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Power: Will there be light? - Views on News from Equitymaster
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  • Apr 16, 2001

    Power: Will there be light?

    Electricity generation has been in the thick of things over the last six months. The Enron imbroglio has brought back the attention to this sector and has once again highlighted the dismal state of affairs.

    A look at the electricity consumption profile over the last fifty years clearly brings out the reason for the mess in the generation segment. The commercial and industrial sectors besides being the largest contributors to the revenue of the industry are also a very lucrative segment as they pay the highest tariff charges. Till the sixties these two segments accounted for 75% of the total consumption. Consequently, the burden of subsidy could be tolerable as the subsidised customers accounted for 20% of the total consumption.

    Electricity Consumption (%)
    Year Domestic Commercial Industry Agriculture Others
    1950-51 12.6 7.5 62.6 3.9 13.4
    1960-61 10.7 6.1 69.4 6 7.8
    1970-71 8.8 5.9 67.6 10.2 7.5
    1980-81 11.2 5.7 58.4 17.6 7.1
    1990-91 16.8 5.9 44.2 26.4 6.7
    1998-99 21.2 6.4 33.9 31.2 7.3

    Consumer-wise tariffs
    (Paise/Kwh) Domestic Commercial Industry Agriculture Railways Others
    1996-97 85.9 191.5 184.1 30.1 160.4 92.1

    However, the deterioration seems to have started in the seventies. The era of nationalisation and the height of socialism. Despite higher energy costs, with two oil shocks, subsidised electricity was doled out to the agricultural sector and the Government looked upon industry to cross subsidise this burden. Consequently, in the seventies industrial consumption declined significantly.

    Unwilling to bear the step motherly treatment, industry has shifted towards captive power plants to meet their power requirements. Consequently, the share of industry in power consumption has steadily declined over the last three decades. Over this period industry's share of consumption has declined by exactly half (50%) while the share of subsidised segments, domestic and agriculture, has increased by 140% and 206% respectively.

    This trend has adversely affected the consumer profile of the State Electricity Boards (SEBs), as the lucrative customers have stopped purchasing electricity from SEBs. With deterioration in consumer profile the finances of the boards were bound to be in trouble. Therefore, the Government will have to rationalise the tariff structure, as the disparity could further deteriorate the consumer mix leading to greater financial hemorrhage of the SEBs.

    Any reform process will have to address the issue of tariff reforms. The power policy of 1991 introduced certain guidelines for tariff reforms.

    • All states and union territories will set up a State Electricity Regulation Commission (SERC), which will fix the tariff for all consumer categories. The tariffs will be structured in such a way so as to ensure 3% rate of return to the SEB.

    • Cross subsidisation will be permitted, provided each consumer category is charged a minimum of 50% of the average cost of electricity supply.

    • The agricultural sector will be charged a minimum of Rs 0.5 Kwh (Kilo watt hour) and within three years the tariff should equal 50% of the cost of supply. In case of shortfall in tariff, after this period, the state Government will have to reimburse the SEB for the same.



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