Ten years after the Government had introduced the Electricity Act in 2003 to drive development and attract private participation in the electricity sector, a report published by an industry chamber has observed that since then the sector has come full circle - from emerging as one of the most attractive investment destinations in the late 2000s, to a point when private investment has since receded.
Citing a consensual view of all stakeholders, it has pointed at the distribution sector as the main culprit which has harmed the sector. “There is complete consensus among all the stakeholders we talked to, that at heart of it all is an unviable distribution sector. This lack of viability is largely because of the significant increase in the cost of procured power due to the massive fuel price, which the discoms are unable to pass through in their tariffs,” the report titled ‘Repowering India’s Electricity Sector’, prepared by the industry body CII in collaboration with McKinsey, has said.
It suggested that in order to make the power sector work, the distribution aspect needs to be fixed. “Distribution generates the cash flows to fund the full power sector value chain, and unless it becomes viable, sustainable development in the power sector is not possible. At the same time, politically, this is the most difficult to achieve and will require significant ingenuity,” it said.
According to industry sources, the report has been discussed with the Power Ministry during a recent meeting of the ministry officials with CII’s representatives. Suggesting remedial measures, the report said that “a balanced risk-return profile is critical to attract investment and drive innovation. Investment will only flow into the sector if the opportunities offer balanced risk and returns. Over the last seven years, the return on invested capital in the sector (based on an analysis of listed companies) has fallen from approximately 11 per cent to 5 per cent”.
At the same time, the report added that the developers are bearing risks (e.g., fuel price and availability, project execution, counter party risks), many of which they cannot legitimately own. It is no surprise that the sentiment has turned negative.
Thirdly, the CII said in the report that “gaining privileged access to low cost fuel is necessary. Fuel prices will continue to escalate. Recent analysis suggests that the price of seaborne thermal coal could cross $130 per tonnes by 2015. In such an escalating, volatile environment, leaving a significant part of India’s generation capacity exposed will make the task of creating a viable distribution sector even tougher than it is now”.
Therefore, it is critical that India fully monetise its domestic fuel resources and use its scale to gain privileged access to international fuel resources, the report has suggested.
Referring to “poor execution and externalities” which have adversely affected the sector, the CII report said that though the Act provides for forcing mechanisms like open access, over 90 per cent of the open access power applied has been delayed owing to high cross subsidy charges and the inadequacy of transmission, billing and settlement mechanisms.
As a result, discoms accumulated losses worth approximately Rs 2,50,000 crore in 2012, thus impairing their ability to secure both long term and short term power. “Many discoms prefer to shed load rather than buy power in the exchanges. At the same time, consumers use significantly higher cost, diesel based power, pointing to a massive market failure,” it said.
Giving credit to the Act where it is due, CII said that the power sector’s failure to deliver as per its potential “is less because of flaws in the Act, and more due to poor execution, unprecedented fuel price increases and project execution bottlenecks”.