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Power: The past and the potential - Views on News from Equitymaster
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  • Jun 25, 2003

    Power: The past and the potential

    Power is a critical infrastructure for the growth of Indian economy. Since demand is higher than supply at the current juncture, expansion in power generation capacity is necessary to ensure rapid economic growth and the overall success of the liberalisation efforts.

    The power infrastructure currently is in bad shape. In India, still 80,000 villages are not connected to power. The major roadblocks for development are:

    Poor efficiency
    As against the installed capacity of 108,205 MW, only about 53% is utilized. The breakup of installed capacity and power generation is given below.

      Installed capacity (MW) % of installed capacity Power generated (MW) Efficiency % of total generation
    Thermal 76,606 70.8% 47,265 61.7% 82.5%
    Hydro 27,010 25.0% 8,305 30.7% 14.5%
    Nuclear 2,720 2.5% 1,720 63.2% 3.0%
    Wind 1,869 1.7% NA - -
    Total 108,205 100.0% 57,290 52.9% 100.0%

    The key reason for poor utilisation of capacity is that a lot of this capacity has become inefficient owing to years of negligence. Although some units are likely to be beyond repair, but still a lot can be done to upgrade the efficiency of the remaining.

    It costs between Rs 35 m to Rs 40 m to install 1 MW unit. If we are able to increase the efficiency of the current units upto even 75%-80%, then it will result in savings around Rs 927.5 bn. Still there is huge potential to set up new units because it is estimated that by the end of this decade power demand in India will be almost double of current installed capacity.

    There are heavy T&D losses.
    The transmission and distribution losses in 2001-02 were officially reported to be about 20%. This is crippling for country that only generates half of its installed capacity. Added to this, the reported figures of distribution losses underestimated the real extent of energy lost (or unaccounted for) because a substantial part of the losses were being shown as unmetered agricultural consumption. States like Punjab and Tamil Nadu have been supplying free electricity to farmers.

    Based on the experience in some states, the actual levels of losses are much higher at about 40%-50% including about 15%-20% of technical & distribution losses, along with 25%-30% of commercial losses.

    As said above we are just operating at 53% capacity and from that too, 20% are T&D losses, ultimately India gets supplies of only 43% of the capacity installed.

    What needs to be done!
    The investments in transmission and distribution have not matched the growth in generation (0.3 : 1). A thumb rule for investment in generation and T&D has been that an investment of one rupee in T&D is necessary for every one rupee of investment in generation. So investment in T&D and generation are required on an equal footing.

    Poor financial health of SEBs
    Most of the SEBs (State Electricity Boards) are on verge of financial collapse. As a result they have not been able to pay for the power supplied to them. Their total outstanding dues to central power utilities have risen to more than Rs 410 bn. The main reason for poor SEB finances is the fact that they are forced to sell power at a price lower than the production cost.

    Agricultural customers, in particular, are heavily subsidised. Over the last few years, many SEBs have tried to raise tariffs, but only for industrial consumers and in some cases domestic consumers. The agriculture sector continues to get a free ride. High T&D losses and poor revenue collection have also bled the SEBs. Most of the losses are a result of theft and pilferage.

    Thus managerial and financial inefficiencies in state sector utilities have adversely affected capacity addition and systems improvement. While the SEBs not having enough resources to finance future capacities, they are also unable to raise funds from alternative sources due to their poor financial and commercial performance.

    Poor financial health of SEBs is a major concern for the private players who are willing to invest in power generation because at the end of the day they are really not sure whether they will be able to get the money back for the electricity supplied to various SEBs.

    What has been done
    The Electricity Bill has addressed most of these issues on the policy front, to re-energise the power sector. De-licensing of power generation projects will help in improving investment flow in generation. Distribution licensees would be free to undertake generation and generating companies would be free to take up distribution, so inefficiencies of one would not pass onto other. Provision has been made for license free generation and distribution in the rural areas.

    There are lots of hopes attached with this Bill. With the improved conditions of SEBs private players will be attracted towards the sector and if things work out as planned, the days of 8% plus GDP growth are not far away.



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