billion at the current exchange) in FY23. As of December 2022, the AAP government defaulted on paying Rs 4,314 crore of subsidies to the DISCOM.

The writing on the wall is clear, if Punjab didn’t have enough cash to purchase electricity or coal last summer, they may end up having even less money this summer. 

The problem will not begin or end with Punjab. Nine states will go to polls in 2023, including Congress-ruled Rajasthan and Chhattisgarh; BJP-ruled Madhya Pradesh, Karnataka and; Bharat Rashtra Samithi (formerly TRS)-ruled Telangana. 

Rest assured ‘free electricity’ will be a top draw among many election promises by the rivals. The results will be felt in terms of coal dues or payments outstanding to gencos (power generation companies). Parts of India will keep plunging into darkness though the country will have enough capacity to meet demand.