Mounting losses undermine electricity generation targets

Mounting losses in power transmission and distribution by state-owned electricity boards are undermining ambitious government plans to boost electricity generation, industry experts say.

Losses of state-run power utilities are estimated to nearly triple and reach Rs1.16 trillion by fiscal 2015, according to a report by US-based energy and metal information provider Platts, published this month, which cited a study by India’s Finance Commission.

“Finance Commission estimates that net annual losses of the state transmission and distribution utilities could almost triple by fiscal 2014/15 if the business as usual approach continues,” said the report. The net losses of power utilities are expected to increase to Rs68,643 crore in the current fiscal from Rs40,000 crore in fiscal 2010.In a report released in January, consulting firm KPMG estimated average transmission and distribution (T&D) losses in India to be 33% of the total power generated. Malay De, chairman and managing director of the West Bengal State Electricity Distribution Co. Ltd says the situation is “very alarming”. Even in West Bengal, which is one of the better off states in terms of operational efficiency, there is room for a 10-percentage point reduction in T&D losses that currently stand at 22%, he says. According to Arun Mishra, principal energy sector adviser at the Planning Commission, plans have already been made to cut down on losses by raising agricultural power tariffs.

“States like Punjab and J&K (Jammu &Kashmir) which were laggards have also improved,” he said. Punjab was a laggard because of high subsidies to farmers and they are also moving towards corporatization this year,” he told Mint.Mishra was referring to a move by the Punjab government towards unbundling the electricity board—the process of dividing state power utilities into separate generation, transmission and distribution units in line with the Electricity Act, 2003.Lack of compensation from state governments to utilities for the subsidized rates at which they sell power to groups such as farmers is a major drag on the finances of such entities, says Ross McCracken, editor of Energy Economist, the Platts publication that carried the report.

“State governments might not have properly funded the subsidies and do not have the money, or they are prioritizing other expenditures knowing that at least temporarily they can pass the burden on to the utilities,” McCracken said in an email response to queries from Mint. “This is not sustainable and undermines utilities’ ability to invest.”Planning Commission deputy chairman Montek Singh Ahluwalia said last month that India is targeting the addition of 20,359MW of power generation capacity this fiscal. Last year, it added only 9,585MW of a targeted 14,507MW.The Platts report quoted B.K. Chaturvedi, a member of the Planning Commission, as likening the situation in the power sector to a “six-lane road ending in a narrow lane”, referring to the large amount of private investment flowing into generation, but not being matched in transmission and distribution.

“Two to three months’ delays in making payments to power generating companies have started to surface in states like Jharkhand, Bihar, Uttar Pradesh, Jammu and Kashmir, and the north-eastern states except Assam,” said the official who spoke on condition of anonymity. “If the companies do not receive their payment on time, they might defer investment plans.”

Sudhir Nair, head of Crisil Research, an arm of Mumbai-based credit rating agency Crisil Ltd, estimates Rs5 trillion will be invested in power generation in the next five years compared with just Rs3.5 trillion in transmission and distribution. “In the developed countries, this is 1:1,” he said.

The situation will change, but only gradually.“In the next 10 years, the composition of power consumption will change with agriculture becoming aminuscule part because of factors such as urbanization,” Nair said. “That will give state governments more power to increase tariffs for this segment. It has already started to happen with the share of agriculture falling around 5% in the last seven years to 20% now.”

Greater engagement of the private sector in the distribution side of the power supply chain may be one solution.“In the Indian context, private sector involvement in distribution functions like metering, billing and collection might help in bringing in managerial efficiency,” said Kuljit Singh, partner, transaction advisory services, at international consulting firm Ernst and Young Pvt. Ltd.