Column: What ails Indias power sector?

Jun 21 2014, 02:12 IST
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SummaryThe failure of states to put in place cost-reflective tariffs leaves them vulnerable to Delhi-like power crises

Piyush Goyal, the minister of state for power, coal and new & renewable energy, told a press conference that inadequate transmission lines meant Delhi could absorb 400 megawatts of power on top of its existing 5,300 MW, falling short of the current peak demand of 5,800 MW. Clearly, the power grid, as it stands today, is outdated, needs augmentation and modernisation, and may repeatedly have outages and tripping problems. He said residents in Delhi should brace for more power cuts, warning that dilapidated power grids could not cope with the extra electricity needed to meet demand. He charged that Delhi is suffering because of the inaction of the previous government.

Let us see whether it is inaction of only one state government or whether it is a common practice among states and how it affects performance of their electricity utilities.

Post Electricity Act, 2003, not only are the operations of transmission and distribution entities mandated by the conditions of the licence, but operations of these entities are regulated on the cost and revenue side too. Inter alia, any investment to be made by these entities, be it for creating new capacity to meet rising demand or to improve system efficiency or to improve system reliability or system stability, needs to be mandated by regulators. These investments by transmission or distribution entities have associated cost implications on the consumers. The general rule of thumb estimate is that 19-22% of the capital investments made by these entities get translated into yearly burden on the consumers, which needs to be compensated through increased consumer tariffs. Thus, a R100 crore investment would get translated into additional/incremental annual revenue requirement (ARR) of R19-22 crore, which will have to be made good through increased tariffs. In an era where there already exists an unbearable inflationary pressure on consumer tariffs due to rising fuel prices of coal and gas, investment decisions, because of their implication on consumer tariffs, often get deferred to the last minute at the expense of adequate capacity or adequate reserve capacity, system reliability, stability or efficiency.

The double failure of the Delhi Electricity Regulatory Commission (DERC) to come up with a cost-reflective tariff and a realistic amortisation schedule for costs yet to be recovered from the consumers (regulatory assets) created a chain of problems: two of the distribution companies (discoms) reduced payments to the Delhi government-run generating and transmission companies. Their over-dues, as on November 2013,

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