Beyond Adani: Why India’s Power Sector Needs To Change

Falling markets dominated the concluding week. The Maharashtra and Jharkhand elections got over, allowing decision-makers to concentrate on decision-making, instead of on campaigning. Manipur gave up its semblance of normalcy, with a member of the BJP-led ruling coalition leaving it, in the wake of sporadic violence–without stripping it of a majority, however.

The US securities regulator, the Securities and Exchange Commission indicted the Adanis under the Foreign Corruption Prevention Act, causing Adani shares to tank in India and the group to abandon a proposed bond issuance worth $600 million. Adani’s discomfiture has given Congress leader Rahul Gandhi a chance, once again, to charge the government with collusion with the businessman, and to seek the businessman’s arrest.

Adani’s indictment points to the imperative for India’s business and politics to reform, regardless of the merits of this specific charge. Bribery and corruption appear to be part of normal life in India, but that does not sit well with Indian businesses’ transnational linkages, in terms of capital, collaborations or personnel.

The Need for Transparency

A major, structural flaw of Indian democracy is the absence of transparent political funding, leading to covert financing of parties across the board by corporate India, suborning both governmental integrity and corporate governance. In the globally interdependent world, Indian business and politics will find its current relationship a hindrance to economic growth. Politics and business must both change.

Adani’s indictment has been for ‘plans to bribe Indian officials’, in relation to a large renewable power contract. Whether these charges are proven true or false, there is little dispute that India’s power sector needs to change at many levels.

Let us begin with the renewable energy sector. Large projects are bid out by the Solar Energy Corporation of India (SECI). But this serves merely as a platform for putting out these large bids. It does not buy the power, and merely offers financial support for two months in the 15-year life of the project, in case the state-level buyer of the power does not make payments on time for the power it purchases. It is up to the winner of the SECI bid to find state-level buyers, and negotiate a contract.

This arrangement serves three purposes.

One, it drives government policy to establish large solar power capacity in the country, enabling the government to fulfil its international commitments to shift swiftly to non-fossil energy.

Two, since the bids are for multiple gigawatts of generation capacity, it narrows the field of eligible bidders, who are capable of undertaking such large projects, to a relatively tiny lot.

Three, it provides space for negotiations in a regime that is otherwise rigidly bound by bids, in which the lowest bid from among qualified bidders, rather than any negotiation with a power buyer, determines the winner.

Suppose the bid had been put out by a state power agency. It would be bound by the bid structure to choose the lowest bidder from among the technically qualified bidders. There is no scope for negotiations. In the SECI arrangement, the tender is by an enterprise floated by the central government. The winner is obliged to find takers for the power it has undertaken to produce. This generates scope for negotiations, and the provision of lubricants to make the negotiations proceed smoothly and fruitfully.

Reforming the Renewable Energy Sector

The successful bidder in the SECI bid can negotiate to sell power at a lower price than the one which the SECI bid had stipulated. This makes the negotiated deal look entirely above board.

The required reform here is to scrap the intermediary layer of SECI. State power entities should invite competitive bids for the quantum of power they require, and select bidders based on the lowest price quoted by technically eligible bidders.

But what recourse does the winning power producer have, in case the state power agency fails to honour its payment commitments? SECI offers reprieve for two months, at least.

The short-term solution is for the power purchaser to offer bank guarantees, to reinforce its contractual obligation to make regular payments. This will add the financing cost of the bank guarantee to the cost of power.

The long-term solution is for the political economy to change, and for power consumers to accept that power is something they have to pay for. Right now, free power, subsidised power, power theft to which the authorities turn a blind eye, unaudited transformer level distribution-collection mismatches, and under-investment in the transmission and distribution infrastructure plague the sector.

Despite the claimed success of rural electrification laying a power line to most homes, this cannot be leveraged to use electricity for cooking, because there would be neither the needed quantity or reliability of power nor any mechanism to ensure that it would be paid for. In the absence of electric power generated from domestically available coal, India now imports hydrocarbons and uses up precious foreign exchange to support an unsustainable fuel habit for smokeless cooking.

People pay for telecom, with no expectation that once their prepaid charge has run out, the government will come forward to replenish the charge. There is no reason why power should be any different.

The poor also deserve power, and the provision of power to the poor should be subsidised, but that subsidy should come from explicit budgetary allocations, not from cross-subsidy on paying consumers or from accumulating losses of the state power utility.

State-level power regulators are supposed to set tariffs that make the system viable. More often than not, they succumb to the dictates of the ruling political dispensation and fix tariffs that do not recover the full cost of delivering power.

This is a problem of politics, rather than essentially of regulatory design of the sector. When the public realises that promises of free or subsidised power ultimately deprive them of reliable power supply, the political economy will begin to change.