Why India’s Power Reforms Fail Green Energy as structural issues of Theft, Fuel and Electoral Carrot unaddressed

The Indian Government has recently come up with some economic reforms in the areas of Subsidies, Aviation, Retail and Power. However most of these reforms are half baked and fail to address the structural issues. Doubts are already being raised about how these changes are going to be implemented, with the ruling party losing the support of a crucial coalition partner. With elections just one and a half years away, it looks likely that the reforms will not meet their objectives.

The Electricity Companies in India have been facing major issues with regulations, corruption and fuel supply issues dogging them. Most private companies are making huge losses despite India facing a huge power deficit. Faulty government policies in the whole supply chain from fuel to equipment to generation is the major cause why despite massive unmet demand, the country’s power companies are losing money.

The new reforms in which the state government will take over half the debt of the state owned distribution companies and the state owned lenders will restructure the massive $35.5 billion in combined debt does not address the structural issues.

1) Theft – Almost 30-40% of the power generated is lost due to theft and transmission losses compared to 5-10% in other countries. This is due to patronage of theft by the political parties

2) Fuel Supply – The country’s policies in gas and coal have left the whole industry in shambles

3) Electoral Carrot – Each party tries to outdo each other by offering free electricity which is unsustainable and leads to massive power cuts. The debt is shouldered by state owned PSEBs which then don’t have any money to buy power

India’s Power Politics

Dirty Politics and blatant misuse of power is nothing new for Indian citizens but it has reached absurd levels in India’s largest state of Uttar Pradesh. Some districts in the state receive 24 hours power supply while some only get 8-10 hours. The discrimination is based on whether the district has elected an important leader for the ruling party. So top Samajwadi Party leaders like Mulayam Singh, Azam Khan and others manage to get 24 hours of electricity supply to their home districts, so does India’s ruling party at the center Congress. However if you are a UP citizen and don’t have a VVIP leader elected from your district you are faced with massive power cuts

India’s Power Industry Fuel Problems

a) Lack of fuel as Coal India the monopoly producer is a den of waste and corruption. There is no coal to feed the new thermal power plants despite India sitting on hundreds and billions of coal reserves

b) The distribution and transmission sector owned by the government is a total mess

c) The coal industry has come under fire from the Auditor General for indulging in widespread corruption

d) Foreign governments have imposed duties and taxes on coal exports to India making the big power plants non-viable. The Reliance power plant being built in AP is now stuck as it is no longer feasible to supply power at the contracted prices at the current fuel cost

e) Gas power plants are stranded as well as domestic gas production has dived (as usual due to government incompetence and corruption).

Why Green Energy will continue to suffer

While Renewable Energy is growing in India, Green Companies are not immune to the general industry crisis. The major problem it faces are:

a) Counterparty Risk from state owned power discoms

b) RPO is not being enforced which means that Renewable Energy Certificates (REC) will not have a marketable value

c) Loan problems as most loans for the power sector have already gone to bankrupt Discoms

WSJ

NEW DELHI–The Indian government on Monday approved a plan to cut state-run electricity-distribution companies’ piled up losses of about 1.9 trillion rupees ($35.5 billion) as it seeks to revive the ailing power sector and growth in the economy.

Under the plan, state governments will take over half of the short-term debt of the distribution firms over the next two to five years, the government said in a statement. The distribution companies will issue bonds to lenders backed by the state governments against this debt.

For the remaining short-term debt, lenders will relax the terms, including extending the time of repayment, it said. The federal government will also provide fiscal incentives to states which adopt the plan.

The implementation of the plan is at the discretion of states, which could be a hurdle in its success.

A similar plan introduced more than a decade ago didn’t yield the desired results due to unwillingness of states to share the debt burden and increase power tariffs, fearing popular backlash.

Hindu

The renewable energy sector has good reasons to rejoice over the approval of financial restructuring of electricity distribution companies by the Cabinet Committee for Economic Affairs, and not just because the utilities will soon have money to pay their dues to wind-power companies.

It is widely expected that States will raise electricity tariffs to avail themselves of the grants offered by the Central Government. This means that solar power will come closer to grid parity, or indeed reach grid parity. ICRA estimates that over the next four years, the annualised tariff hike would be around 11 per cent. It says that some “outlier” States may even need to raise their tariffs between 15 per cent and 17 per cent. This is sweet news for solar-power producers.

The restructure of discoms’ loans will help the green-power sector in yet another way. As the State Governments take over the bonds issued by discoms to lenders, the lenders will have additional room to finance energy companies. Now, there is a fear of banks hitting their exposure limits to the power sector.