The Looming Power Sector Crisis: Chickens of 2003 Coming Home to Roost

Let us look at the dimension of the crisis first. This year, many of the regulators have raised the tariffs by more than 20%. Rajasthan and Delhi are just two examples. Obviously, power tariffs are a sensitive political issue – if the tariffs rise, industry, domestic consumer and the farmer are all hit and are going to protest. In theory, the state can say the power tariff has been raised by an independent regulator and we have nothing to do with this. In practice, the people will hold the Government answerable, the legal niceties notwithstanding. Therefore, if the state governments had believed that restructuring of the sector as the had been pressed by both the NDA and UPA central governments would relieve them of the tariff issue, the people on the streets will convince them otherwise.

However, the current rise of tariffs is only a precursor of things to come. By some estimate, the tariffs have to rise by about 50% for the power sector to break even, a rise that is politically impossible to achieve. If this scale of tariff rise is to be avoided, the state governments will have to bear a huge burden of underwriting the cost of power. With state governments almost all in the red, and already huge accumulated losses of the state distribution companies touching about Rs. 75,000 crore, (2008-2009 figure presented in Forum of Regulators, June 2011) the ability of the states carry more losses is also limited.

The coal situation has become critical in the country. 33 power stations have reported that they have only 7 days or less of coal stocks with them. While there is a temporary dislocation due to the Telengana agitation and strikes in some of the coal mines, the much larger issue is that there is a bottle-neck in moving coal through ports, railways and roads and also the ability of taking coal out of the ground. What is missing today is a thrust to remove these bottlenecks by investing in ports, railways and in mining.

India does not lack for coal reserves – it has the 4th largest reserve of coal in the world. Today, about 30% of coal consumed in India is being imported. Obviously, this links Indian coal prices – and therefore with power generation costs – to international price of coal. This has been one of the reasons that Indian power tariffs are being forced up.

The question is what is the intention this government has regarding the coal sector – is it create a crisis so that a justification is built to privatise the coal sector? Or is it just incompetence and poor planning which has become the hall-mark of this government – a form of government by crisis, which is India's unique contribution to management “theory”?

Underpinning all these issues is the larger framework within which the Indian power sector is operating. After independence, State Electricity Boards were created with the responsibility of generating and supplying electricity. This was the 1948 Electricity Act, which was piloted in the Indian Constituent Assembly by Babasaheb Ambedkar. His vision was very clear – electricity was the backbone of a modern nation. It must be the responsibility of the Indian state to provide electricity to all parts of India and provide it at reasonable costs. It was with this objective that it was decided that the electricity sector will not make profits, later on changed that it will make only a nominal profit.

While this might have been the basis of the sector, the fact was that power was a concurrent subject and the central government also had a say in this. Various central agencies were also set up, the chief out of which was National Thermal Power Corporation (NTPC). While NTPC has played a very important role in power generation, one consequence of its growth was that the central government channelled funds through NTPC and could starve the State Electricity Boards. As the SEB's had the responsibility of generation and distribution both, while NTPC was only a generator, the central Government's outlook on the power sector came to be much closer to that of the generators, while believing that distribution was not its headache.

All this might have contributed to the power sector becoming another bone of contention between the states and the centre. However, the economic reforms starting in the early 90's gave an altogether different direction to the power sector.

The power sector reforms advocated unbundling of the sector – generation, distribution and transmission were all to be separated. This, we were told will lead to competition between generators and would bring down the prices, or so the neo-liberal economic theory ran. The argument was that crisis of the SEB's would be solved if they were unbundled. Sheila Dixit in 2004 when unbundling and privatising the Delhi Vidyut Nigam claimed how through more efficient running and generation competition, tariffs would become lower.

What these set of reforms did, even where privatisation was not done for distribution companies after unbundling, is that NTPC and private power companies became increasingly more important in the grid. The states had now no control over generation prices as more and more generation passed into the hands of the centre and private generators. Increasingly, the interests of the central government and the private players became aligned – both of them were essentially what are called Independent Power Producers (IPPs), companies that produce power but do not distribute it. The state governments now have to distribute power at costs that are reasonable for the consumers but have no control over it. The Central Government agencies – NTPC, NHPC, etc are all IPP's and the central government interests are now aligned to those of private power companies.

When these reforms were introduced via the 2003 Electricity Act, most state governments did not understand the deeper game plan. This was large scale induction of private power into the grid which needed that private power tariffs be removed from political control of the states. The so-called independent regulator would create a “market” and would also remove the all the subsidies for the poor and the farmers, so hated by the neo-liberal establishment. The removal of the subsidies and that the state governments would have no role in setting the tariffs are all a part of the 2003 Electricity Act. From electricity being fundamental the country's development, we had now come to the point that it is just another set of goods, like soap or vegetable oil, to be bought and sold like any other commodity.

The consequences of this unbundling and induction of private generators is now partially with us. Currently, the private sector has an installed capacity of 23% in the grid. This is one major element in driving up costs. The states have now less than 45% of the generation, a fraction that is bound to come down even further with time. With another 30,000 MW of private power about to enter the grid in the next few years, costly private power is going to push up the cost of electricity steeply.

 

                                  Installed Capacity in MW (30-09-2011)

Sector	MW	%
State Sector	83,563	45.8
Central Sector	56,573	31.0
Private Sector	42,209	23.2
Total	1,82,345

 

A simple look at the gap between the cost of electricity and the revenue realised per unit makes the direction in which the power sector is travelling clear. In 2006-7, the gap was about Re. 0.26, in two years this has roughly doubled. Not surprisingly, more the distribution companies sell electricity to the consumers, deeper they are going to go into the red.

In case the states want to control the cost of electricity, they have to either reduce their off-take or ask for lower costs to be paid to the generators. The problem here is that all the private power companies have taken huge loans from the banking sector. According to Crisil, the lending to the power sector is a whopping Rs. 480,000 crore. If the tariffs do not go up by 50%, and this is Crisil's calculations, a substantial amount of this huge debt is at risk.

For those who are following what is happening in the banking and the financial sector crisis in the west, the scenario is familiar. First we have huge private sector debt that puts the financial sector at risk. As the banks and other financial sector companies are too big to fail, the governments have to bail them out. In country after country, it is private debt that becomes public debt and then of course the bail out comes from the pockets of the ordinary citizen. As a double whammy, not only do tax revenues or public funds go to salvage private debt masquerading as “sovereign” debt, the people also have to bear the burden of the austerity measures. The bankers live it up with their out-size bonuses and all their perks, as the new masters of the universe, while people languish with no jobs and no future.

If the price of electricity does not rise by 50%, the banks will be left with the bad debts of private sector power companies. If the tariffs rise by anywhere near 50%, there will be a huge explosion of anger as people cutting across all sectors and classes will find these tariffs unbearable. Already, industries in Rajasthan have protested on the steep hike imposed on them this year and we had the spectacle of industrialists being beaten up by the police in tariff protests. If tariffs go up by another 50%, Indian manufacturing may as well close shop. They are already finding Chinese competition very hard to beat, this will be their death-knell.

The problem is that without a hard look at the basic policies that have been followed in the power sector, there is no easy way out of the crisis. This is not of course where the current political and economic establishment want to go. For them, the issues are simple – if private players need a higher tariff, so be it. If the state governments have to face the wrath of the people, this is their problem. In any case, the BJP and the Congress have had a consensus on the power sector reforms, so all that BJP can talk about is “corruption” and not the underlying causes. This is exactly what they are doing in both Delhi and Rajasthan, where they are now in the opposition.

What is at stake is the fundamental question of the economic reforms. Are these reforms for the people or for the capitalist class? The answer in power sector reforms is that it was always meant for the Tatas, the Relainces, and now the Adani's and the Lancos. It is this 1% versus 99% that is at the core of power sector reforms, as it is in the Wall Street protests.