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Power: Achievable target?

May 24, 2001

In the current budget (2001-02) the government unveiled an ambitious Rs 7.5 bn rural electrification program under which it is targeting to electrify 80,000 villages in the next six years. It is quite an ambitious target considering the ground realities. India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the demand-supply gap. More importantly it has to bring transmission and distribution (T&D) at par with power generation. India’s T&D to generation ratio stands at a dismal 0.3:1, as compared to an international benchmark of 1:1.

Power generation stood at 56,740 MW in FY01, just 0.9% growth over FY00. This is slower than the growth displayed in FY00 (9.8% YoY).

(figures in MW) FY98 FY99 FY00 FY01* CAGR (%)
Total consumption 34,148 37,578 40,891 43,719 8.6%
T&D losses (%) 23.7 23.3 23.1 22.8 -1.3%
T&D losses 8,093 8,756 9,446 9,968 7.2%
Energy requirement 44,744 48,986 53,204 56,651 8.2%
Load factor (%) 78.3 72.8 70.9 70.9 -3.3%
Peak load (MW) 57,167 67,312 75,012 79,856 11.8%
* estimated figures
Source: CEA

Average transmission and distribution losses (T&D) exceed 20% of total power generation compared to less than 15% for developing economies. In fact T&D losses in some states like Orissa and Karnataka are very high (51% and 37% - 42% respectively). As a result, it has become necessary to resort to power cuts and other regulatory measures to ration power supply. Such rationing has resulted in forced outages and large fluctuations in the supply of power.

The SEBs, have continued to suffer from high T&D losses which stood at 25% in FY98. These have increased to 26% in FY99. The net subsidy after accounting for amounts received from state governments was Rs 54 bn in FY92, which has gone up to Rs 229 bn in FY00. The hidden subsidy for agriculture and domestic sectors has increased from Rs 74.5 bn in FY92 (accounting for 1.1% of GDP) to Rs 381 bn in 1999-2000 (accounting for 1.7% of GDP). It is projected to go up further to Rs 412 bn in FY02. The gross subsidy of the state power sector as a percentage of gross fiscal deficits of state Governments was about 36% in FY00.

Restoration of the financial health of SEBs and improvement in their operating performance continue to remain a critical issue for development of the power sector. The performance of SEBs has gone from bad to worse in the last 10 years. In 1993-96, 14 SEBs, out of 17 SEBs (including Orissa SEB), had a positive rate of return (ROR), including subsidy. In FY99, 10 SEBs out of 16 SEBs (excluding Orissa SEB) had a positive ROR (including subsidy). Only 3 SEBs (MSEB, TNEB and UPSEB) had a ROR of more than 3% in FY99 (with subsidy). Managerial and financial inefficiencies in state sector utilities have adversely affected capacity addition and systems improvement. While the SEBs do not have enough resources to finance future capacities, they are also unable to raise investible funds from alternative sources due to their poor financial and commercial performance. Also, the inability of SEBs to pay their dues, in full, to central power utilities (CPSU) adversely affects the finances and investment plans of these CPSUs.

In order to improve the financial state of the SEBs the central government has promised to write of all losses (estimated to be Rs 260 bn) so that they can start afresh. However, the government has also warned that if the SEBs continue to incur losses then this could adversely affect the concerned state’s plan outlay.

If the government can execute even half (i.e. electrification of 40,000 villages) of what it is targeting in the next six years, it will spur industrial activity in rural India. More importantly, if executed it means more investments in the power sector and more growth opportunities for the companies. In light of this power seems to be the sunrise sector for India. But before that there is an urgent need to speed up the process of restructuring of the sector and particularly, strengthen the transmission and distribution networks.

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