India Markets closed

    +112.77 (+0.28%)
  • Nifty 50

    +23.75 (+0.20%)
  • Dow

    -410.89 (-1.44%)
  • Nasdaq

    -192.67 (-1.65%)

    +58,432.81 (+7.20%)
  • CMC Crypto 200

    +5.04 (+2.16%)
  • Hang Seng

    +27.28 (+0.11%)
  • Nikkei

    -104.09 (-0.44%)

    +0.4751 (+0.55%)

    +0.0176 (+0.02%)

    +0.0410 (+0.21%)

    +0.0004 (+0.03%)

    +0.1110 (+0.21%)

Why do power firms incur losses despite tariff hikes?

Amitabh Tiwari
·4-min read

By Amitabh Tiwari & K Shankar

The opening up of the sector by the Government of India during the last decade has transformed the power landscape significantly.

This is reflected by the pace of capacity addition. Till 2007, the first 60 years of the post-independence era, India added ~132 GW (1GW = 1000 MW) of capacity, and within the next 10 years an additional ~190 GW was added.

By 2022 we would be ~3x of 2007 capacity at ~400GW.

With electricity demand continuing to grow at an annual average growth of 4-5%, this robust capacity addition spree has helped in reducing the deficit (both base and peak) significantly.

The fallout of this has been a sharp dip in capacity utilization (PLF%), especially of the thermal (read coal-based) power plants. So while all the non-fossil-fuel-based power capacities are running close to their optimal utilization level, coal-based plants are being run at their most inefficient levels.

Hence, while technically the nation is having a deficit but practically there is a surplus. This surplus is also across the country and not confined to any particular region.

While the surplus situation should ideally be a good position for a nation to be in, but with India, the problem continues.

This is evident from the losses of the distribution companies (discoms) which continue to be at elevated levels despite various reforms/restructuring packages being undertaken periodically over the last decade.

The more they sell it, the more they lose it: the performance of state electricity boards (SEBs) has been nothing electrifying for a while now. The latest report card by Power Finance Corporation (PFC) on the performance of SEBs highlights the fact that losses in FY18 were Rs 54,800 crore (Rs 42,400 crore in FY10) despite frequent reforms, refinancing, and easy tariff hikes.

Hence, we believe, SEBs must focus on efficiency first and then seek tariff rationalization (not tariff hike). They must trim cost of supply, improve collection and privatise inefficient operations.

Performance v/s MoU commitment of key states under UDAY as on March 2020

Note: The figures marked in yellow denote states who have met or exceeded their target in the respective category

Even after the well accepted reform & refinance - UDAY scheme, performance of almost all state discoms have fallen short of their own target (as on March 2020) as per their MoU as on March 2020.

We believe the key reason for SEBs incurring high losses (both commercial and financial) is the tariff gap and its related issues. Almost all SEBs have been cross-subsidizing the low agricultural tariffs (Rs 0.96 in FY18 against Rs 1.97 in 2010) through high industrial tariffs (Rs 7.54 in FY18 against Rs 4.82 in 2010).

However, as can be seen from the table below, this approach has boomeranged with industrial consumers have started to draw less electricity from the grid (from 34% of volumes in 2010 to 28% in 2018) and even more sharply in terms of revenues (from 46% in FY10 to 36% in FY18).

Since industrial tariffs have been significantly higher compared to even the average cost of supply (ACS), they have been the biggest contributor to the profits / arresting the losses.

However, with their share dropping sharply (both in volumes and value) the aggregate losses have increased. In the process the agriculture’s revenue share has steadily been decreasing which has further impacted the financials.

To summarize, the losses of SEBs are due to inefficient operations and skewed tariff policy. Hence, apart from the routine loss-reduction measures that is being followed as per UDAY and other reforms, the following could also help in improving discoms’ financial health:

1. Resort to franchisee business of all inefficient units across the value chain (Generation, Transmission, & Distribution). This will enhance the cash flow (due to lower capex & opex, relatively better spark spread) and will not result in job losses.

2. Use solar power for electrifying remote & uneconomical locations and subsidise these installations through schemes. This will limit the loss funding, divert these loss making volumes by selling to paying customers (Industrial and Commercial users) and thereby bringing down their average costs, reduce the load on the transmission cum distribution network and arrest commercial losses.

3. Adopt a friendlier tariff policy towards commercial and industrial consumers. From the historic customer wise tariff data, it seems up-to Rs 5-6/kwh these customers are comfortable paying.

We believe that focussing on tariff hikes is misplaced as SEBs should lay more emphasis on efficient operations before seeking tariff rationalization.

SEBs need to fix leakages in the system in terms of inadequate T&D (non‐metering, inferior cables/conductors, lack of proper maintenance/upkeep of transformers/substations) and collection inefficiencies (theft, bad debts and corruption).

A tariff hike would be highly effective in a scenario of least AT&C losses else such indiscriminate losses would only worsen theft/bad debts and demand destruction. We believe SEBs should bring down the cost of supply first by improving PLF, undergo financial structuring, increase collection, privatise some of the inefficient operations and finally seek tariff rationalisation (not tariff hike) to ward off the current crisis.

ALSO SEE: Yahoo Originals