Power India found that according to the recent insights published by CRISIL, the losses of power distribution companies have crosses Rs. 2 Lacs Crores at end of March 2012 due to lower tariffs and higher fuel costs.
As outlined by the Report to primary reasons for the decreased bottom lines of Discoms are inadequate increase in tariffs of the power and inefficient harnessing of fuels such as coal, gas etc.
Issues relating to Tariff Side
- Over the second half of the previous decade, power tariffs in India grew by under 5% p.a.
- Against this, per capita income grew by 13.4% p.a. while household expenditure grew at 10.6% p.a.
- Consequently, the share of energy expenses in Indian households declined for the first time in two decades, during this period.
- Power tariffs have also lagged inflation.
- As said by MD and CEO of CRUSIL, Roopa Kudva, Managing Director and CEO, CRISIL,
“This indicates that Indian consumers can bear higher tariffs, and policy makers may have more flexibility to increase tariffs than they are currently exercising. Had power tariffs been hiked to keep pace with other household expenses, power utilities would have earned additional revenue of about Rs.950 billion in this period. Instead of making aggregate losses of Rs.870 billion, they would have made an aggregate profit of Rs. 80 billion.
Issues relating to Fuel Costs
- Indian coal production has remained stagnant in the last 4 years at 400-440 million MT.
- The power sector’s reliance on more expensive imported coal therefore doubled from 7% of coal-based power generation in FY 2007 to 15% in FY 2012.
- Imported coal is priced at 1.6 times domestic coal and typical transportation cost for imported coal is 1.5 times that for domestic coal.
Suggested Reforms
- The key reform would be to devise a mechanism to enable an automatic pass through of fuel price increases to power tariffs.
- The problem of delays in payment of subsidies by state governments to utilities can be addressed by setting up an appropriate escrow mechanism operated by the Reserve Bank of India to ensure timely subsidy payments.
- Utilities must be required to disclose their circle-wise technical and commercial losses along with the improvement targets for each circle.
- Further, we must effectively harness our coal reserves by formulating mining policies that incentivise timely development and production by mine licensees.
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