Making electricity affordable in India

Impact of power sector has to be measured in terms of 5 ‘A’s- Awareness, Accessibility, Availability, Affordability and Acceptability. Recent policy measures of the government have remarkably improved the first 3’A’s i.e. awareness, accessibility and availability of power especially after launching of “Saubhagya” scheme. However, it has also brought unintended outcomes for the distribution companies whose cost of supply has increased due to increase in LT distribution network length necessitating more conductors, meters and transformers etc. Most of the newly added consumers are from rural areas of low income states like UP & Bihar and belong to subsidized categories of consumers like agriculture and rural domestic. These all have also added to the subsidy burden of respective state governments.

There is a limit to which the states can meet their subsidy obligations for its low income consumers. The state’s capacity to service power subsidy of its BPL consumers is dependent on its per capita income which varies from state to state. For example, the capacity of Delhi state government to meet its obligations and expenditures from current per capita income of Rs. 3.89 Lacs and tax to GSDP ratio of 10% will be around Rs.38, 900 per person whereas for a state like UP with per capita income of Rs.70, 500 and tax to GSDP of 10% , it will be meager Rs.7050 per person. Needless to mention that the competing demand for developmental funds from its own revenue resources in these low income states is very high and also the fact that no subsidy is provided by the central government for this purpose. Therefore making electricity affordable for its consumers becomes a priority for the sector. Lower tariffs will increase the capacity and willingness of the consumers to pay for their electricity consumptions thereby improving the financial health of discoms; it will also make the industries more competitive. Limiting focus only on reduction in cross-subsidy burden of the industries, a zero Sum game approach, may not be fruitful. In order to make it a win-win situation, the overall cost of supply must come down to make electricity affordable so that it is within capacity & willingness of increased number of consumers; reduces the cross-subsidy burden on industries; and also reduces the subsidy burden of the state governments thereby freeing fiscal space for its developmental expenditure.

The possible policy steps to make electricity affordable are as follows:

1.      Expedite overdue distribution reforms

While Generation and Transmission sectors have been unbundled, unbundling (segregation of carrier and content business) of distribution has been a non-starter. Privatization and governance reforms of distribution companies are likely to unlock huge value and provide efficiency gains through loss reduction for making power affordable. However, this option is most difficult in our political-economy as it requires wider consultations, ground preparations and strategy for managing transition to avoid disruptions during interregnum.

2.      Capping of Stranded Capacity charges

As of now, we have surplus installed capacity of around 370 GW against peak demand of 183 GW, therefore any fresh capacity addition should be limited to projected load demand growth and replacement of retiring power plants. This will reduce the stranded capacity charges the discoms are currently paying to the generating companies for their long term power purchase agreements without taking any power from them under availability based tariff regime.

3.      Say Goodbye to Cost Plus regime

a)      No new project (except Hydro and Nuclear) should be allowed on cost plus route or MoU route under section 62 of the Electricity Act. This section of the Act is reminiscent of “Enron” and had relevance only when India was power deficit. Now when country has sufficient installed capacity, it makes no sense to provide a risk free 15.5% tax free (or 22% after Tax) return on equity to the power companies. Therefore, all new generating projects including RE should compulsorily be taken up only on tariff based competitive bidding (TBCB) route and evaluated at procuring state’s periphery including inter-state transmission charges to bring in transparency.

b)      Existing power projects of CPSU’s like NTPC / PGCIL /NHPC and state power generating, transmission and distribution companies are the main beneficiary of cost plus power procurement under section-62. CERC regulations have been providing a tax free Return of Equity of 15.5% which is followed by the State Regulatory Commissions for the state’s PSUs as per statute.

c)      On the other hand, none of the major diversified unregulated private power companies could achieve higher ROE than regulated PSUs. For example in the years 15-16, 16-17, 17-18 & 18-19 , ROE of Tata Power was only 4.82%,-1.06%, 7.73% and 7.45% and ROE of CESC was 6.08%, 8.45%, 7.19% and 9.73% in respective years. Similarly ROE of all other private unregulated power companies was lower as compared to regulated PSUs.

This needs to be reviewed by linking ROE with a formula based on RBI repo rate and appropriate risk beta weightage. If we use Capital Asset Pricing Model (CAPM)-

              Return on Equity= 

              Risk Free Return+ Beta x (Market Return – Risk Free Return)

                      Risk Free Return = Average of Last 5 Years G-Sec Yield = 7.01%

                     Beta of BSE Power Index=1.004

                     Avg. Annual  Return of BSE in last 5 years (2014 to 2019)=10%

                     ROE= 7.01+ 1.004*(10-7.2) =9.82%

In present context, around 5% reduction in ROE will provide noticeable reduction in tariff. Also bringing PSUs under competitive bidding route will bring level playing field and help in tariff reduction through increased competition and efficiency gains.

1.     Restructure normative debt: equity financing to 80:20

Presently, the regulatory norm used for tariff computation of projects is 70:30 debt: equity. While debt servicing is limited only to term of the loan up-to 12 years, but RoE is allowed in perpetuity even after plant is fully depreciated. This needs to be limited to useful life of the unit. Further, If debt: equity is increased to 80:20 as in case of other infrastructure projects, the levelized tariff will be reduced due to the fact that cost of equity is higher than debt..

2.      No double whammy for consumers

National Clean Energy Fund was created as a non-lapsable fund in 2010 for promoting clean technology and since then around One Lac Crore has been collected from coal cess. However, most of it has been diverted and used for other purposes like funding to states for their GST losses etc. Asking Generating companies to install FGD and pass on the cost to the consumer amounts to double whammy for the consumers who first pay for the coal-cess and now will have to bear the FGD cost also. We should stop using cess as Tax and NCEF should be used to fund the clean energy initiative and FGD installation etc.

 

 

 

 

About the Author:

Raj Pratap Singh retired from IAS has worked at senior positions at Central & State Government including PMO and World Bank. Presently he is Chairman of UP Electricity Regulatory Commission.

Disclaimer: Views expressed in this article are author’s personal opinion.