A sector in trouble

The Union government must get its act together on issues that continue to plague the power sector
Livemint First Published: Sun, Nov 11 2012. 08 36 PM IST

Illustration: Shyamal Banerjee/Mint

Power equipment maker Bharat Heavy Electricals Ltds chief B.P. Rao recently pointed out that there was a marked slowdown in private sector interest in electricity generation. Between 2008 and 2010, tenders for projects worth 30-40,000 megawatts (MW) were floated. Last year, this dropped sharply to 4,000 MW; this year, there have hardly been any deals, Rao said. This development should be seen in the perspective of the larger issues that plague the power sector. The slowdown will hurt a few years from now since coal and gas-based generation plants take three-four years to build and private plants have accounted for a sizeable 55% of incremental capacity in the past five years. As a result, one can expect the industry to establish captive units that, owing to their limited size, are not particularly efficient. The scars owing to inadequate power supply in the past are not insignificant currently, captive units account for as much as 17% of installed capacity in the country.

Part of the reason for the slowdown appears to be external to the sectorabsence of reforms in coal mining has led to a crippling inability to meet power sector demands. For the 12th Plan period, supply is expected to be short by a substantial amount. Shortages of natural gas are being felt acutely. In the case of hydropower, while large-capacity projects are entering the construction phase, it offers little relief in the medium term since projects take 7-8 years to complete. At the same time, power project developers are constrained from choosing expensive imported fuels since distribution utilities are financially fragile. The question then is: are power reforms aggressive and effective enough to improve the financial health in quick time to avert a slowdown in capacity addition of the kind currently being witnessed? On its part, the Union government has offered a restructuring package to state utilities to reduce their debt. In its recent India Economic Update report (September 2012), the World Bank has, in the context of this package, cautioned that bailouts create a moral hazard unless accompanied by strong monitoring mechanism. In the past, the Union government has failed to establish effective monitoring mechanisms in its reform prescriptions. Had these gone on track, the supply losses should have pared to 15%. However, if one looks at the situation in the six states that account for 70% of the losses of the sectorUttar Pradesh, Tamil Nadu, Madhya Pradesh, Punjab, Haryana and Rajasthanthe supply losses there are as high as 30-40%. These larger issues then continue to haunt power equipment manufacturers and other parts of the power sector. The Union government needs to get its act together, fast. How long will it take to fix the problems of the power sector?