Everyone is busy discussing the crisis in the coal sector. Perhaps rightly so. However, the real problem is much more serious and it is the power sector. If one looks at the power sector, it reveals that the Distribution Companies or DISCOMs are in an extremely bad shape. Non-performing assets in power generating companies or GENCOs are mounting. Coal shortages have recurred. Till a few days ago, there were a number of power-generating units that were critically low oncoal. The data released in the Power Finance Corporation Report on Performance of Power Utilities 2019-20, reveals that the GENCOs have a receivable of more than Rs 2.16 lakh crore from DISCOMs in 2019-20. This has actually grown from Rs 1.79 lakh crore during 2017-18. The GENCOs, in turn, owe Rs 20,000 crore to Coal India Ltd.
It would not be an exaggeration to say that the poor health of DISCOMs is the primary cause of problems in India’s power sector. The relief to DISCOMs from “UDAY” (Ujwal DISCOM Assurance Yojana), launched in 2015, was a temporary one. UDAY is indeed a great idea. This approach had worked in Gujarat. The power sector reforms carried out had benefitted the state. It was perhaps correctly felt that this model would benefit other states. However, it didn’t in the manner it was envisaged.
DISCOMS in debt
One of the most significant features of UDAY was the take-over of 75 per cent of DISCOM debts by the states as they stood on 30 September 2015. This was the easier part and it provided the necessary fiscal space to improve their finances, including their balance sheets. In fact, many DISCOMs benefitted from this provision and some of them even showed profits on account of reduced interest burden, though it was apprehended that such a debt transfer would impact the finances of the states. The more difficult part was related to reduction of AT&C (Aggregate Technical and Commercial) losses, elimination of ACS (Average Cost of Supply per unit)-ARR (Average Realised Revenue) gap, feeder metering, DT (Distribution Transformer) metering, price rationalisation, etc.
Had the DISCOMs carried out the difficult part, as was done in Gujarat, it could have led to their revival. But a large number of them failed. If we compare the 32 UDAY states and UTs between FY 2019 and FY 2020, the Power Finance Corporation (PFC) Report shows that while the average AT&C losses improved slightly from 22.4 per cent to 21.9 per cent, 14 of them were actually worse off. Consequently, most of the DISCOMs are still in trouble as fundamental issues have not been addressed. The DISCOMs do not have money for entering into new PPAs even though there is demand for power. India’s per capita consumption is still one-third of world average. Ironically, on account of the pricing structure, most of the DISCOMs lose more as they sell more.
The poor financial condition of DISCOMs is impacting the financial health of GENCOs as well. DISCOMs owe a huge amount to GENCOs and these are mounting by the day. The Plant Load Factor (PLF) of GENCOs is also getting adversely impacted because DISCOMs are unable to articulate the demand through new PPAs. There are a number of other factors that are impacting the finances of GENCOS, but these two contribute substantially. GENCOs are in huge debt and debt servicing is becoming extremely difficult. A large part of this debt is likely to become Non-Performing Assets (NPA). This in turn will impact the banking industry that is already reeling under the burden of NPAs. The impact is also being felt by Coal India Limited (CIL). With GENCOs not getting their dues from DISCOMs, they are unable to pay regularly to CIL.
There is, thus, a serious crisis at hand that can impact the economy as a whole. DISCOMs are at the centre of this malaise. That is where the remedial action should begin.
The Gujarat model
The blue print for the revival of DISCOMs is available and has worked in some states. The key is now to get it going in other states as well. If one Gujarat model that deserves to be replicated, it is the power sector reforms it carried out. It would be a painstaking effort that may not be newsworthy to begin with, but is critical. This cannot be accomplished sitting in Delhi. Assistance will have to be sought from states like Gujarat and details worked out sitting with respective state government officers and other stakeholders.
Coal production will have to grow at the rate (8-9 per cent) it grew during 2014-16. It can be done now as well by following the same strategy. The Union government will have to play the role of a facilitator by enabling and ensuring faster clearances. At the central level, they would primarily relate to environment and forest. Most of the action relating to coal is in states. Hence, interaction with the states will have to increase. The ongoing “war” between the Union and the states has to stop. Value proposition will have to be conveyed to the states as was done in the past.
As mentioned earlier, many GENCOs are on the verge of becoming “sick”. Some of them may have already become sick. Hence, it is imperative to revive them. Each entity will have to be looked at by an empowered committee set up by the government in this regard. They will then have to come up with a comprehensive plan that may not merely be limited to financial restructuring. There could be a large number of disputes that would require settlement. This committee should be empowered to settle such disputes.
Coal supply is a problem. The problem was sorted out between 2014 and 2016. It will again be sorted out, but the real problem is in the power sector. The enormity of the situation needs to be recognised now. And correctives put in place and pursued. A “powerless” future stares at us otherwise. The good news is that some states have moved in that direction and are reaping the benefits. Others now need to learn from them before it is too late.
The author is a retired civil servant and former secretary in the government of India. Views are personal.
(Edited by Neera Majumdar)