Vinayak Chatterjee: Weakest link in the power chain
Distribution remains a contentious area and urgently needs a complete overhaul

Without doubt, distribution is the weakest link in the entire power sector value chain — fuels, logistics, generation, transmission and distribution.

The medium-term “fuels” outlook for our coal-dominated energy sector is beginning to look less scary. The demand for coal is expected rise to 980.50 million tonnes by 2017. The domestic availability of coal has been pegged at 795 million tonnes. This demand-supply gap of around 200 million tonnes is expected to be made up substantially by imports by 2016-17. On imports, the “sarkar” is gearing up functionally and administratively, according to latest reports coming from the Prime Minister’s Office. An inter-ministerial group is preparing public-private partnership schemes for roping in the private sector for coal mining. The brouhaha over the Comptroller and Auditor General’s report has got political parties to broadly agree to de-nationalise coal mining. The price of coal has fallen by 40 per cent in international markets and 65,000 Mw of thermal plants in the US are shifting to gas by 2016. Political and administrative decisions on import-aggregation, pooled pricing and tariff pass-through, have, for all practical purposes, been taken.

A significant amount of capacity is stranded owing to the non-availability of gas. Rising demand and falling domestic production has pushed the share of imported gas to 40 per cent of the current consumption in India. The US has turned into a net energy exporter on the back of huge quantities of shale gas and oil becoming available commercially. Washington, however, allows gas exports only to free-trade agreement partners. New Delhi has asked Washington for special exemption that will allow Indian companies to import liquid gas in ships from the US. With increased gas imports and the KG D6 impasse likely to be resolved, there is hope in the medium term.

On the logistics front, serious issues remain on the efficiency and capacity of railways and ports to handle 200 metric tonnes of imported coal. Liquefied natural gas, or LNG, terminals to receive imported gas require augmentation as well as pipelines across the country. These are capital investment and project execution challenges that are largely under the Centre’s control. Already, there are clear signs of new capacity being built.

Generation targets look eminently doable. The target for power capacity addition during the 12th Plan period is 88,000 Mw. With about 60,000 Mw under execution, this 88 Gw should be achieved after hitting 55 Gw in the 11th Plan.

Transmission, after the grid collapse in early August, surfaced to attention. However, other than this kind of an episodic event, it has not done badly. The existing inter-regional power transfer capacity was targeted to be raised to 37,150 Mw by the end of the 11th Plan period. Power Grid was the only company from the power sector to have met its investment target during the 11th Plan. Its pace of investment was higher compared to the generation sector. Its expenditure outlay was Rs 6,000 crore in Ninth Plan, Rs 18,000 crore in 10th Plan, Rs 55,000 crore in 11th Plan, and now Rs 100,000 crore in the 12th Plan. Along with its wholly-owned subsidiary, Power Systems Operation Corporation – which manages the Regional Load Dispatch Centres and the National Load Dispatch Centre – transmission is certainly not the major fault line. Plans are in place for strengthening the regional grid links to the national power grid to support the generation capacity addition of 88 Gw. The phasing out of the current Unscheduled Interchange format and the implementation of Special Protection Schemes will all add to the robustness of the grid.

It is, thus, the huge distribution tail that will wag the power dog.

India’s distribution losses and economics are inter-related, and in the theatre of the absurd. The average cost of supply for all power companies has far exceeded the average revenue realised. Not surprisingly, the accumulated losses of financial utilities were estimated to be over Rs 2 trillion at the end of 2011-12, from Rs 1.23 trillion at the end of the previous year.

The controversial and contentious heart of distribution reforms is “open access”. Here, the government is finally beginning to flex its muscles. A letter dated April 23, 2012, from the power ministry to the Chairperson of the Central Electricity Regulatory Commission, curtly says: “The matter has been examined further and it has been decided to issue a direction under section 107 of the Act in order to remove any ambiguity in the legal provisions in this regard. Accordingly, the Ministry of Power, Govt. of India in exercise of powers under section 107 of the Electricity Act, 2003 hereby issues direction to the Central Commission to take all necessary steps, including framing of appropriate Regulations to implement the provisions of ‘Open Access’ as contained in the Electricity Act in pursuance of the Ministry of Power letter dated November 30, 2011.”

Simultaneously, the finance ministry has agreed on restructuring bank loans worth about Rs 70,000 crore to bail out ailing electricity distribution companies. The remaining half of the distribution companies’ debt would have to be taken care of by state governments issuing bonds. This package for distribution companies comes with a host of conditionalities. There have to be regular tariff increases, and states will have to commit to undertake key power sector reforms, including change in the management control of loss-making distribution circles. There will be a quarterly review of distribution companies before the release of fresh funds.

So, why is distribution the weakest link?

One, issues on fuel supply, logistics, generation and transmission appear to be getting sorted out in the short to medium term. They are broadly technocratic in nature — administrative decisions, and once taken, with adequate political push, can be implemented.

Two, the above are also central decisions; whereas distribution is in the realm of 29 state governments. Thus, moves related to open access, free power to farmers, privatisation of distribution networks, tariff increases et al fall in the area of state-level politics and are, thus, less likely to move either speedily or in an orchestrated manner.

Three, the non-receipt of subsidies from cash-strapped state governments coffers affects the finances of distribution companies. Subsidy from state governments was estimated at 18.94 per cent (Rs 29,665 crore) of the total revenue of state utilities in 2008-09. Although subsidies booked have grown at 30 per cent a year, cash received stood at only 14 per cent.

Four, it is distribution that requires the micro-management of millions and millions of end-users with metering, billing, collection, theft reduction, mafia-control and local area infrastructure upgradation. This systemic micro overhaul across the length and breadth of the country and a granular set of related activities is not amenable to broad sweeps of fresh policy, lumpy capital investment or rapid execution. While few towns (Delhi, Bhiwandi) have demonstrated the art of the possible, India’s balance 5,200 urban agglomerations and over 600,000 villages are waiting for their power-line knots to be untangled from their lamp-posts.

Five, ,many state regulators are ponderous, lethargic and under “political capture”. Distribution reforms depend crucially on their playing a vibrant and reformist role.

Six, strict implementation of “open access” may actually strain the financials of state utilities further in the short term, until the full system is harmonised again.

The dinosaur had an adverse tooth:tail ratio. Generation:distribution issues mimic this extinct species.

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