Wednesday, August 15, 2012

Power sector needs major reforms

India will give Batman a run for his dollars. Our dark nights hit 600 million people in one single day, which no Hollywood blockbuster can ever beat. Which modern nation in circa 2012 will suffer a 48-hour blackout affecting more than half of its population, after two decades of reforms in the power sector?

So, what's wrong with the power sector? The sector has seen the extraordinary Electricity Act of 2003, significant private capital finding its way to it, open access - at least in theory - unbundling of utilities, restructuring of the debt of distribution companies (discoms) and reduction in transmission and distribution losses. Yet, it is in hardly a sanguine state with capacity addition trailing way behind targets every single year and grid collapses of such a large scale happening.

Why did the grid collapse so comprehensively and was it really sudden and unanticipated? The load management system is monitored by the National Regional Load Dispatch Centre (NRLDC), New Delhi. The responsibility of maintaining the frequency is with both power generators and power users. If power generators produce less power or power users use more power, the load management system throws up warnings. In this case, looking at NRLDC data, power users consumed more power than agreed upon, with frequency falling below the permitted 49.7 Hz. NRLDC issued multiple warnings to state transmission bodies and when these went unheeded, it filed a petition before the Central Electricity Regulatory Commission(CERC) alleging that state transmission companies in Punjab, Rajasthan, Haryana, Delhi, Uttar Pradesh, Himachal Pradesh, Jammu & Kashmir and other state authorities were drawing excessive power. The states were violating clauses 6.4.8, 6.4.7, 5.4.2 (a) and 5.4.2 (b) of the Grid Code and Regulation 7 of the Central Electricity Regulatory Commission Regulation, 2009, and Section 29 of the Electricity Act.
The commission heard the petition on May 31, 2012, and an order was issued to state transmission companies on July 10, 2012, to rein in power consumption. Yet, the violations continued unabated, as CERC is a toothless tiger: its orders do not have the same authority as a court decree.
According to the petition, during January 1-March 25, 2012, Haryana, Uttar Pradesh, Rajasthan, Uttarakhand and Jammu & Kashmir drew excessive power when the grid frequency was below the permitted 49.7 Hz. There were 63 instances when the frequency of the northern grid was below the permitted frequency. NRLDC issued 319 warnings to these states during the period. Most of them were to Haryana, Uttar Pradesh, Rajasthan, Punjab and Jammu & Kashmir. This appears to be the immediate cause for the collapse, though the absence of protection systems or supply-chain malfunction could be other causes.
So, the grid collapse was hardly sudden, and states repeatedly ignored warnings knowing fully well that under Articles 142 of the Electricity Act, the maximum penalty is 1 lakh per violation - what a travesty this is. This needs to be immediately made manifold and compounded for repeat violations for every 15-minute block, which is how the grid cycle is measured in the country. Even with this meagre penalty, states owe about 11.58 crore of the total of 14.7 crore imposed as penalty for grid violations between 2006 and 2012. Just like income-tax tribunals have the power to attach bank accounts of defaulters, CERC should be given more punitive power so that its decisions have the same force as that of a court decree.
There are numerous pending reforms in power that will ensure that private capital doesn't run away from it. These are restructuring the discoms, periodic small tariff increases, fuel supply reform, upgrading grid evacuation infrastructure, investment in transmission, distribution privatisation and so on.

Data speaks louder than words. Research by some consulting firms reveals that of the 89,882 MW of private power under development in 2009-10, there was no fuel linkage provided in 57%, construction hadn't commenced in 91%, there were land acquisition issues in 80% of the cases, financial closure hadn't happened in 90% and the EPC contract hadn't been awarded in 86% of the projects. The situation today can, at best, be marginally better. Unless Lord Ganesha drinks milk again, private power development seems to be in all sorts of difficulties and wont kickstart easily.
When the losses of utilities were at 20,000 crore, they were restructured by the Ahluwalia Committee 10 years ago. Today, the losses stand at around 2,00,000 crore and could take down a significant part of the banking system with it. The government is toying with a proposal where states will take over 50% of the losses and convert them into bonds, and the rest will be restructured by the banks through a combination of a moratorium and extension of tenure.
When the date for repayment comes up, the Centre will take over 25% of the states' liabilities, if they have met some benchmarks on tariff increases, cut technical and commercial losses and so on. But the finance ministry might not agree to this dent on its budget balance. But first, the discoms will have to be rated, not by handmaidens of the Power Finance Corp but by respected agencies with high credibility.
Band-Aid reforms can't cure cancer in any organ of the body. Cancer requires surgery and chemotherapy, in focused and controlled doses. India's power sector has been getting Band-Aids as a proxy for bold reforms, whereas what it needs is surgery to complete the process started in 2003 with the introduction of the Electricity Act, which has been wrecked in its implementation.

Srivatsa Krishna, Economics Times

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