THE NEW POWER POLICY – BANKRUPTING THE POWER SECTOR

(Courtesy: Economic & Political Weekly. Volume XVIII, P-995/20/1993) The future of the power sector in India appears rather bleak. A cursory perusal will show that organisations and companies connected to the power sector are in various stages of crisis. The Government of India has of course found the usual solution – invite capital both foreign and Indian and all will be well.  However, it needs to be examined whether the proposed solution will lead to the long term health of the power sector or will it be worse than the disease. A simple calculation shows that the measures proposed by the Department of Power will result in an additional loss of about 10,000 to 15,000 crores to the State Electricity Boards (SEBs). Even if the power tariffs are hiked to three times their current levels, the SEBs will still incur a net loss for each unit of electricity that they will buy from these power companies. If the lack of investable resources with the SEBs is the crisis in the power sector, the measures proposed to be taken by the Department of Power are a sure recipe for disaster.

 The Eighth Plan envisages a net addition to the Indian Grid of 38,000 MWs out of which 28,000 MWs are to be met from state’s internal resources and 10,000 MWs from private and foreign investments.  The Department of Power has offered for such investments 78 such projects with an aggregate capacity of approximately 21,500 MWs, presumably including a part of the Ninth Plan targets. Offers have been received for 41 of such projects1. However, looking at the current investments being made, the promised state resource mobilisation for the 28,000 MWs does not seem to be forthcoming. Perhaps if large scale capital inflows can be found from private or foreign sources, much more than  the estimated 10,000 MWs will be handed over. However, for the purpose of calculations here, private or foreign generation of only 10,000 MWs as planned initially by Department of Power has been considered. If the possibility of even larger slice of the Power sector being handed over is taken into account, the scenario is even gloomier.

For making power generation attractive to foreign capital, there are a number of commitments that the Government of India has made. The key commitments are a minimum guaranteed 16 % rate of return on equity2 based on hard currency and a cost plus calculation for the electricity produced. The SEBs will have to enter into long term contracts to ensure the above  payments, which will be backed up by sovereign guarantees from the Government of India. The SEBs will also guarantee minimum off take of 60% for such plants.

The proposals available with the Government for various projects clearly show that the cost per MW in terms of investments is of the order of 4 crores per MW. The total foreign or private investment being sought is therefore of the order of 40,000 crores for 10,000 MWs. If the above returns are to be guaranteed, the SEBs who are the distributing agencies will have to realise the revenue from the sale of such electricity. Therefore, it is worth while examining the cost of such electricity as against current generating costs and the additional losses the SEBs will incur if the current power tariffs are maintained.

The detailed calculations for the costs of such power have been worked by K.Vijaychandran in his report on the Indian Power Sector, a study jointly sponsored by an Apex Committee of Officer’s association and Trade Unions in the Power Sector3. Roughly, these calculations show that per MW of such contracted power, the SEBs will have to pay Rs. 5/- per unit as against the current cost of generation per unit of Rs. 1.05/- and their curent realisation of 81 paisa. The calculations have assumed a debt equity ratio of unity. Even if 4:1 debt equity ratio is assumed, the SEBs will have to shell out nearly Rs. 3.50/- per unit (Table 1) for coal based plants. If no tariff changes take place, the loss to the SEBs on account of paying for such power will be nearly equal to the total revenue being earned by the SEBs today. The SEBs will have to suffer an additional loss of 10,000 to 15,000 crores per year and this for an additional installed capacity of a mere 8 percent (Eighth Plan end as the base).

TABLE 1 Cost Calculation per Unit of Electricity

a) The costs of distribution in order to link the transmission systems are at least Re.1.00 per unit prices as against the current distribution costs of the SEBs of 0.24 Rupee. Most of the proposed plants will require large investments by SEBs to link them to the Grid. Therefore, Re. 1.00 for distribution is quite reasonable.

b) The costs have been shown in Rupees for loan and equity portion of the capital but are actual hard currency costs. Therefore, an annual depreciation of the rupee cost has been added as the repayments have been guaranteed in hard currency.
c)   Calculation for current costs are based on 1990 figures.  Based on costs for 1992-93, they are marginally higher.

The other alternative for the SEBs will be to hike up the tariff rate massively to offset this loss. Currently, the SEBs are in the red to the tune of Rs.4300 crores in accumulated losses and owe Coal India and NTPC almost similar amounts. If we do not take into account the past losses and look only at the current realisation as against current costs,  the SEBs are losing approximately 24 paisa per unit as against a cost of Rs. 1.05 per unit, a loss of 30 per cent in current revenue terms. To offset the huge amounts that would have to be paid to the proposed Power Companies, a simple back of the envelope calculations would show that the tariffs will have to be revised not by 30 or 40 per cent but by 300 per cent.  Even after such revisions, the SEBs will be paying more to the proposed Power Companies than their selling price to the consumers.  The loss due to such power will come down if tariffs are hiked up so steeply, but would still constitute a serious drain. Thus the SEBs will continue to be in the red even after a three fold rise in the cost of electricity.

The problem of the Indian Power Sector does not lie in a temporary resource crunch. A temporary capital shortage can be made good by borrowings or inviting private and foreign capital. As long as the power produced can be sold at a profit, the decision to adopt this path is at least financially viable. But what happens if the power produced in this way has to be sold at a loss? The costly power from the proposed investments is going to land the Power Sector with a perpetual loss of enormous proportions which will have to be made good by the cheaper power produced by the much reviled SEBs. In fact, in this case, the suggested cure is much worse than the disease.

Why is the Government embarking on a path which is sure to spell disaster?  The first and foremost perhaps is that the global Power Equipment manufacturers are bringing enormous pressures through IMF and World Bank to open up the Indian Power Sector to import of power equipment. The world power market, particularly in advanced countries is totally depressed as their power consumptions have remained static or have actually come down in the last decades. With no new investments forthcoming in the home countries, the Power Equipment MNCs are looking to external markets. However, the existence of an indigenous power industry has meant that the equipment costs are much lower in India than in the West. Therefore, the only way that power equipment can come from the MNCs is through tied credit and equity participation. It is important to note that in tied credit, even if cheaper equipment is available locally, purchases have to be made according to the choices of the financiers. The initial phase of global competitive bidding introduced due to World Bank financing itself had pushed up domestic power equipment costs. In order to compete, the domestic suppliers had to meet the specification framed according to World Bank approvals and this did see a substantial rise in costs. However, in spite of this, domestic equipment manufacturers have been able to maintain a clear price advantage and have bagged most of the orders in such competitive global bidding. It is not an accident that the cost per MW for BHEL boilers and turbines have been substantially lower than that where tied foreign credit was involved. BHEL sets were cheaper by almost a factor of 2 in most of these cases3.

The other reason could be that in line with current thinking, the Government feels that the power equipment  manufacturing concerns in the public sector should be “aligned” to the MNcs. In other words, they would like to sell off BHEL, the only power equipment manufacturer in the global scene outside the MNCs line up. The current policy of tied credit and imported equipment would ensure that BHEL has very little orders and thus facilitate this transfer.  And the importance of multi-nationalising the BHEL lies in its removal as a potential global competitor. Even though BHEL’s  global presence is small, there is little doubt that it prevents complete cartelisation which has been the norm in this sector. With current set of mergers, the  number of players in Europe and US have come down to virtually four. With another three from Japan, there are only seven MNCs now operating in the power equipment sector. In such a scenario, even a small player can cause a lot of problems for price fixation.

The above may appear to smack of conspiracies. However, in the absence of any logic for following such disastrous policies, it is difficult to find other reasons. The only other reason could be that if surviving on loans is the norm, then why bother about the future? As long as the current shortfalls are taken care of, it matters little what happens five years later. Either the policy makers are foolish or they are knaves — these are the choices. However, can the country afford that the power sector be put in the red permanently in so cavalier a fashion?

To follow the path that the Government has chosen, power tariffs have to be increased drastically. The arguments have already been forthcoming from the Fund-Bank axis that in India, power is being subsidised heavily. But is this true? To prove that Indian power is being subsidised, the power tariffs are being compared across countries and it is being shown that in India, the power tariffs are one half to one third that of advanced countries. However, how valid are the comparisons by using foreign exchange rates? The rupee/dollar parity has little to do with the intrinsic value of the rupee as with the value of our exports against our imports. It does not indicate the buying power of the rupee in India. A much clearer picture would emerge if we examine the cost of power production in India as against the selling price of electricity. Here, it is true that the current realisation is 30 per cent less than the current production costs. However, even if this implicit subsidy is removed, the cost of Indian power is well below that of the advanced countries. If the cost of production of power is much lower in India, raising power tariffs to the level of those countries who are producing much more expensive power make little sense. The subsidy element in the power sector is not so much in the general public being subsidised but subsiding electricity to agriculture and theft “subsidy” to the tune of 12 to 13 per cent of total generation. The consumers, domestic as well as the industry pay tariff rates which are already as high if not higher than their in-house generation costs. The elasticity in terms of pricing really does not exist in these sectors.

It is not the purpose here to argue that all is well with the SEBs. Far from it. However, the current problems that the SEBs  are facing are being utilised to push a scheme which will see the power tariff going up by at least three  times, the loss of the country’s power equipment sector and a future drain on the national exchequer of huge amounts. And the SEBs will continue to be in the red even after such huge tariff revisions as they will have to subsidise the power being produced by the proposed private and foreign power companies. Further, the power tariffs will be pushed up to the levels which will make this an item of luxury consumption only for the favoured few. If this is not a gigantic fraud on the people, what else is it?

It may be argued that any power at whatever the cost is better than no power. However, even by the Department of Power’s own estimates, the country is going to invest from internal resources to add 28,000 MWs. What needs to be examined is whether alternatives exist to either use the same amount of investments for increasing the installed capacity beyond 28,000 Mws or in controlling the demand. Incidentally, both possibilities exist today.

It has been shown by  S.N.Roy4, one of the most respected power engineers in the country that there are other planning options available which are not being utilised. The load curve today shows that in future, we shall be short of peaking power during day and have surplus power at night. This is already so in the Eastern Grid and also for much of  the North. This is obviously because the demand during day is much higher than at night. However, Department of Power is planning to add coal fired power plants, nuclear power plants and combined cycle power plants all of which are base load plants. The coal fired power plants will have to be put either on two shift operations or a number of such plants will have to operate well below their capacity for those periods when the demand is low. Hydel power is ideal for peaking power but has come under severe environmental opposition. In effect, Department of Power is planning on base load stations instead of peak load stations. It will be far more economical to add open cycle gas turbines in place of the combined cycle plants as these will meet peaking duty at much lower capital costs.

The second option is to introduce demand side management for power consumption. It has been computed that it is much cheaper to invest in reducing consumption rather than in investing in new power generating plants. The lowering of consumption in Europe and US has been mainly on this account. Thus an utility in US, gave out to its customers free compact fluorescents which consume only 20 per cent electricity compared to the normal lamps and avoided the installation of new power plants. In India, a study5 suggests that even if 20 per cent of all lamps were replaced by compact fluorescents, there would be a saving of 1500 crores per annum.

The other possibility is to lower the capital costs by standardisation and replication of a basic design with only some modifications. The economics of standardisation can lead to a substantial reduction of costs, particularly if capital crunch is recognised and designs are made accordingly. In the power sector, the tendency has been to build rather expensive plants in the name of reliability. The plant load factors have not shown any major improvements due to this, but the plant costs have gone up considerably. The above course can lead to reduction of costs by as much as 25 % to the cost of plants and should be the first option to be exercised. However, with import of capital, the power planning is moving in the opposite direction – more non- standard plants and consequently higher capital costs. It might be interesting to note that in the nuclear energy sector, US capital costs are much higher than European capital costs precisely because of this. The European plants have been standardised while the US ones are not.

Currently, the Indian planing process seems to be completely comatose. No long term planning is being done to ensure a coherent energy policy which will evaluate various options and suggest a viable path. Instead, a few buzz words like liberalisation and privatisation are being used to substitute for hard policy. However, power policies can not be formulated on such flimsy basis. For those enamoured of the South Korean experience, it might be interesting to know that South Korea nationalised the power sector in 1982 because of the problems with private power companies. To those who wear ideological blinkers, all this means little. The selling of India piecemeal is the game, and it matters little if future generations pay a heavy price for the activities of today’s carpetbaggers.

References

• P.V.Rangyya Naidu, Minister of State for Power, Rajya Sabha        Answer to Unstarred Question no. 1000, May, 1993.
• P.V.Rangyya Naidu, Minister of State for Power, Rajya Sabha Answer to Unstarred Question no. 988, May, 1993.
• K.Vijaychandran, Study Report on India’s Power Sector: Problems and Prospects, April 1992.
• S.N.Roy, IEEE Horizon, Institute of Electrical and Electronic Engineers, Issue No 2, 1992.
• Chris Cragg, Demanding Plans for Power Cuts, New Scientist, March, 1993.