India's state utility companies make losses of $9 billion annually. While raising tariffs for consumers or farmers is an option - it remains unlikely given upcoming elections or political pressure. On the other hand, power theft in the system remains high ($6 billion of losses) and can be reduced given its high concentration among five states (45 per cent of total losses).
Despite having an assured return on equity of 16 per cent, power distribution business entities in India have been making losses of about $9 billion per annum. It may sound incredulous, but if utilities take the inefficiencies in the value chain seriously, there is potential to save $16 billion based on already introduced reforms in the power sector.
According to a realistic analysis drawn by Bank of America and Merrill Lynch, the state electricity boards have potential to generate profits of $7 billion v/s loss of $9 billion if inefficiencies across the value chain are curtailed. See how: Power theft, inefficiency in billing or collection of power bills itself comprises $7.5 billion of annual losses. Besides, of the 29 states in India, five states alone account for 45 per cent of total power theft. Addressing the issue of power theft within these states alone could generate significant savings.
That said, the analysis further suggests that if domestic coal is mined efficiently, the cost could be shrunk from the current level of Rs 1,050 per tonne to a mere Rs 450-550 per tonne. And, this has been demonstrated by certain power sector miners. This implies potential savings of around $4 billion. What's more! At $3 billion, India is the fourth largest importer of coal; however, since domestic coal is 40 per cent cheaper than that of imported coal, augmenting the same can save $1.4 billion of costs.
Meanwhile, by rationalising coal logisticsùcoal supply to power project from the nearest coal mine, there is a potential of curtailing coal haulage distance through rail from an average of 510 km currently to 416 km (19 per cent savings). If implemented, shorter haulage of coal should help save $1billion. Augmentation of the rail network and providing last mile rail connectivity between power plants and coal mines should help reduce coal transport through road. As per the analysis, cost of coal transport through road is 58 per cent more expensive as compared to that through rail. While road transport could not be completely done away with for very remote power plants or coal mines, this has the potential to generate $0.6 billion of savings.
Over the period, operating losses in the power sector (especially the power distributors) has accumulated a large chunk of borrowing from banks than capex. If, above mentioned suggestions are implemented, there is a potential to significantly cut the need for borrowings to fund the operating losses andhence do away with the interest burden from such loans. It is expected that $1.8 billion of borrowing expenses, to plug the operating losses, could be averted.
Here, there is an interesting observation. Most of the power entities are state-owned; they are massively staffed accounting for 54 per cent of the total cost within the sector. To cite an example, PGCIL accounts for 50 per cent of power transmission in India and has $2 billion of O&M or other costs, while the state government-owned transmission utilities account for the balance 50 per cent transmission but have massive $17 billion of O&M or other costs.
Further reluctance among discoms to increase their purchases to supply uninterrupted power, breakdown of transformers, inadequate transmission capacity and distribution infrastructure is forcing plant to run at sub-optimal levels. So on one hand, we have capacity to generate surplus power, and on the other, we have 45 million rural households lacking access to electricity.
Unless cost inefficiencies within the value chain are resolved, don't expect structural power demand to pick up. And, if structural demand does not pick up India would continue to face over-supply of power generation capacity, which potentially could turn infructuous.
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