How India’s Power Sector is Blocking its GDP Growth with Subhomoy Bhattacharjee
Insights on why the Power Sector is running at a Loss
In this episode, author and journalist Puja Mehra speaks to Journalist and Consulting Editor at Business Standard, Subhomoy Bhattacharjee. They discuss the deficiencies within the power sector, why it is incurring losses, the parallels between Power Sector Policy and GST policy, how the power sector disincentivises business and much more. Tune in for insights into the absurdities into one of the most important sectors of the economy.
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
TRANSCRIPT
Puja Mehra (Host): A major bottleneck for India's economic growth is the power sector. The absurdities and irrationalities in the power producing and selling business are incredibly crazy.
The sector is dominated by government utilities, especially in the consumers facing transmission end of the business. Most of these report financial losses, and in most cases, every extra unit of power produced and supplied to consumers results in more losses incurred. These losses accumulate on the books of the sellers, and then every few years, some sort of financial engineering is used to defer bankruptcy.
And yet, for consumers, power supply is expensive, which makes it difficult for an industry to compete globally. Tariff plan design encourages firms to remain small. The worst bit is that no one seems interested in fixing the power sector's problems.
Instead, policymakers are hoping to milk the renewable energy segment of the industry to remedy the situation. My guest on the show today is Subhomoy Bhattacharjee. Subhomoy is Consulting Editor at Business Standard and Professor of Practice and Director, Centre for Regulatory Governance at the Jindal Global Law School.
He wrote a book, India's Coal Story, about the murky politics of coal and the options for an energy-secure future for India. His upcoming book is about India's maritime sector. Before becoming a journalist, Subhomoy worked in government in the Indian Information Service.
I asked Subhomoy how the electricity business is run in India and how it's performing.
—-
Subhomoy Bhattacharjee: I would say that the sector is definitely seeing much more investment than it used to do earlier. So if that is an indicator, it is a healthy thing. It is also a sector which is pretty critical to our ambitions of climate transition and how it pans out in terms of the mix between renewable as well as the thermal power.
What I suspect you and I would be rather interested in is how the distribution leg of the electricity sector is performing. So just to take a very basic point, the electricity sector has got three arms to it. One is the generation, one is the transmission, and then the distribution of the electricity.
Now the generation part of electricity is largely thanks to several initiatives taken since 1994-95, many of them not very smart, but some of them are like the Enron ones. Some smarter later on when we went in for the Electricity Act of 2003, the electricity sector, the generation in India has come up at a considerable level. So we now produce on an average about 450 gigawatts, which is considerably large by any global standard.
In fact, it is larger than, for instance, Britain has about 80 gigawatts. Europe's total combined capacity is far less than the 460 gigawatts that we have as a commission. So generation-wise, we have done well.
In terms of transmission, that transmission is largely something which is run through government agencies, and that has its own issues, but those are not something which people like you and me or our listeners would be that interested in. Of course, if there's a breakdown of the grid, then some things can happen. Next door to us in Sri Lanka, a monkey entered one of the stations in February and brought the entire electricity supply to Sri Lanka to a stop for a few hours.
Unless we have those sorts of monkey business, I mean, at least India is not prone to those sorts of glitches. So we can leave the transmission. The distribution sector, which is where essentially people are concerned.
Why is it so? Because this is the place where electricity boards or electricity companies buy electricity from the generating companies, wheel it through the transmission lines, and then bring it from there to the doors of us, everybody's houses. And this is where a lot of interesting developments take place.
And your question, particularly about whether the sector is healthy or not, becomes a very interesting part of the entire architecture.
Puja Mehra: So two follow-up questions. One, do we produce enough electricity for our needs or do we face shortages? And two, since you're saying that the most important part of the electricity business is the distribution part, which is the consumer-facing part, whether the consumers, households like you and me, or our offices, or commercial enterprises, or industry, or even I believe much of the industry now also produces its own power, but that's a separate matter.
But also there are other consumers of electricity, such as rural areas and farmers, etc. So they determine our experience of using electricity, what we pay for electricity or sometimes don't pay for electricity, etc. So how well the business is performing and if it is healthy or not largely depends, I suppose, on the price that they are able to make us pay for electricity, right?
Subhomoy Bhattacharjee: Right. So to look at the electricity sector in India, again, just one word about what used to happen in the 80s and 90s when we used to have massive power outages across every Indian city. Those were stuff of films, stories, and so on.
So the electricity sector was one of the first ones where liberalisation was thought about. In fact, India's reforms in the manufacturing sector were predicated on reforms in the electricity sector. So the electricity sector reforms have got as long a history as that.
And reforms, as it was understood, were basically about whether the consumers, as you pointed out, are getting electricity when they switch on their lights. Simultaneously, what has happened is, while this was being thought of as a static problem, in the sense that there's a certain amount of electricity that should reach the consumers, it's not reaching the consumers, so therefore there's a problem. The problem became more dynamic because the demand from the consumers themselves started massively jumping as this economy started developing, as the economy's demand for electricity became huge.
Today, with electricity for all, we now have a demand for electricity when every year it's rising by 40 gigawatts. I'm talking about the peak demand in the summer. Last year it was 250, and this 250 gigawatt demand had jumped up from an average of 220 a couple of years ago.
So you can imagine the jump that happened in just one year. We needed 30 gigawatts extra to supply. This year the demand can go up to as high as 270 or 280 depending on how the summer months pan out.
So electricity supply is, while the supply is there, the demand conditions are actually what determines electricity pricing. And this is where the challenge of meeting, ensuring that electricity reaches the people, becomes a very difficult one. Because electricity, as we all understand intuitively, cannot be stored.
So the trick is to manage how it is produced at the right time and sold at the right price to the consumer when she wants it. And this means bringing in business management into the entire business of distributing electricity. And because electricity distribution companies in India are largely state-run, even now out of the about 80-odd generating companies, the overwhelming number are run by different state governments.
This is where the problem is that they are not particularly nimble. We have had some successes, but the failures have been more. And we therefore have the challenge of how to ensure that electricity reaches those people.
To take an example, as you said, there are the agricultural consumers, the domestic consumers, and the industrial or the business consumers. Now, if we leave the electricity for the agriculture sector away from this discussion for a minute, it is the challenge between providing electricity for the domestic consumer and the business consumers which becomes an interesting one. Why so?
Because for quite some time when I said electricity was a static demand and supply problem, or it was thought of as much in the early 2000s, it was thought that if you could just make agricultural consumers pay for electricity or at least sort of canalise their demand into a separate line, we would have sorted out the problem. The problem today has now become much more in the domestic sector. Why so?
Because in the domestic sector, a large percentage of electricity being supplied today is now being supplied free. The question of freebies is most acute in any sector, I would say it's in the power sector, in the electricity distribution sector. Every political party has a hand in the tin.
And this is creating a challenge that how would electricity be supplied to domestic consumers at a price which there's some amount of recovery of what the generating distribution company is buying electricity for, and then ensuring that the rest of it can be met from the industrial consumers, yet, as you rightly pointed out, not making the price so high that those consumers decide to switch off from the grid and start their own electricity supply system, which is obviously a very costly exercise.
So that is where the problem has come.
Puja Mehra: So many things there. First of all, I want to understand, is the electricity business by and large profitable in India or is it loss making?
Subhomoy Bhattacharjee:
It is not profitable in India, principally because of the three segments of the consumers. The domestic consumer, the agricultural consumer and the business consumer. Agricultural consumers are being given electricity at a set price, which is usually way below the price at which the electricity distribution companies, which we'll call DISCOMs, buy the electricity for.
The same problems have started coming into the supply of electricity for the domestic consumers. There also, electricity is being supplied at prices which are below the cost price. And so the push is to recover that differential from the industrial consumers who are rebelling by taking their demand somewhere else.
So essentially, the electricity distribution business in India is not profitable for most of the DISCOMs. What you're saying is that the average
Puja Mehra: cost of producing and supplying electricity on the whole to whoever's buying electricity, or sometimes using electricity and not buying it, compared to that, the cost average realisation of revenue per unit cost of electricity being used, there is a gap, negative gap, which means that for every extra unit of electricity that is being generated and supplied, there are losses. The losses are increasing.
Subhomoy Bhattacharjee: That's right. And why is that so? Because as we just described, the political economy.
Yeah. So what are the steps that the DISCOMs are taking? Well, one of the things that they're talking about, you would have heard about the concept of the AT&T, the transmission and distribution losses.
So what they're trying to do is, instead of raising the revenue from average revenue from the consumers, they are trying to cut down costs. And what does that mean? That means that they are basically saying that, okay, I can't raise the price at which I charge from the domestic consumers.
Puja Mehra: The political bosses in the government have turned electricity into a freebie.
Subhomoy Bhattacharjee: Into a freebie, which we exactly said so. So the result of it is that the average cost is being sought to be reduced by cutting down on transmission and distribution losses. Now, that's not so easy, because for most of the electricity boards, one of the things that they've done well is to cut down transmission and distribution losses over the years.
Puja Mehra: What does that mean? What are these losses?
Subhomoy Bhattacharjee: So it means that earlier on, a large swath of electricity that was supplied to the people, supplied to any consumer was not metered. Now most of it is metered. Not only that, what has happened is that thanks to better engineering, the electricity distribution companies have a fairly good idea of where there's somebody trying to tap into electricity lines.
You know, the old simplest system of just tapping in theft or something more sophisticated, all of those have largely been eliminated. So the scope for further cutting down of transmission and distribution losses, because the average has now come down to less than 20%, and there's an engineering minimum beyond which it will not go down, which is about eight to nine percent. So there isn't really much of a headroom there for the individual electricity companies, distribution companies, to cut down transmission and distribution losses anymore.
If they can't reduce average cost anymore, then what is their way out? The way out is that they have to raise average revenue from the consumers, which means whom? Which means the domestic consumer.
But domestic consumers, as you're pointing out, are now being shielded by being offered free electricity, subsidised electricity. So that is where the challenge now stands.
Puja Mehra: Understood. So now the freebies that are being offered to the domestic consumers, do the state governments that promise these freebies, do they compensate the state electricity boards, the distribution companies for these freebies from their budget, which means by taxing taxpayers, or do they remain unpaid? They're just accumulating like losses on the books of these...
Subhomoy Bhattacharjee: On the books of the distribution companies. And it's affecting not just the government-run companies, it's also affecting the private distribution companies, which is why you find that while there are a lot of companies which are entering the generation business, there are very few companies. In fact, if you look at the list of DISCOMs, there are only about 10 companies, which includes Adani Power, JSW, Gujarat Industries, KEC, Tata, NLC India, and Reliance which are there in the distribution business.
There are no other companies which have shown any interest in getting into the business of distributing power. Because they also will have to take on the cost of supplying power to the domestic consumers at subsidised rates. And if those subsidised rates and how are the state governments handling it, again, what we discussed right now, essentially most states are not offering upfront subsidy to the distribution companies.
Instead, what they're saying is that you make it up, make it good by reducing the average cost of the power that you're selling. And as we just also discussed, the average cost of power cannot be reduced any further, because we are reaching some sort of a minimum at which it cannot be reduced. So therefore, the distribution companies are caught between what's called a rock and a hard place.
Puja Mehra: So there is a practice also of cross subsidies, overcharging industrial users, buyers of electricity to cover for losses from the other consumers. Is that continuing? Is electricity expensive in India compared to other countries?
Subhomoy Bhattacharjee: Well, yes. Actually, electricity is expensive in India. And it's expensive when you mean that is about the industries, the business enterprises, and these people who pay.
And this is so high that it especially affects the small and medium enterprises. Why? Because they are the ones who can rarely, if ever, afford to switch off electricity and buy and produce their own electricity.
So the entire small and medium enterprises in India pay for higher electricity. And as you would know, there's hardly any industrial process which doesn't require electricity. So the smaller the unit, the higher per capita is the cost on them of the electricity that they buy.
So what happens? State governments do a very peculiar thing, or electricity companies are encouraged to do a peculiar thing. They classify the business whenever there's somebody who comes along and says, my cost of electricity is very high.
And then to ease of doing business, what is done is offer that company a new tariff line. That if you are, for instance, using electricity load of, say, less than 6, less than 2 megawatts, and using so many units, or if you are using so many AC, but actually your ACs are of less than this number, there are also the variations that states do. They are given those lines.
So units get the encouragement to stay small or to stay within that slab to ensure that their electricity rate is at a particular level. Now this is absurd, because it means policing across that entire level. Some states have gone up to something like over 100 varieties of prices for industrial consumers.
And by industrial consumers, I mean both industry, business, and anybody who's not a domestic consumer. Now that's absurd, because what it does is create a massive creation of infeasibility. Which are these states?
Well, the state which had done this with the state government also didn't know was Bihar, but then it also affected states, but then let's not berate only that state. It was there in UP, it was there in Telangana, it was there even in Tamil Nadu. There's practically no state in India which allows for electricity for industrial consumers to be classified into broad few categories.
In fact, consultancies, I know very well, when they have discussions with the state governments, the first thing that they talk about is that can we reduce those slabs? And those slabs can't be reduced. So to put it on a broad economic scale, what happens is that the incentive for electricity, for reforms in the sector are so misaligned between the consumer, between the electricity companies, and within the state governments, that it's been a very difficult challenge over the years, over the decade to make electricity reform work in India.
Puja Mehra: Yeah, because if you reform electricity, it basically means that you charge everybody the right price of electricity. For those who are overpaying, you reduce. For those who are not paying or underpaying, you increase.
And that's going to have political ramifications. And therefore, why would anybody do power sector reforms?
Subhomoy Bhattacharjee: That's right. And because of that, when you ask about whether electricity prices in India are higher, for all business groups or anybody who's not a domestic consumer, electricity prices in India add at least something like 50 basis points to their cost. So that we are actually talking of a considerable differential vis-a-vis other Asian countries.
So when we talk about infrastructure challenges, I always say that the electricity challenge is a very major infrastructure challenge for units in India. And this is something that is often overlooked in discussions about how to provide a competitive environment to Indian business.
Puja Mehra: Yeah. And you know, the reason I asked you about the price of electricity is because I had a conversation with some farmers here in UP only. And I was asking them about why there aren't enough cold storages or when, you know, the Yamuna belt is such a fertile part of UP, why they are not investing in cold storages, which would help them increase their produce in the market.
And they said, because the price of electricity is so high that you cannot run, you know, a cold storage economic business. It just doesn't work out. The cost of it just doesn't work out.
So it's a growth barrier, the price of electricity, including for farmers, you know, supposedly the beneficiaries of this whole politics of keeping electricity tariffs low or zero or something.
Subhomoy Bhattacharjee: Right. And you know, the problem that's coming along with Puja is that it's not that this is something which is unknown to most constituencies. If you ask an electricity distribution company, a DISCOM, their chief, they would readily agree that these are the challenges.
But it becomes so difficult or rather very peculiar that these are not brought up front to the consumers. So why an electricity price should be, I mean, tried to be free for a domestic consumer and the same consumer, when he goes from his house to the small enterprise where he works, where he pays through his nose, why it doesn't make sense is one would have thought that that's a very obvious thing to explain. But that's just not done.
And in the process, what happens is that the irrationality in the electricity supply of making so many rates has been a challenge that has just not got sorted for the past two decades. And I said electricity was the first sector where we tried reforms in India. But this is one sector where we have teamed up the generation sector.
The distribution sector continues to be in a mess.
Puja Mehra: It's absurd. But it's also like you're saying, the losses of these companies are increasing. And at some point, somebody will have to pay for them. And earlier also, we went through this sort of debt crisis, I think in 2002, where the accumulated losses, including the dues that they were not paying to the railways, Coal India, had reached up to 2% of GDP.
How big is it now?
Subhomoy Bhattacharjee: It's very big. In fact, if you look at the Ministry of Power's list of both the individual providers as well as their dashboard on the electricity distribution companies, their calculation is very sharp. Even as at the end of March, the cumulative dues of all the major states is more than 40,000 crore.
Now, that's actually a very big sum sitting unpaid. And this is being soaked into the system as money not well allocated. 40,000 crore is something that states are not able to reconcile.
I mean, at any stage, whenever there's a challenge, states, you very briefly stop the electricity companies from asking. I mean, since they've already stopped asking, and stopped allowing the electricity distribution companies to go to the state government for freebies, so the state electricity distribution companies now have the only alternative is to go to the market to raise debt. If they have to raise debt...
Puja Mehra: Who will lend to them?
Subhomoy Bhattacharjee: Exactly. If they have to raise debt, then they have to show up in the balance sheet. And that balance sheet is now riddled with, I mean, has always been riddled with so many pockets of inefficiencies that banks without any sovereign guarantee wouldn't want to lend to them, which is why distribution companies aren't really happy.
Puja Mehra: 40,000 crore is the total accumulated losses in the books of the distribution companies for electricity they have supplied, but that has not been paid for.
Subhomoy Bhattacharjee: Yeah, and this is on March 25. So, these are the current data. And this number will multiply.
Remember, as the economy picks up steam, and if we expect that the manufacturing sector will gather mass, then you would expect that this sort of a challenge to become even bigger for the distribution companies. In fact, as I said, the small and medium enterprises, this is their biggest problem of the electricity that they can't get and of how to do it on. One option that was thought about was to allow the industrial consumers what is called an open access.
The open access principle that was laid out in the Electricity Act of 2003. In fact, that was one principle which was never operationalised from the Electricity Act, which was that a company, if it wants, and if it has electricity consumption above a particular threshold, can go to the market and buy electricity from the lowest level from whichever company is willing to provide. So, state governments, what they said is, first of all, they did not operationalise it for about seven to eight years.
Then when there was a sufficient amount of uproar, and the Central Electricity Commission started pressing on them, almost every state government has said, we will allow, provided a certain amount of compensation is paid to us. There are different names for those compensations, but they asked for compensation from the companies to switch to market pricing. So, basically, the companies are paying the state electricity boards for the inefficiencies, and that's how the system is supposed to go.
So, obviously, companies which are bigger, have responded by setting up their own generation units. And when they set up their own generation units, as you know, subcritical levels of generation units are much less efficient than the supercritical thermal power units, which is why you would find the pollution loads in many of the industrial centres rising. And they rise precisely because the industrial units are providing their own electricity.
It affects the small industries, which simply shut shop for the time that they can't get electricity because they can't jump. So, again, it's a classic problem, where, as I said, the incentives are so different, I mean, so different to align for the different segments, that it becomes very difficult for a logical set of decisions to be taken. The last problem, as you pointed out, is about the cost issue that we have not even tried to account for the earlier cost.
Now, there's no point saying that every government tries to say that let's forget what has happened in the past and strive for a fresh slate. The problem is that the fresh slate for running a business enterprise is absolutely impossible. Somebody has got to pay for the past dues.
So, for instance, the COVID dues, enduring what I call the COVID dues, what happened is that due to the COVID disruptions globally, prices of coal rose across the world. When the price of coal rose and rose very massively, it affected the Indian generation companies. So, the Indian generation companies raised the price of the power at which they were supplying to distribution companies.
But till today, while that incident happened in 21-22, and we are sitting in the year 25-26, no state like cities regulatory commission has allowed for a pass-through of those raised costs. So, all the state like city boards are actually sitting on unaccounted costs and that 40,000 crore doesn't include this because they have not screwed up their accounts. So, that's another huge chunk that has not been shown in the system, which means that they are sitting on unpaid dues, which is not showing up because they have not factored in the higher cost at which they had bought their electricity.
Puja Mehra: So, we seem to be sitting on a ticking bomb, no? We are consuming electricity. We are not paying for it.
The supplier's losses are mounting continuously because they're not compensated for the electricity that they're supplying either by the government, which is asking them to give it for free or at subsidised rates, or by those who are buying it but not paying for it. So, I mean, at some point, these losses will mean that nobody will lend to them and they will have cash flow problems or whatever, financial crisis, debt crisis.
Subhomoy Bhattacharjee: Well, to put it simply for the consumers, I mean, you're absolutely right what you're talking about. If you look at renewable energy, the reason why renewable energy is such an attractive thing for all states is precisely because of that problem that we talked about, that all these problems, state governments feel, the discoms feel, they can solve by going in for renewable energy because renewable energy, the current costs are cheap. So, they try to look at as cheap as possible as renewable energy to buy, which is why renewable energy companies have another problem, that they are not able to get a very good levelized cost.
So, we are trying to shift the cost of our previous losses onto the renewable energy sector by saying that let those guys bring in cheaper electricity and that cheaper electricity will allow me to sell electricity at a price in which my subsidy burden of having to provide free electricity to the domestic consumer would be contained. And Delhi, for instance, is one of those classic ones.
Puja Mehra: So, what you're saying is that the politician's strategy is that we will claw back the profits that the renewable energy sector could have had because of their efficiency, but we will claw that back to compensate the state electricity distributors for past accumulated losses resulting from basically our politics.
Subhomoy Bhattacharjee: Exactly.
Puja Mehra: What could have been a healthy sector, you're spreading the problem to them.
Subhomoy Bhattacharjee: They're spreading health problems to them. This is the reason why states like, you know, typically you'd notice the states which are in debt problems as per the RBI data, Punjab, Andhra Pradesh government, are typically the states which are massively pressurising the renewable energy generation companies to keep their cost of their supplies low. They're extremely reluctant to let them raise the price because that upsets the balance sheet pretty badly.
So, it is exactly as you say. The solution for it, you know, it's something like, I mean, I keep on saying that the electricity sector problem is something like the GST problem. Just as in GST, states are unwilling to let go of key players like the liquor industry, power sector itself.
In fact, the power sector still hasn't come into the GST. There are sectors like automobiles and others who can pay real estate, but you don't want to let them go into the GST front and within GST also keep the rates high to milk them for your problems. The electricity sector has the same problem. In fact, the electricity sector's problems of inefficiencies are exactly the same as the GST problem.
It's a central issue. You can call it a centre state issue. You can call it the same problem that you cover up inefficiency in a particular area by trying to make it good in other areas.
I mean, the parallels are huge for both the sectors and why both of them have had difficulties coming to what is called an optimum rate for the consumers to benefit.
Puja Mehra: What is the role of the central government here? Is the central government in a position to remedy this chronic problem?
Subhomoy Bhattacharjee: Well, pricing is entirely a state government authority. So, central governments have very little role there. But what the central government has tried to do is, therefore, look at it largely from two ways.
One is that the generation that has tried to make the generating companies, those which are in the public sector like NTPC, insist on getting their money back. So, that is one discipline that the central government has been able to ensure. The other thing the central government does is, it has pushed back against state governments against giving massive subsidies or any subsidies to the state distribution companies.
So, state power reforms are now giving money for their TPECs. And you know this very well, it is dependent on how well they have reformed their power sector. And that's why quite a bit of that money actually lies unused.
Because many of the states have not been able to get the power sector reforms done. Yes. And the third thing that the central government is doing is to give more role to the Central Deity Regulatory Commission.
One of the things that they have said is that if a State Deity Regulatory Commission sits on a generating, on a distribution company's accounts and doesn't sort of, what is called, show the correct prices, then it will be presumed that what the discounts have provided as their accounts to the State Deity Regulatory Commission will be considered as having been passed and okayed if there's a time limit, it's about 90 days, within which if they don't approve the new cost structure.
And it just hopes that the distribution companies will actually have the nerve to show their true costs, so that the costs actually get pushed on. So, these are some of the ways in which the centre has done. Some of these have worked, which is why you find now differences among, radical differences, between the state performances of some states versus those states which are laggards.
But as you pointed out, that's the renewable sector now, which seems to be picking up the mess from the fossil fuel sector.
Puja Mehra: But doesn't the central government have, you know, any carrot or stick with which they can tackle the political economy problem of just telling state governments that it's a ticking bomb, it can't go on, you cannot keep, I mean, in any business, unless the product is paid for, that business cannot run. How much can you keep lowering costs? You can't reduce costs to zero, no?
Subhomoy Bhattacharjee: I mean, where do you think projects like Surya Ghar Mufti Bijli Yoshina is all coming from? It's basically the central government's way of saying that let's wean the consumers away from the distribution companies, from having to depend on the distribution companies, and have solar power. And that will largely be, I mean, free them from this vicious cycle.
So those, I think, are useful ideas. It has already reached about 1 crore applications so far, which I think is a good start that they can definitely make more use of that scheme. However, through the Finance Commission or others, if it can be done, is not something that I'm very sure about.
And I think probably you would have a much better idea of how the central and state finances can be negotiated to provide more hard solutions for this sort of thing. Almost all the three, both the 2002 iteration, the 2009 iteration, and then the 2016 iteration, which is the Uday scheme, all the three iterations have tried, I mean, between them, they've tried every possible way in which to bring the state governments to a heel. They've just only managed to pick the can down the road.
It has not really led to any substantial change. And the example of that substantial change not happening is in the fact that our power sector, the amount of power that is traded in the stock exchange today, of the total volume of power generated, only 5% gets traded on the three power exchanges. And that's precisely because no generation company wants to get into the, I mean, is comfortable dealing with the state electricity distribution companies through the power market.
They want to do it through what is called the bilateral power purchase agreement. The bilateral power purchase agreement is just to ring -fence their receivables, but it doesn't lead to reforms because of the state electricity generation companies, the DISCOMs had to buy power from the electricity markets, they would have immediately pushed the states to go in for much more smarter pricing. But the volumes in the market have not taken up again, as I said, due to misaligned incentives.
Puja Mehra: So there are no markets in the electricity sector and that seems to be the main problem. But what you're saying that on how much negotiating space there is between the centre and the states through the finance commission on getting the states to agree to some of these reforms, I don't know that much, but because, you know, it's a constitutional right of the states to have a share in the divisible pool, but I suspect that, you know, some of the extra grants, that they give, I don't know if that they can make it conditional on power sector reforms, like they've done for CAPEX allocations from the budget or, you know, when they allow state governments to go and borrow, when the central government allows the state governments to borrow in the debt market, if they can sort of begin to specify some conditions, because ultimately these are unpaid dues and they're somewhere sitting and somebody will have to ultimately pay for them at some point.
Subhomoy Bhattacharjee: I mean, the funniest thing that happened is in Delhi, for instance, in the Delhi government, Delhi was buying power at PPA rates from power companies and then Delhi government was selling power on the market at a profit. This was a few years ago and it led to a huge uproar and obviously, I mean, this was ridiculous because the Delhi government was meanwhile running up a massive bill on giving free power to people and it was trying to make good on that by selling power in the power market. But of course, what the central government did was wrong because what it did was it sort of capped volumes by putting price barriers in the day ahead market, which is actually no solution.
It would have probably been much better if the sort of things that you have talked about had been worked on. Though I don't know how much the state governments will agree because they already think that there's far too many conditions on their plans and others that they get. So, whether its additional trends on power supply, whether those would ask muster.
Puja Mehra: Also, I think state governments lose out because the central government is taxing more and more through cesses and surcharges, which they don't share with the states. So, states are not happy about what they say is their sort of shrinking share in the divisible pool.
Subhomoy Bhattacharjee: But Puja, whenever I find states, I mean, there's not a centre state issue, but I would still say that whenever state governments say that they are being shortchanged by the centre in terms of the amount of grants that they get, in terms of other things that they're supposed to get, I always look around to see what is it that they have done in terms of reforms in the power sector. I mean, a lot of money that the states can actually get for themselves could come by reforming the power sector. And that is something which just sits quiet in every state budget.
Like, we have just passed the presentation of all the state budgets. I didn't find in any of the state budgets any plan to improve the working of the power sector. And I think that's an opportunity that is badly missed and it gets missed every year.
Puja Mehra: And it's an opportunity missed also because if you had a well-functioning electricity sector, more and more industries will come and set up in that state. So, it will be a huge attraction for investors. I also wanted to ask about the famous privatisation case in Delhi of the Delhi Vidyut board.
What is the experience being like now? From what you're saying, I understand that not many other states are going to try and do something like that because the incentives are not aligned. But at one point, Delhi, the losses accumulated had become such a problem that they were forced to privatise distribution of power in Delhi.
How has the experience been for consumers as well as for the state finances and the private sector?
Subhomoy Bhattacharjee: None of these really did very well, which is why just about 10 companies have entered from the private sector into the business of distribution, pan India. And if you look at Delhi, in Delhi, there are three power companies. Two are run by Reliance Power, which is BSES South Delhi and BSES East Delhi, roughly.
And if you look at them, none of them are particularly doing well. I mean, the two, the Reliance Power companies are not doing particularly well. The Tata Power company has been able to do well.
One of the reasons is that its catchment area was much better than BSES. For instance, if you look at it, the BRPL as part of the Reliance ADA group is still running a fair amount of regulatory assets. What does regulatory assets mean?
That these are the losses which the companies which are there sitting on the book of accounts, but they have not been able to clear it up by charging the consumers. So, the revenue gap has increased because, A, the higher power purchase cost, lower average sales realisation and lower recovery of carrying cost and surcharge amount. So, the regulatory deferral account recognised in the books, which means that these are the losses that the company is actually sitting on of BRPL.
These are big amounts. These are like something like almost six to eight thousand crore. Those are substantial amounts which these companies have not been able to sort out.
So, every year, these are like accumulating because when you are selling electricity at a price which is lower than your average cost, then obviously your regulatory assets, what you call the regulatory deferral account, will keep on mounting and then it'll happen for, I mean, BSA's Rajdhani, which is the largest one of these, of the two Reliance part. I mean, as of 2020. Why am I saying 2020?
Because that's the last year from which its accounts were true. Okay, so just look at that number.
Puja Mehra: My god, so for four years you don't have their accounts.
Subhomoy Bhattacharjee: Yeah, so now the regulatory deferral account recognised in the company's book of account in 2020 was 9,261 crore. Okay, this is on March 31st, 2020. Whereas the Delhi Electricity Regulatory Commission has recognised only about half of that, 4,109 crore.
So, what does that mean? That the company claims it has got so many losses. DERC is saying, no, your loss is only this.
Based on the company's assessment of losses, the company will say this is the rate at which I should charge the consumer. DERC is saying, no, your price actually, I mean, your losses are only half of that. So, therefore, you can charge only this much to the consumer.
Puja Mehra: But it's a fact, no, that the policy of the state government is such that there are power subsidies. So, they are going to have losses, won't they?
Subhomoy Bhattacharjee: Yeah, so therefore, the leverage of this company has shot up. And because of that, the CAPEX for doing network upgradation, debt to do fresh power purchases, all of those start looking weak.
Puja Mehra: Basically, penalising the private sector for politics.
Subhomoy Bhattacharjee: Whereas BRPL has actually done well in terms of its collection. I mean, it's reducing what is called transmission inefficiency. I mean, it used to be very high in Delhi, almost like 50%.
It has come down. It has come down to something like an average of closer to 14 or 15%. I mean, I'm of course, quoting this from memory, but I'm more or less that that's where it's come.
So, it's actually done well.
Puja Mehra: Yeah, I think at the time of privatisation, more than half of the power that was being supplied from the DVB was not being paid for. The metres were either sort of broken or worn out or they'd been tampered with. I mean, I think something like I was reading 1.5 million of the 2.6 million metres that there were in Delhi, 1.5 million were not working or worn out or tampered with, etc. And the losses were huge. So, they sort of brought in these private companies and they said that you don't have to take on the accumulated losses. You don't have to pay for the employee retirement benefits, etc.
The state government will take care of all of that. But what's the point? These private companies are also, despite all the efficiency they've brought to the sector, they're also running into losses.
And those losses, they're not even being allowed to report as losses.
Subhomoy Bhattacharjee: So, you'd remember the tussle that happened between this company, the Nancy ADHD and the former government in Delhi, the AAP government. And there was an audit report which these guys wanted to commission and tried to commission saying that there's a massive amount of discrepancy there. I mean, the average cost of supply against average revenue realised has gone beyond 35 paise per unit.
That's actually quite large, quite large. Because that means that for every marginal cost, every marginal unit of electricity supply, it's making a loss. That's not something that is going to be very comfortable.
Puja Mehra: That's not how you're going to become Bixit Bharat. You're going to become an economic superpower. You're penalising your own companies.
Subhomoy Bhattacharjee: That's right. So, the distribution sector is, frankly speaking, I would say the answers are simple. It's a question of really realising that even the domestic consumers, just as the agricultural consumers at one stage realised that they needed to pay because when they were being given the assurance of free power, they realised that the free power didn't help because the power wasn't available.
So, in lots of states, the farmers have agreed to basic metering and are going in for that sort of electricity so that they can at least get electricity for a particular number of hours. And that has helped it because the sector has actually turned around as far as electricity is concerned. I think the challenge now is in the domestic sector.
In the domestic sector, political parties have to agree to say that free power will actually lead to no power. So, therefore, agree to pay a certain amount and then use that as the negotiating platform to clean up the problems in the power sector. That is the basic way.
In fact, we can take a leap from the agricultural sector to see how this can be done.
Puja Mehra: I think, yeah, my questions are all done.
Subhomoy Bhattacharjee: Thanks, Puja. It was a good conversation.
—
Puja Mehra (Host): Our conversation ended a bit abruptly due to technical glitches. We had covered everything we'd set out to by then. Before we started recording, Shubhamoy said that since electricity produced cannot be stored, ensuring that there are no shortages depends to an extent on managing supplies across the country. North India is typically a deficit region and the south tends to have surpluses. Wheeling electricity from the south to north costs money, but the central rules don't allow southern states to collect these charges and instead insists on compensation from the centre.
The trouble is that this compensation doesn't fully cover the costs. The implications, Shubhamoy explained, is that a state like Punjab buys coal from the coal-producing states and transports it 2,200 kilometres to produce electricity. That's just another example of the absurdity of this sector.
