Policy Wise: India’s Power Sector

Government bailouts are not the answer to India’s energy sector woes

Note4Students

From UPSC perspective, the following things are important :

Prelims level : India's coal import

Mains level : Paper 3- Issues with India's power sector

Context

Across several states, the fiscal situation is becoming increasingly challenging. Yet, the common thread that runs through these deficits — state ownership and control — remains unaddressed.

State ownership: structural cause of India’s deficit

  • Coal India’s inability to raise production to meet growing demand contributed to the recent power crisis.
  • The state-owned power distribution companies have failed to bring down losses despite many schemes and packages.
  • The state control of these critical aspects of India’s power chain is central to a higher current account deficit and growing fiscal risks at the state level.

Coal output fails to meet the demand

  • From 2013-14, the Indian economy has grown by around 50 per cent (in real terms).
  • But Coal India, which accounts for around 80 per cent of India’s total coal production, was able to raise its output by just 34 per cent over the same period.
  • Increased reliance on imported coal: India’s coal imports (thermal and cooking) rose to a staggering 230.3 million tonnes in 2020-21, up 37 per cent from 168.5 million tonnes in 2013-14.
  • Coal imports for thermal power alone have more than doubled in the first quarter, compared to the same period last year.
  • To put this in perspective — the value of coal imports in just the first three months of this year is likely to be around half of what was imported in all of last year.
  • Increase in current account deficit: This growing reliance on coal imports (along with crude and gold) is at the root of the country’s widening current account deficit.
  • An inability to ramp up production, to forecast demand accurately, as every episode of coal shortage over the years has exposed, is the hallmark of the coal sector that is still largely the preserve of a public sector monopoly.

Problem of DISCOMS

  • No improvement in financial and operational issues: Despite repeated attempts to turn around their financial and operational positions, on key metrics, the divide between the public and private sector discoms is deepening.
  • In 2019-20, public sector discoms lost Rs 0.72 per unit of power sold, while private discoms made Rs 0.20 per unit.
  • High AT&C losses: Similarly, in 2019-20, the AT&C losses (due to operational inefficiencies) for state discoms were pegged at 21.7 per cent, while for the private sector, losses were at 8 per cent.
  • With deteriorating finances, the net worth of all public sector discoms put together stands at a negative Rs 61,757 crore, while for the private sector, it is a positive Rs 24,965 crore.
  • There have been several attempts to rescue state discoms.
  • In the early 2000s, the scheme for repayment of SEB dues amounted to Rs 41,473 crore.
  • In 2012, the financial restructuring plan added up to Rs 1.19 lakh crore.
  • In 2015, UDAY involved a transfer of Rs 2.01 lakh crore to state government balance sheets.
  • Notwithstanding various schemes to turn around their finances, the total debt of all discoms put together stood at Rs 5.14 lakh crore at the end of 2019-20.
  • Of this, Rs 4.87 lakh crore is owed by state discoms.
  • Impact on entire power chain: A deterioration in the financial position of discoms means that their dues to power generating companies start mounting, which in turn delay payments to coal miners, affecting the financial stability of the entire power chain.

Declining cross-subsidisation

  • As tariffs charged by discoms are much higher than the cost of alternatives, a sizeable part of non-agricultural sales of discoms (industrial and commercial consumers) have already shifted towards captive and solar.
  •  And with the ministry of power recently reducing the threshold for green energy open access, more and more consumers will increasingly opt out.
  • This would mean that discom losses will rise as cross subsidisation from commercial and industrial consumers will decline, increasing their dependence on state subsidies.
  • In 2019-20, the total state subsidy claimed and released was around Rs 1.1 lakh crore or 17 per cent of total discom revenue.
  • This will only increase down the line, making future bailouts even more fiscally challenging.

Conclusion

Tackling these deficits requires addressing the issue of government control over critical aspects of India’s energy sector. Without shifting to market-determined prices — reforms are ultimately about price — little headway is likely to be made.

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