Column: Crisis Too Big To Ignore

For a government trying to jump start the economy, big-ticket infrastructure investments are usually near the top of the list. The absence of any significant announcements linked to the power sector in Budget 2016-17, was something of a surprise. This omission indicates a major crisis building up in the power sector — which can potentially,be bigger than the bad-loan problem of the banking sector. Meanwhile, multiple schemes targeting rural India, including crop insurance and irrigation schemes, indicates that the government is trying to stave off rural distress after two weak monsoons.

A quick look at the macro-economic data tells the story very effectively.

India’s economy is projected to grow at 7.6 per cent during the financial year 2016, but the electricity generation so far this year (April-January) is up just 4.6 per cent. India’s thermal power plants, which were expected to operate at 66.6 per cent of their rated capacity in this period, have managed only 61.8 per cent. Unlike the past, coal availability isn’t the problem either.

What has happened is that the state government-owned power ‘discoms’ (Distribution Companies) are buying less electricity from the generation companies. This is because they are incurring heavy losses and are collectively, insolvent. During the financial year 2014, the last year for which numbers are available, these utilities collectively incurred a loss of Rs 62,154 crore. Their combined net worth is negative and they owe Rs 5.4 lakh crore to banks — if they were a company, it would be bankrupt and the loans would be classified as non-performing.

The reasons the discoms lose money are well-documented. About a quarter of the electricity they deliver is not paid for (theft and losses) and another 22.7 per cent is given to farmers for free or at very low rates. At an aggregate level, these utilities sell electricity at almost Rs 1.1 per unit less than what it costs them. Since the utilities are bankrupt, they can’t buy electricity from the generators and the suffering is passed down the line. Fresh investment, whether in conventional or renewable energy, is difficult if not impossible. As far as investment is concerned, the power sector is dead in the water.

The government is aware of the problem, and has recently launched a scheme for financial turnaround of these discoms, termed Ujjawal Discom Assurance Yojana (UDAY), which aims to improve operational and financial metrics of the discoms by bringing down the cost of electricity and the cost of finance. But this scheme will not work unless the core problem — of selling electricity at a loss, is dealt with. While theft and technical losses can be reduced, cutting power subsidies for the farm sector might be politically impossible. With two bad monsoons in a row, removing the subsidy will also cause needless misery in the agriculture sector.

The problems of the power sector have been created over the last several decades and can obviously not be resolved in a hurry. Renewable energy will have to be part of the solution. It would be good to see the government think creatively about this.

Mainstreaming solar power and partnering with farmers to implement it could be one ‘out-of-the-box’ approach. Solar power requires large amounts of land (~5 acres per megawatt). Mega-solar projects will take up thousands of acres of land — land acquisition has been a problem in the past. However, solar power works well at a small, distributed scale.

What if 10 per cent of a 1 acre plot is used to set up a solar farm of 20 kilowatts. At 15 per cent load factor, this should generate 25,000 units of electricity during a year. If the grid can buy this electricity at Rs 4 per unit, it gives the farmer a cash flow of Rs 1 lakh per annum.

In less fertile/water-deficient areas, farmers can turn part of their land into a solar farm, which will not only meet their requirement, but can also feed surplus electricity into the grid. Discoms will no longer have to provide free power to farmers — cutting down their losses while farmers get an additional crop and a stream of income, one that is not vulnerable to erratic rains. Since part of the land is not being used for crops, this could actually end up reducing the aggregate water requirement of farmers.

Making this work would require policy changes and financial support. Firstly, discoms should be able to buy electricity from small producers — this will require a net metering policy, which allows distribution companies to buy renewable energy from small producers. Secondly, it will be difficult for small and marginal farmers to make the investment needed to put up small scale solar farms — so institutional financing will be needed. Financing again, cannot happen unless there is an assurance of revenue from the discoms buying electricity.

India’s power logjam is a complex problem, that can no longer be ignored. The sooner the government realizes this, the better it will be for everyone.

The author is fellow for energy and environment studies at Gateway House: Indian Council on Global Relations, a foreign policy think tank in Mumbai