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Cover Story | December 2011

Fulcrum of power sector is the distribution sector

If the distribution sector is not viable enough to effect recoveries which will allow generators to continue to produce and earn profits, it will end up in losses, says Gopal K Saxena.

When we started off with Delhi privatisation in 2002 there were predominantly 4-5 things that were required. One was reduction in losses and the loss reduction trajectory had to be such that it was about the best that could have been achieved in the country which we stand committed to and which we have already achieved. Second was the standard of supply, the scope of supply, the technical requirement of the network coverage, network augmentation and voltage fluctuation. All these have been complied with fully to the extent that for the last two years Delhi has seen no load-shedding and power is available 24x7. The third covenant was that the consumer services had to be uplifted in a manner which bespoke of what is happening in many of the other developed regions of the world. There again, from minimal levels what we have today is a plethora of consumer touch points, a plethora of easy access and instant relief to the consumers. For the last three years we have been meeting all the performance standards as per DERC. So all this has certainly changed the way power is brought into Delhi and consumed by the consumers and I say this with a reason. One of the covenants that has not been met is the fact that at the time of privatisation we were promised a 16 per cent return on equity. Now despite the mass investments that we have done which has brought Delhi to the forefront of technological and process improvement across India certainly and in comparison with the rest of the world that 16 per cent return equity has remained just on paper. Consistently for five years the regulators have denied cost-effective tariff increases and that has virtually killed the industry. Now if this can happen in a place like Delhi you can well imagine its repercussions across the rest of the country. Delhi at least had a chief minister who was at least the initiator of these reforms or who was committed to these reforms but the entire regulatory process has subverted this whole exercise, so today the achievements on the operational front which are recognised and applauded globally are becoming a source of bankruptcy for companies who ventured into this and somebody has to find answers to this. The prime minister in his speech to the nation on 15th of August had called for the regulators to be accountable to some agency or mechanism by which they themselves are held accountable for their actions or inactions and unfortunately we have reached an imperative where these regulators are getting away with everything. Now today the fulcrum of the power sector is the distribution sector. If one looks across generation or transmission then you look across state-level transmission and finally distribution - the money for this hinges entirely on the distribution sector. It's all right to put up the project through project financing but if the distribution sector is not viable enough so as to be able to effect the recoveries which will allow the generators to continue to produce and earn profits, this whole thing will go down and indeed it is going down. Today, we have a bank exposure of about Rs 300,000 crore in various avatars of the power scenario be it generation, transmission or distribution. And this whole thing will become a non-performing asset if distribution companies are not able to pay the generators fully.

Per capita electricity availability and the global average

From 2003-2011, our cost of generation and transmission are now globally bench-marked. Any project that is being put up barring some inconsistencies on account of higher interest cost or some project duties etc., the capital costs are virtually marked globally. The fuel costs are by and large globally bench-marked. In fact, coal in India is cheapest and if one goes for imported coal the cost goes much higher. Similarly gas is also much cheaper and if one was to go for L&G etc., then it is much higher. So the cost of production by and large is globally bench-marked. Unfortunately because of the purchasing power parity and growing aspirations of millions of consumers, the affordability to buy power at a globally bench-marked cost is not there. So what is happening is that on paper you talk about a growth or doubling of per capita consumption but that is on the back of artificially reduced tariff. If tariffs had kept pace with globally bench-marked cost then what percentage of the consumer in India would have been able to afford power at that rate is the issue. And therefore one comes to a sort of conundrum that is this a problem of governance or a problem of demand-supply.

Importance of private participation

One of the first few things is the portal determination to look and possibly restructure the entire regulatory process. Generation on one hand is governed by CERC where the costs are routinely being passed on to the generators as and when they are trued up. Of course CERC has tried to bring about a lot of market determined competition. They are talking of changing over from a cost-based regime to a tariff-based regime to a bidding-based regime and this is part of the evolutionary process. On the other hand, power being a concurrent subject distribution is largely a state-owned prerogative and there is no uniformity in approach, tariff setting or addressing the needs of the current power distribution sector across various states. So this is largely resting in the hands of the regulator and possibly to some extent allowed by the regulators with whomsoever are the distribution companies.

Distribution Reforms

Since power sector reforms hinge on the distribution sector 1) There has to be a far better emphasis on uplifting this sector which has always been in the doldrums and has always taken a backseat. 2) There is great need for reaching cost-effective tariffs in as short a time as possible. 3) There is a need to introspect and reflect on how we are going to be addressing the needs of power distribution 5 yrs from now and how are we going to build the capabilities of discoms to meet those challenges and equip themselves to supply that power economically and in a more efficient manner. 4) How are we going to eliminate all cross subsidies or bring about mechanisms which allow governments to compensate the distribution company for any direct or indirect subsidies that serve political interest?

Growth of transformers market

A Frost & Sullivan study is based on the fact that there is a latent demand for electricity across India. There is the RGGVY scheme which talks about making electricity available to all rural households. There is great need for reforming the legacy infrastructure of the distribution company. There is a growing network in the grid so across the range of power transformers, distribution transformers, HVDS transformers and lower end transformers there is a definite need.

And to that extent all the signs indicate that if one is to meet the latent demand the transformer market will grow substantially. Also one needs to look at more and more efficient transformation and loss reduction.

So there is a need to bring in higher technology and to ensure that the service aspects of these transformers comply with international norms.

Presence of global participants

A lot of these people who operate in the EHV segment have set up dedicated facilities in India itself. People like ABB, Areva, Siemens, all of them have dedicated manufacturing facilities in India and most of the products that we get for instance are coming from such facilities.

On the other hand there are certain grids etc., which have come up on the back of a fully offshore contract. And there the EPC contractor has the call to be able to purchase globally and certainly there are areas where these people have used the opportunity to be able to make purchases on a global benchmark. But that's not too much different from what is obtained in India.

Investments in R&D, global price hike in transformer raw materials

IEEMA is looking at these aspects very significantly and I believe they are going to set up a core group to identify the constraints within the Indian industry. One of the areas that has been addressed is that there is much greater need for R&D. Today R&D by and large is largely being undertaken by Areva, ABB, etc., on the back of global revenues whereas Indian firms that are into the transformer market do not have the scale of operation and the vast resources globally to be able to put more and more money into R&D.

So the Indian concerns are by and large riding on the back of whatever are the technological developments that are taking place in these global majors. World-over steel prices have been rising significantly. Copper, commodity and oil prices have been rising significantly and it's no wonder that prices will rise.

Today, India is very much a part of the global marketplace and it will witness the movements in the market that happen globally. So if global prices or commodity prices are rising then India cannot remain insulated.

SEB losses and the way ahead

The Abraham committee was set up to look at T&D losses across various states. Now Delhi has served as an example of bringing down these losses from 52 per cent earlier to about 15 per cent now. Now within Delhi itself these areas by themselves are much bigger than some of the largest towns in India. For instance, losses in south Delhi are only 12 per cent. The losses in the NDPL area which is the total is about 13 and 1/2 to 14 per cent, losses in west Delhi are higher and in NDMC are about 11-12 per cent. The point is that it can be seen that private participation has brought about significant improvement and very high loss reduction trajectory. It is possible that some of the steps that we have taken in Delhi can be emulated across India where loss reduction has not been even 1 per cent per annum and the second thing is that there is a lot of leakage going into the agricultural sector and unmetered supply which balances out the loss reduction figures. So one really does not know what the actual losses are. But these are political issues. If politically it is felt feasible to give subsidies to a section of the community whether it is farmers or economically-deprived people or the under-privileged, it is a governance issue. But the cost of providing the subsidy should then be taken up by the government upfront and not passed on to the state electricity board or the distribution company. Finally, in the context of Delhi itself we have been given a distribution license. We are not a financing company. Why are we evaluated more for our ability to bring in finances to subsidise these so-called losses which are arising because the regulators have not given me a cost-reflective subsidy rather than on the operational achievements which are apparent to the whole world.

At the highest level, the Planning Commission, Government, Finance Ministry or Ministry of Power need to evolve a very fast mechanism which addresses the problem of sickness in the distribution sector to start with because that will eventually reflect upon the entire power sector. A large part of investments coming into India in the last 5-7 years have been in the growth of infrastructure and particularly in power.

Already people are taking lessons from what was obtained in Delhi. This entire privatisation of the distribution sector has been slowed down totally and entire investments on the generation side are now in jeopardy. There are stranded assets. There is no coherent plan to address the challenges raised in the generation sector and this will lead to recurring sickness, which will then be more and more difficult to arrest.

Distribution Investments in Delhi

Between the three companies the total level of investment is Rs 10,000 crore and it needs to be viewed in the context that there has been a saving of about Rs 28,000-30,000 crore to the Government of Delhi which actually has gone into development of other amenities and social services.

Creation of national electricity fund

It [National Electricity Fund] is a very welcome step but unless one looks at structural issues first and addresses and rectifies them, it should not happen that there is good money running after bad.

Status of the smart grids initiative

There are two things basically. Firstly BRPL and NDPL, two companies in Delhi, had themselves evaluated on the smart grid majority model of the University of Carnegie Mellon, USA, and the US Agency for International Development and it is a matter of great satisfaction that BRPL and NDPL rank above average on a global benchmark. Areas where they are not able to reach global standards are on issues related to tariff fixation, regulatory and financing. What this shows is that today utilities in India are closer to reaching the level of smart grid. For instance in Delhi, BRPL can seamlessly move over to a smart grid solution. However, all these transformations and migrations entail a capital cost and the question of affordability. Now when we are not even able to recognise and realise our true cost-reflective tariffs. I have the technological or process capabilities to move on to a smart grid solution very fast. I have been evaluated on 203 parameters but at the end of the day it should make sense to me, to the consumers and to all the stake-holders. Our greatest concern is reliability of power to consumers across India or access of power to rural areas. I think smart grid solutions will obviously take time.

The author is Chief Executive Officer, BRPL. Views are personal.
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