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Issue No.: 561 | March 2014

Power and Populism

Ranga Kota
AAP’s lack of faith in all established institutions is at the heart of its actions.

The spectacular performance of Aam Aadmi Party (AAP) in the recently concluded Delhi   Assembly elections has jolted the established parties, the Congress and the BJP, out of their comfort zone.  AAP, after much dithering, has formed the government with outside support of the discredited Congress Party. 

The AAP was quick off its blocks and announced a couple of measures that must have gladdened some sections of Delhi Aam Aadmi. The quick announcements of providing 700 liters free water per day per family for metered connections and a substantial reduction in power tariff in the lower slabs have made AAP’s pre-poll promises into a reality for Delhi’s Aam Aadmi.  It is not very clear who will bear the cost of power tariff reduction. 

Though as per the provisions the much maligned power distribution companies in Delhi are insulated from tariff reduction by the government in power, it may not happen that way. The distribution companies will have to bill the consumers at the reduced tariff and expect the difference to be compensated by the government. If the Delhi government fails to reimburse the amount (a possibility), the power companies will have to seek a remedy available under the provisions. In the next few months, we may witness an interesting battle between the AAP in Delhi and the privatized DISCOMs. One DISCOM was indicating a possible black out in Delhi if they were pushed to the wall. AAP mandated audit of these DISCOMs by CAG might queer the pitch further with the attendant mudslinging in all directions.

Collateral Damage

The experts in the power sector have voiced a grave concern at the decision of AAP in reducing the tariffs which were fixed by the DERC, a statutory body set-up under the Electricity Act of 2003. If AAP felt that DERC erred in fixing the tariff, it should have engaged DERC in a constructive way to get to know the basis of tariff fixation. AAP’s lack of faith in all established institutions is at the heart of its actions.  

In the normal course, the power battle (AAP vs. DISCOMs) may not have mattered much in the larger context, but with AAP planning to make its battle pan India in the ensuing Lok Sabha elections, the echo of Delhi is heard loud and wide across India. 

The first to feel the heat is Maharashtra’s political class which believes that the AAP could use the gambit of power tariff to challenge the incumbent’s (Congress Party) prospects as well as Shiv Sena and BJP’s in the Lok Sabha elections. A call for a reduction in electricity tariff was made and the incumbent government reduced the electricity tariff in all parts of Maharashtra except in the city of Mumbai where power distribution is with private companies. Sanjay Nirupam of the Congress Party wants this benefit to be extended to the city of Mumbai as well. The Government might go for it and face the kind of trouble AAP has with DISCOMs in Delhi .Whether the tariff reduction will save the day for them in the coming Lok Sabha election is anybody’s guess. 

Another Congress ruled state, Haryana, geographically the closest future battle ground for AAP, has announced a hasty tariff reduction. How many more state governments would follow suit is to be seen. The 2003 Electricity Act was a forward looking one. It sought to get the power sector out of MAA-BAAP (dole) culture. It freed from government licensing power generation and rural distribution. It sought unbundling of generation, transmission and distribution among state power utilities, leaving the state governments holding the can for power subsidies. Tariff at the distribution level was to be set by the State Electricity Regulators. It allowed open access to certain categories of users.  If only the states had let go of their control over power utilities at the distribution stage and allowed a free play of the provisions of the New Act, India would have found its power sector in a much better physical and financial health than it is today. 

Farmers and the urban middle class are the two holy cows for the political class: the first for its perceived value as vote bank and the second for its access to media power. The state utilities have combined losses of over Rs 200,000 cores due their inability to price the power at economically viable rates. The populist power tariffs at the distribution end leave power utilities short of funds for buying adequate power from producers making investment in the distribution infrastructure an obvious casualty.

The AAP’s ill conceived decision would perpetuate the political class to use the route of cheap power to get to power or continue in power. It will make state utilities lose more money and come to a stage where they would collapse under the heavy burden of losses and debts. The electoral success of parties like AAP would make even reform-oriented Parties pause and roll back well intended policy initiatives in the power sector. The cost of AAP’s populism will be much higher than the tab the Delhi Government or DISCOMs will pick up.

The Cascading Effect

The collapse or bankruptcy of distribution companies, mostly government owned, will pose a very difficult economic challenge to the upstream power generations companies in thermal power sector. India has close to 1,60,000 MW of thermal power generating capacity using either coal or gas. India does not have enough domestic coal or gas to operate these plants at peak capacity. Huge imports are necessary which pushes up the generation cost of these plants. The cash-starved state distribution companies are reluctant to pay a higher price to purchase power as they cannot pass it on to their consumers due to the state governments ‘penchant for populism’.

Our Paradox

As the last mile is controlled by the state power distribution companies, the generating plants cannot easily access other users, mostly in industrial and corporate sector, who can pay a better price for reliable supply. This leads to a strange situation. The plants operate at a low capacity or even prefer to keep them shut. Almost all gas based power plants in AP do not operate. Dhabol power plant in Maharashtra is limping for want of gas. Close to 5000 MW power capacity in Gujarat is idle due to shortage of gas. TATAS who are the first one to commission the UMP of 4000 MWs in Mundra (Gujarat) are bleeding as the state governments which buy power from this plant are reluctant to allow a tariff revision to compensate for a steep increase in cost for imported coal.  

Usually a lack of generating capacity is cited as the reason for power shortages. But we have now a paradox. We cannot fully use the capacity we have built in last few years as the plants cannot produce or sell power at the rates that make economic sense.  

There are no prospects of a significant step-up in production of domestic gas or coal. Gas production nosedived due to problems Reliance had with their wells in Godavari Basin. Gujarat State Petroleum has yet to commence its production in Godavari basin. With Central Government giving priority in gas allocation to fertilizer plants, gas-based power plants take the hit and remain idle. 

Coal India is sitting on vast reserves of coal but cannot extract the required coal fast enough to support coal-based thermal plants. Estimates put India’s import requirement to around 200 million tons of coal every year to bridge the fuel deficit. Coal India produces less than 500 million tons per annum and it cannot ramp up the production due to maoist, environmental or labor issues.  Private sector participation in coal mining is under intense scrutiny and no significant contribution can be expected from them in near future. The inordinate delays in regulatory clearances for coal mining put future private investment in coal mining in question.   

New Government Has No Magic Wand

The new government taking charge later this year will find the power sector a difficult challenge. As power distribution is a state subject, the centre cannot force its way. Most ruling dispensations in states have neither the vision nor the resolve to reform their power sector. With competitive populism making a foray, cheap power is used as a potent weapon in political battles. 

If the new government at the centre means business, it has to show a quick economic turnaround which will depend on a quick recovery in manufacturing/industrial output. Reliable and affordable power is essential to make industry fire all cylinders. With Central Government being powerless in ensuring this to the industry, a quick and significant turnaround in industry in the near term looks very much doubtful.

Liberalizing power distribution in states and appointing competent and upright power regulators are necessary to align the interests of the downstream and the upstream players in the power sector. Government's failure to do so quickly enough will keep a fair amount of generating capacity idle in a country which suffers from severe power cuts in summer months. The country will have to pay a huge cost for idle capacity because it would reflect as non performing assets with financial institutions. The financial institutions will take a significant hit if they cannot restructure and recover their loans. It will make financial sector cautious and private sector chary about future investments in power sector putting economic growth at stake. The power situation will worsen. We are likely to see more power cuts across several states. 

The AAM AADMI has his promise of cheap power fulfilled but will have no assurance of its availability. He does not see the latter is a consequence of former. As long as he does not see the connection we cannot hope for a turnaround in the power sector.

RANGA KOTA is an adviser to Clearsep Technologies (I) Pvt. Ltd, Mumbai 
and an independent consultant in theLogistics and Supply Chain Area.






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