Power Sector: A Time Bomb Ticking Away

THE priority in the power sector has been to chase high cost power to meet mythical demands. As Enron has shown, the result of adding a huge amount of costly power leads to bankrupting the Maharashtra State Electricity Board (MSEB). When the second stage coming on-stream, MSEB will pay more than 50 per cent of its revenue to Enron for adding only 20 per cent of its installed capacity. This will not only bankrupt MSEB but also the Maharashtra government.

Unfortunately, failures of earlier reforms have taught the power establishment nothing. The current proposals of restructuring the electricity boards, carry with it similar problems. The restructuring of the State Electricity Boards (SEBs) will lead to revaluing the assets of the Boards and paying their capital costs all over again. This would obviously impact power tariffs substantially, a consequence on which everybody is maintaining a studied silence.

Enron is not just a bad contract. Underlying Enron is a mindset that propagates that power at any cost is preferable to no power. In the first phase of reforms, this led to getting private projects with very expensive power. Andhra has shown that power tariffs are not elastic; people will not tolerate sharp rises in power tariffs without large-scale resistance.


Why is Enron’s power so expensive? There are three major reasons for the same. The first is choosing the liquid fuel route – naphtha for the first stage and Liquified Natural Gas (LNG) for the second stage. Denominating the price of power in dollars compounded this. If the above two were not enough, MSEB promised a fixed capacity charge: if they did not draw power equal to 82 per cent, they would pay Enron a sum equal to about Rs 90 crore per month at today’s price of the rupee. All these have contributed to Enron power costing MSEB more than Rs 7.00 per unit.

Enron’s argument is that in any pricing of power, we have to take the pooled cost into account. In any electrical system, there are new sources of power – new power stations – and older stations. With time, the capital costs of the older stations get written off and the costs of their power become cheaper than the new stations that we put up. Thus, NTPC’s old plants such as Singrauli still supply power at Re 0.77 per unit while its new plants charge about Rs 3.00. Enron’s argument is that we should look at the average cost of the power in the pool and not the individual cost of suppliers such as Enron.


The scheduling of new power stations is crucial as if we add new expensive power capacity far above our requirement, we will increase the pooled costs substantially. The question that is relevant is how short of power are we and how much do we need in the next decade? If the Ninth Plan documents are to be believed, we need an additional 100,000 MW in the next decade. The predictions are based on the 15th Electric Power Survey (EPS). The 15th EPS, like the 14th EPS and the 13th EPS, grossly over-estimated the demand. 15th EPS estimated demand by the year 2000-01 at 90,000 MW against an actual demand of 73,000 MW. For the year 2001-02, 15th EPS predicted a figure of 95,757 MW as demand against a projected demand based on current load demand of at best 76,500 MW. The rate of growth of power demand assumed in the 15th EPS was about 6-7.6 per cent against an actual growth of only 4-5 per cent.

The reason for the repeated overestimation in the successive power surveys is because the surveys assume that power demand is autonomous and does not depend on factors such as industrial growth, the health of the economy and the cost of power. Further, it assumes that the ability of the Indian power system to meet peak demand (peak to installed capacity) is poor – 65 per cent at best — and considerably lower than even other developing countries such as Bangladesh, Philippines and Pakistan, all of whom have figures in the range of 75-90 per cent. This leads to gross overestimation of the amount of installed capacity that we need to add.

If we had indeed added 57,735 MW as planned in the Ninth Plan, we would have been surplus to the tune of 30,000 MW and 150 Billion Units of energy for which there would have been no demand. Due to this huge increase in expensive new power source added to the pool, the cost of power would have increased by 40-50 per cent. Instead, we will add about 19,000 MW in the Ninth Plan with shortages of 10 per cent in peak demand and 5 per cent in energy demand. If we had added about 28,000 MW, we would have met peak demand of 76,500 MW even with current peak to installed capacity ratio. The slippages from the Eighth Plan and CEA cleared schemes — 28,447 MW — was enough to meet actual demand.

Our shortages are currently of peaking power. However, our focus still remains base load plants. Adding 28,244 MW of private power as base load stations, would have further distorted the economics of the power pool. Base load stations with liquid fuel and rise in liquid fuel prices has further compounded the problem of the pooled costs.

Thus building overcapacity in the system has huge costs, costs particularly that the people have to bear in terms of higher tariffs.

We have earlier addressed the issue whether Enron’s cost of Rs 7.00 per unit compared to the average cost MSEB’s own plants of about Rs 2.00 per unit is fair or not. Here, I will confine myself to the question of the pool itself. What happens to the pooled costs if the ratio of new power to older power is high as has happened in Maharashtra? In the Enron case, all of a sudden, a new expensive source –generating more than 2,000 MW with a minimum guaranteed off-take of 82 per cent — is being dumped into the existing pool. This results in a huge surplus of generating capacity. As MSEB has given off-take guarantees (in any case LNG contracts are take-or-pay contracts), they will have to back down their cheaper units. Prayas, a young group of energy professionals have done a study of MSEB’s economics after the second stage starts to produce full power (scheduled for 2001 end). Their calculations show that the average tariff for domestic and agricultural consumers must rise from Rs 1.45 currently to Rs 3.60: a more than two fold rise in their tariffs, if MSEB has to survive! They have also calculated that if Enron had been scheduled for 2003, when there would have been adequate demand, the impact on the tariffs would have been much less. The Enron case is not only one of very expensive power but how such power should be scheduled in the pool.


Now let us look at the current set of reforms that the ministry is proposing. The ministry and planning agencies are focussing on restructuring the State Electricity Boards (SEBs) by separating generation, transmission and distribution into separate businesses and then privatising them. Setting up a regulatory framework will — according to the government and its experts – depoliticise electricity tariffs allowing the subsidies in agriculture to be reduced, if not removed completely.

While it is clear that agricultural tariff will rise after restructuring, the domestic consumer does not believe that restructuring and privatisation will affect his or her tariffs. What the current reformers are not telling the people, is that privatisation of existing assets of the SEBs will lead to its revaluation. Unless we agree to handing over all SEBs to private parties at book value – virtually then gifting them away – we will have to get them valued at either replacement costs or at market value. Once this is done and these assets handed over to private capital at those prices, the historical low cost of power of older stations will get revalued with current capital costs, leading to a much higher price of pooled power. For instance, the hydel stations in Orissa were supplying power at the historical cost of 10 paise. After restructuring, the cost of such power is now 40 paise. The impact thus of restructuring is to substantially increase the cost of pooled power. After restructuring MSEB, for example, high cost power of Enron will not be pooled with low cost of existing power in the pool, but with an already high cost of pooled power.

There is certainly a need to improve the electricity sector in the country. I am afraid that instead of taking hard decisions and concrete steps to improve the sector, we are substituting real reforms with slogans. The political system has to realise that the power sector is a time bomb ticking away at its heart. And only concerted action in a positive direction will save the power sector and the country.