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The much needed power reforms have begun...
Wed, 23 Sep Pre-Open

India has made a reasonable progress in adding power generation capacities. Previously the power plant units used to remain idle due to scarcity in the supply of coal. This constraint was eased by the government through auctioning of coal mines. However the worst is hardly behind the sector given the sluggish demand from the State Electricity Boards (SEBs), the biggest buyers of electricity.

In order to bring efficiency in the Indian power sector, government has laid out a process to kick-start power sector reforms in three states. The three states are Goa, Uttarakhand and Meghalaya. One of the important steps is to indulge in regular power tariff increases. The distribution companies don't often indulge in tariff increase as they succumb to political pressures. CRISIL had prepared a report on state utilities and suggested measures to reform the system. It had proposed rate increases of 1.7%, 11% and 15% for Uttarakhand, Goa and Meghalaya respectively from the next financial year.

Further, the distribution companies are facing huge Aggregate Technical & Commercial (AT&C) losses due to outright theft, unmetered supply to the farmers and lack of technological upgradation. The government has laid out guidelines in order to curb these losses too.

Unlike the previous government, the National Democratic Alliance (NDA) will not provide any grants or bailout packages to the distribution companies for reduction in their debts and losses. Hence the states will have to take radical steps in order to revive the SEBs. A report released on Monday pointed to a five point agenda to revive the power sector in these states:

  1. Emphasis on increase in power generation from local energy source (Hydro power generation in Uttarakhand and Meghalaya)
  2. Improvement in inter-state transmission network.
  3. Revival of the sick distribution sector.
  4. Enhancement in use of renewable energy.
  5. Use of energy efficient measures.

The weak financial health of the SEBs has also affected the Plant Load Factor (PLF) of the generation companies. As per an article in Livemint, PLFs fell to as much as 60% as compared to 64-70% in the last three years. As incentives are linked to PLF, the bottomline of the generation companies have taken a hit as well.

Reforms in the distribution sector are necessary to revive the entire power sector. Steps taken by the government in this direction will provide boost to the sector on the whole. Until then, the government's dream to supply 24x7 power is far from achievable. Meanwhile the investor needs to ensure that their selection of stocks, in a regulated sector like power, is based not just on the company's growth but also its profitability and efficiency.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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