India mined more coal, built more power plants and distribution companies connected millions of homes to the grid over four years leading up to 2019. But those companies are now saddled with a record debt that hinders a key government promise.
24x7 power is the government’s priority, India’s new power minister Raj Kumar Singh said on May 30. His predecessor, Piyush Goyal, declared India a power surplus country two years ago. A government dashboard says 99.99% of rural homes – which account for nearly 7 in 10 Indian homes – now have grid power.
At the root of the contradictions between almost-universal electrification, surplus electricity and the inability to supply it around-the-clock to Indian homes is a debt that burdens state-owned electricity distribution companies nationwide, impairing their ability to build and maintain power grids and equipment.
The inability or refusal of state governments to increase power bills, has led to more borrowing and power shortages and made distribution companies reluctant to buy available electricity, which means continuing blackouts and erratic power supply.
This debt will reach Rs 2.6 lakh crore by 2020, according to a May study by Crisil, a market research agency. When that happens, the debt will be the same as in 2015, which is when the Ujwal DISCOM Assurance Yojana or UDAY, the government’s bailout programme for distribution companies, began.
“The much bigger need [other than distribution company inefficiencies] is to address the large amount of free power that is distributed for irrigation and for rural households in the country,” Vibhav Nuwal, director of REconnect, a Bangalore-based energy solutions company, told IndiaSpend. Only if this electricity is metered and billed will distribution company losses reduce, he said.
We sought comment from Vishal Kapoor, director of UDAY, at India’s power ministry over email and followed up with phone calls over two weeks, but there was no response. His office declined a request for an appointment.
The looming distribution company debt of Rs 2.6 lakh crore will be more than the Centre’s combined 2017-’18 spending on: highways, national railways, metro-rail systems, national food subsidies, cash transfers for national social-security schemes or direct benefit transfers, cooking-gas subsidies and capital expenditure for the defence services, space technology applications and satellites.
India’s traditional model of managing the electricity distribution sector warned a May 2018 paper by Prayas, a nonprofit that advises the government, “is on the verge of collapse”, which means much of India’s electricity gains are threatened.
“Crucially, it is not just the fate of distribution companies that are at stake,” said the Prayas paper. “As electrification accelerates and millions of newly electrified households join the grid, also at stake is the fate of all the small, rural and agricultural consumers.”
The return of the distribution companies debt to the pre-UDAY levels does indicate the failure of the Yojana, but this borrowed money said experts, also allowed India to build more power plants and expand India’s electricity network, which is why many states now have so-called surpluses.
The expansion costs could have been offset, if the scheme had kept to its other aims, such as getting states to increase power bills by 6% a year for four years till 2019. But the average increase over the period was half that and supply losses by October 2018 were 25% instead of 15% as they were supposed to be by March 2019.
We sought comments from Aparna U, managing director of the Uttar Pradesh Power Corporation Limited, an amalgam of seven state-owned distribution companies, over email and followed up with phone calls over two weeks. There was no response. Other officers from UP distribution companies refused to comment, as well.
India’s power deficit, which is the difference between the demand and supply of electricity, is not zero. India’s electricity deficit in the financial year ending March 2019 was 0.6%, and the peak power deficit or shortfall from the maximum electricity demand in a year was 0.8%.
“Power deficit is primarily due to the reluctance of debt-laden states’ distribution companies in buying more power,” said Prateek Aggarwal, an expert on the power sector at the Council on Energy Environment and Water, a Delhi-based think-tank.
India currently has around 356 gigawatts of installed generation capacity against a peak demand of about 177 gigawatts.
The nub of the issue: power generation cannot be increased unless distribution companies pay their dues.
It is also difficult to calculate how much electricity India needs for the 24x7 promise, said Aggarwal, “because most of the rural and agricultural connections are not metered, and India does not really know how much power it needs to supply 24x7 electricity to all its connected homes”.
Despite UDAY, darkness
When Prime Minister Narendra Modi began his first term in 2014, 70% of India’s homes had been connected to the grid. His government accelerated that programme and connected 26 million more homes over 16 months to December 2018.
But thousands of Indian villages receive 12 hours or less electricity a day – because of distribution companies’ inefficiencies – and India’s per capita electricity consumption was 14% of the average per capita consumption of the rich countries that comprise the Organisation for Economic Co-operation and Development, IndiaSpend reported on November 3, 2018.
In 2015, India’s distribution companies collectively recovered less than 80% of their operational costs. On March 2015, they had accumulated losses of about Rs 4.3 lakh crore.
So, the companies borrowed money from banks, with interest rates as high as 14%-15%, to cover their costs, their cycle of losses cancelling out India’s other gains: more coal, more power plants and more transmission lines, IndiaSpend reported on April 13, 2017.
Under UDAY, the power ministry, state governments and distribution companies signed a memoranda of understanding that said state governments would take over 75% of the companies’ debts – outstanding as on September 2015 – through bonds with a maturity period of 10 years to 15 years.
The companies were given goals: reduce power and interest costs, monitor and reduce transmission losses and power theft and fix faulty meters. By charging more, distribution companies were to wipe out the difference between the cost of supply and average revenue by 2018-’19.
In 15 states that account for 85% of national aggregate technical and commercial losses, despite the debt takeover, the UDAY failed, said the Crisil report cited earlier.
National aggregate technical and commercial losses were 25.41% on October 2018, or more than 10 percentage points more than they were to be by March 2019. Instead of hiking tariffs by 5% to 6% every year, the 15 states increased bills by 3%, said the Crisil study.
Success drove failure
Why could UDAY not help distribution companies be more profitable?
The answer, said experts, lies in the success of India’s electrification drive.
In 2016, a year after UDAY began, the Indian government launched another flagship programme to connect all the villages and households to the grid and to provide them with around-the-clock power.
“The time-bound objectives [of electrification drives] and UDAY were converging and diverging on certain aspects, which resulted in a haywire situation for the implementation agencies, such as the distribution agencies,” said Aggarwal of Council on Energy, Environment and Water.
The government electrified 26.30 million rural households to achieve 99.93% electrification over 16 months leading up to January 2019, a mammoth exercise whose implementation created problems for distribution companies: higher costs and reduced revenues from the newly connected households, mostly rural, paying low or no bills, said Aggarwal.
The blackouts continue primarily because the companies are reluctant to buy more power, either because they do not have the money or are afraid consumers will not pay, said Aggarwal.
Bills don’t reflect costs
Another reason why UDAY could not bailout distribution companies is infrequent tariff hikes.
“Consumer tariffs are still not cost reflective,” said Vibhuti Garg, a senior energy specialist with the Global Subsidies Initiative at the International Institute for Sustainable Development, a think-tank.
India’s electricity regulatory agency allows distribution companies to recover regulatory assets or the costs of power consumption at a later stage from the consumer through higher bills.
Due to sporadic tariff hikes, India’s consumers owed distribution companies Rs 76,963 crore by March 31, 2019, since the companies were not allowed to raise tariff.
Distribution companies in three BJP-ruled states – Uttar Pradesh, Jharkhand and Maharashtra – are responsible for 87% of the outstanding amount, said a May 20 study, by the India Ratings and Research, a market research agency.
The inability of distribution companies to recover unpaid bills has been a long-standing concern for the government, which blames state regulators for not raising tariffs to cut losses, The Indian Express reported on May 27.
The mess is often caused by populist measures. In many states, successive governments have kept electricity prices low for political gain, keeping distribution companies in the red, IndiaSpend reported on April 2, 2018.
Better meters will also help, said Garg.
“The poor levels of metering across various electricity categories [mostly domestic and agricultural consumer], the lower billing and collection efficiencies resulting in limited fund inflow for distribution companies will have to be fixed if the companies are to progress towards financially stable balance sheets,” said Aggarwal.
What can the government do?
If the government wants to fulfil its promise of 24x7 power, said experts, it must accelerate the process of installing electricity meters in all homes, replace defective meters, ensure unpaid bills are paid and end electricity theft – which is easier said than done.
The government will also need to address the problem of ensuring power stations are profitable before building more or reducing stranded assets and low utilisation, as Aggarwal put it.
Since 2010, India has seen the cancellation of proposals to build power plants worth 573 gigawatts –1.5 times the current national capacity – according to a 2018 report by the Global Coal Plant Tracker, the End Coal advocacy group’s global repository of information on coal.
The lack of “long-term power-purchase agreements” was cited as one of the leading causes for this financial stress, said the report.
This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.