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Interaction | August 2015

State governments need to focus on supplying quality power

This is what Naveen Munjal, Director ´ Commercial, CLP India Private Ltd, believes, as according to him ´good economics is good politics´ and will bring a more professional approach.

The government has claimed several records in its first year, but which is the worrying factor hurting the sector?

Our sector is one where you have long gestation periods and one can´t see results overnight. The last year has been a mixed bag; as they say, ´you win some, you lose some!´ Clearly, there have been positive initiatives from the new government, such as improvement in coal production, efforts to partially mitigate the problem of stranded gas-based generation, proposed changes in the Electricity Act, etc., and the results are partially visible, while some will be seen over the next few years.

However, to answer your question, the single biggest concern in the power sector that has persisted over the years is the serious lack of reforms on the power distribution side. This is causing agony to every stakeholder in the sector. In 1992, private sector participation in generation was introduced under the Narasimha Rao government, it was cited as a classic case of´putting the cart before the horse´ with the distribution sector being the horse. But, despite the Central government´s´previous and current´being very aware of this situation, there have been limited measures in reforming this space, mainly at the state level.

The main reason is that ´power´ is on the concurrent list; while the Centre formulates the overarching policies, state governments decide their own fate. The SEBs/State Regulatory Commissions, which are supposed to be autonomous bodies, have remained under constant pressure on the back of populist policies, essentially providing free or cheap power and also huge levels of cross subsidy.

SEBs lose, on an average, 60-70 paisa per unit while selling to consumers. Considering the fact that India has generated close to one trillion units annually, the losses incurred by SEBs are in the region of ~Rs 60,000-70,000 crore. This is a humongous amount that we are losing as a part of our GDP.

I believe, if states focus on supply of quality and not necessarily cheap power to consumers, the situation will improve.

So, you mean to say it is the mindset of state governments that needs to change...
I believe personally that´good economics is also good politics´; so state governments need to focus on supplying quality power and take a more professional approach to the sector. Let´s look at the example of Gujarat, they have been making profits and are way ahead of most others in terms of financial health. Evidence increasingly suggests that ruling governments which have done well economically, have been rewarded with another term. These days, consumers require quality power, not just cheap and free power. Meanwhile, the negligence towards distribution reforms have also affected plant load factor (PLF) of the country, which was operating at a mere 65 per cent, the lowest in the last 15 years...

The basic tendency of the debt ridden and loss making SEBs is that since they are on a losing streak, they rather not buy and sell power´this will arrest their losses. Of course there are other factors like lack of domestic coal availability and a stretched transmission infrastructure which has not kept pace with the increase in generation capacity, that have impacted PLF.

Apart from distribution, don´t you think transportation of coal is a weak link in this game too?
Besides transportation, there are issues with coal quality and sampling too. The government is trying to bring some level of independence in the sampling process. How quickly and effectively this happens remains to be seen. But at least they are is making all the right noises.

Look at coal availability; coal supplies to our own Jhajjar plant have improved substantially. This has happened due to a combination of two factors´one, the supply itself has improved as the coal companies are producing more coal; and secondly, we are making our own private arrangements to transport part of the coal made available by Coal India under the ´as is where is´ scheme.

CCL, our largest supplier of domestic coal has infrastructure constraints in terms of moving coal. For the last couple of years, they have offered us coal under the above referred ´as is, where is ´ scheme´for this, a coal consumer has to spend large sums of monies, which is in addition to the CIL price, to transport coal to the Railway sidings from the mines. This is something we have done in conjunction with the Haryana government.

In that case, as a private player, you spend a substantial amount on transporting, which was the prime responsibility of the government in the first place...
Yes, but having coal is better than having no coal; a cost benefit analysis is the overarching principle even when procuring such coal. It may be noted that for this coal, the standard CIL mine transportation charges are waived. We have a PPA with Haryana, under which fuel cost, including transportation, is a pass-through on the basis of a pre-determined heat rate. At the end of the day, the state needs power. Also, an IPP under a case 2 project with linkage just cannot absorb any fuel related expenses, i.e. one cannot afford to pay for variable (fuel) charges from our fixed charges (levelised charge of 92 paise/kWh), which are probably the lowest in the region.

What agendas would you like to put forth as the government has stepped into its second year?
To boost overall performance in the power distribution space, the Centre must encourage competition between states. States that do better should continue to be incentivised by the Centre. Additionally, state governments should invite private players who understand this sector. This will help turn around the distribution sector by bringing some kind of business perspective and inducting latest technology. Secondly, to strengthen SEBs, the government must resist extending unconditional bail-out packages. At the end of the day, these bail-outs are at the expense of the exchequer; and sends out wrong signals vis-+á-vis abetting the problem. Since most large banks are owned by the Centre, they need to leverage them for future funding of SEBs in a measured manner. With any precipitate action, they run the risk of provisioning or write-offs, causing substantial losses to the bank. At present, these banks have exposure to the tune of ~ Rs 2 lakh crore to SEBs; this is despite two rounds of major bail-out packages in the past.

Going forward, the government also needs to ramp up inter-state transmission capacity.
I believe that efforts have been largely on the generation side and transmission has been ignored. Also, the federal or state agencies on many occasions delay implementation of transmission projects and at the 11th hour, on the grounds of urgency, hand these to federal or state transmission utilities on a cost plus basis. Similarly, on the generation front, state or federal utilities are able to bag projects either by being a state-owned company or through joint ventures of state governments with federal generation companies. So, what is the kind of level playing field available to private players?

Also importantly, the government should not lose focus on generation, as the gestation period of a power plant is at least 4-5 years. If we don´t plan ahead of time, we will find ourselves in a difficult situation. I must be fair to the incumbent government and acknowledge that expecting things to change in a jiffy, especially in the sector like ours, is unrealistic.

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