View: Remember, free power is no power

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The free power promise will hurl Indian states back to the Jurassic era, says Dr Srivatsa Krishna.

View: Remember, free power is no power
The free power jumla is back and that is terrible news for India. Even though it appeared that thanks to sensible policies over the past few years, almost all political leaders had moved away from this game (except perhaps of hiding free agricultural power inside T&D losses), it appears to be sadly back on the political centerstage, as assembly elections approach.
More than a decade ago I had the privilege of being part of a World Bank Group Study which did one of the 1st ever in-depth reports on the link between groundwater depletion and free power, leading to a messing up of the power sector as a whole. It focused on Punjab (and Karnataka) and the evidence was damning. The recent promise of free power by the Aam Aadmi Party and the Congress Party (and any other party which does so), will hurl Punjab, Goa, Uttarakhand (and any other state which does so) back to the Jurassic age, economically speaking. It is the mother of all “Amma Economy” failed models - which have always failed for there is no free lunch. It is negative competitive politics at its worst.
With a total installed generation capacity of 14.2 GW in 2019, the State of Punjab accounts for about four percent the total installed capacity of India, making it the tenth largest state in terms of generation capacity as per the Central Electricity Authority. The peak demand has been growing rapidly reaching 13.7 GW in 2019, higher by 8.4 percent than in 2018. Its power sector provides 47,374 GWh of electricity to consumers in the state. The electricity consumed has been also increasing quickly and met by increasing power trade with the central system and other states. There is a strong seasonality of the peak demand. During the paddy season from June to August, the peak demand is almost double the peak demand in the low season. In addition, during the day, there is a high variability of the electricity demand between day and night.
Punjab’s power sector is comprised of several stakeholders with different responsibilities and incentives facing them. The power sector has been financially distressed and relied heavily on subsidy from the state government. The provision of free electricity to agricultural customers and subsidy to almost every segment of electricity customers has incurred high expenditure from the state government to the state utility company for generation and distribution, Punjab State Power Corporation Limited (PSPCL). The utility has also accumulated debt rapidly due to insufficient financial sustainability, high interest, and financial charges.
After signing the UDAY MOU, Government of Punjab (GOP) has taken over Rs 15,628.26 Crore, 75% of debt of PSPCL as on September 30, 2015 (50% in FY 2015-16 and 25% in FY 2016-17). GOP has issued non-SLR (Statutory Liquidity Ratio) state development bonds (SDL) in market or directly to banks and financial institutions holding DISCOM debt. This amount is currently recorded as GOP loan in PSPCL’s book and will be converted to Rs 11,728.26 Crore of grant and Rs 3,900.00 Crore of equity in FY2019-20. In addition, GOP has agreed to partially take over losses of PSPCL over the four years from FY2016-17 to FY2020-21, by providing grant equivalent to a certain percentage of net losses in the following year. Further, as per Budget provision made by Government of Punjab, it has been decided that the amount of Rs. 15,628.26 Crore will be converted into equity as whole as on March 31, 2020.
Despite UDAY scheme and aggressive debt takeover from the state government, the power sector is still in trouble. PSPCL recorded net losses over the recent four years in row from FY2015-16 to FY2018-19. The revenue of each year includes the government subsidy for the several consumer categories as explained above, so even with the subsidy income PSPCL does not make profit out of its business. PSTCL’s net profit or loss is marginal compared to its revenue over the last four years, as its annual required revenue filed to PSERC is approved by PSERC without much variation and paid by PSPCL.
Revenue from the approved electricity tariff is not sufficient to recover the cost of PSPCL approved by PSERC. Even though the tariff determination mechanism allows PSERC to set the tariff to cover the aggregate revenue requirement (ARR) filed by PSPCL, the revenue billed is lower than the cost approved by PSERC in True-up exercise, per unit basis.
The subsidy to be paid by the GoP has reached INR 9,674 crore (equivalent to USD 1.35 billion) in FY2019-20, with the annual average growth of 12 percent over the last five years. In the True-up exercise, PSERC adjusts the ARR by reviewing the actual expense, but some disallowed expense still exists, making the ARR insufficient to cover the actual cost. Except FY2018-19, over the last five years there has been disallowed expense in True-up. The aggregate disallowed expense is about Rs. 6,840 crores over the last five years, which is over 60 percent of its current equity position. As a result, the current tariff determination mechanism does not allow full cost recovery from electricity sales. Government subsidy, accounting for about 30 percent of PSPCL’s tariff revenue, has been underpaid, mounting arrears to PSPCL. The cumulative arrears up to FY2018-19 is about Rs. 5,300 crores, on top of the projected subsidy of Rs. 9,670 crores for FY2019-20. The total subsidy payable by the GoP is therefore Rs. 14,970 crores for FY2019-20, reaching about 10 percent of GoP’s total expenditure for the year.
In sum, as the above evidence suggests, no party in its right mind should compete on the promise of free power, anywhere in the country. They should move on to compete on more substantive, mature issues and leave behind the freebie “Amma Economy” model, which is well past its political expiry date, even despite the short-term illusory gains that it offers. Hope better sense prevails and realization dawns that free power is no power.
Note:
The author Dr Srivatsa Krishna is an IAS officer. Views are personal.

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