Interest rate subsidy for power

The government is likely to come out with an interest subsidy scheme to push distribution reforms in the power sector. The performance-linked subsidy would be given to distribution companies to create infrastructure.

With the aim of bringing more areas under the reform process, the subsidy would only be available to distribution companies not being covered under the existing distribution reform programme. The scheme would be enforced through creation of a national electricity fund (NEF).According to a senior power ministry official, the ministry of finance has given its go-ahead and the power ministry is likely to move a Cabinet note for approval. The government would also decide on the executing agency for the new scheme.

“It could either be Power Finance Corporation (PFC) or Rural Electrification Corporation (REC), or both,” the official said.

The existing R-APDRP (Restructured Accelerated Power Development and Reforms Programme) is also meant to improve distribution systems and minimise transmission and distribution losses in the sector through loans that are converted into grants on the completion of the reform process.

The idea of an NEF was first proposed in the 2008-09 Budget to help the perennially bankrupt state electricity boards (SEBs) improve finances and reduce distribution losses.

Subsequently, a committee headed by Planning Commission member B K Chaturvedi was set up to work out the details. The Commission suggested an interest subsidy mechanism, wherein the Centre would bear a part of the interest cost of funds raised by a state utility for power distribution projects.

Though the corpus for the fund is yet to be decided, the power ministry official said the requirement would be met through budgetary support. Under the Restructured Accelerated Power Development and Reforms Programme, the government provided a budgetary support of Rs 1,831 crore for 2011-12, of which Rs 1,756 crore is being given as loan to PFC which finances distribution companies.

Projects under the scheme are taken up in two parts in urban areas and cities with population of more than 10,000 in special category states and 30,000 in other states. The objective of the programme is to facilitate reduction in Aggregate Technical and Commercial (AT&C) losses to 15 per cent.

The distribution of electricity was identified as the “weakest part” in the country’s power sector by the Planning Commission in its mid-term appraisal last year, owing to heavy AT&C losses. The losses, which touched a record high of Rs 40,000 crore in 2009-10, ensured the disability of most SEBs to raise money or to do so only at very high rates of interest.