Curious case of power sector
27 Feb 2014 11:20 PM GMT
In my last column, I had argued that the Aam Aadmi Party was losing focus from its core issues – delinking of elections and money power, increasing accountability of politicians/bureaucracy and an end to politics of caste and religion. The power of these issues is their national appeal as witnessed in the sudden emergence of the AAP party as a national party from nowhere in a matter of a year or so. However, the perceived failure of the AAP in governance seems to emerge from their excessive emphasis on micro issues. These issues range from power to gas pricing. While political statements are understandable, it is the statements from political leaders on technical issues which indicates that the party think tanks haven’t done their homework well. In this article, I will look at the power sector in particular and see how sustainable is the promise of lower power bills in the future.
But first it is necessary to understand the structure of the power sector. The main focus of the Electricity Act 2003 was to depoliticise the determination of power tariffs. As in other areas (for example, the stock market) the powers of the ministry were replaced by an independent regulator, the Central Electricity Regulatory Commission (CERC) which now monitors trading, pricing etc in the power sector. At the state level, the CERC is represented by the state level bodies, the SERCs (the DERC for Delhi). At the same time, private power generation was to be allowed. This has actually grown so that, in 2012, private generators (Essar, Relaince etc) accounted for about 30 percent of the total power generated in the country. Balance is with central bodies (like NTPC) and state utilities.
The supply of electricity is based on bilateral trading: between states (inter-state trading) and between the distribution companies (DISCOMS). The inter state trading is largely done through listed private intermediaries (licencees of CERC) whose margins are fixed by the CERC. Apart from this power can also be traded multilaterally via the two power exchanges but this is only a small percentage of the total trade. The dominance of bilateral transactions rather than those through the power exchanges is mainly because of technical problems (transmission congestion) of taking all transactions through the national grid.
The next thing to understand is the peculiar nature of power: it cannot be stored. Consider the issue of a city like Delhi. Its demand for power can vary from 3,000 MW to peak (in summer) demand of 6,000 MW (expected this year). At the same time, a surplus state like Sikkim would like to sell its power to someone else in summer when its own demand is low. Since power cannot be stored, Sikkim would incur excessive maintenance costs of generating plants in summer when its own demand is low. It would therefore prefer to contract to sell its excess power in summer to other states. By the same logic, it actually makes sense to sell/buy not only monthly but daily and hourly based on anticipated demand. This also allows states to maintain their power generation at maximum levels throughout the year. This short term market for power (contracts of less than one year) accounts for about 11 per cent of the total electricity procured. The balance 89 per cent is procured mainly by DISCOMS through long-term contracts and short-term inter-state transactions. The power purchased by DISCOMS is based on what are now called power purchase contracts (PPCs).
Based on these PPCs, the DISCOMS then apply to SERCs for a rate increase with a 16 per cent profit margin. This allows SERCs to fix the power rates in their states. How is electricity priced in these markets? According to a CERC report, the lowest price of electricity in bilateral trades (including Reliance as one producer) in December 2013 was around Rs 2.74 per unit (kWh) going upto a high of almost Rs 7. The peak time rates were almost 60 per cent higher. The corresponding prices in the (limited) exchanges are substantially lower but the peak prices are almost 15 times higher. Hence, after the rates notified by the AAP government, about 67 per cent of consumers will be subsidised as their tariff will be well above the minimum rate at which electricity is traded. It is not surprising that, in its last action, the AAP government had to arrange for an amount of about Rs 370 crores to meet this subsidy. This will go up dramatically in summer when electricity consumption peaks. Who will pay for this? In any case, even after the new rates, the electricity bills of consumers cannot be half of the December 2013 rates. This will surely be played up by the other political parties. Maybe the audit of DISCOMS will reveal some padding of PPCs. Frankly, this is unlikely given the way the national electricity market works. At best the DISCOMS will be grilled on their savings in cutting distribution losses but these are now only about 20 per cent of costs. Yet, the way to cut rates surely lies in increasing competition among DISCOMS by extending ‘open access’ to residential consumers (as, for example) in the telecom sector. We have heard little on this so far.
I have no brief for Ambani and Kejriwal’s general beef with him may be well taken. But what interests me is not their personal battles but my electricity pricing. What concerns me is not the general corruption in high places but my power bills. I can only wait for the peak summer days with a fair degree of trepidation.
The author is professor of Economics at JNU
But first it is necessary to understand the structure of the power sector. The main focus of the Electricity Act 2003 was to depoliticise the determination of power tariffs. As in other areas (for example, the stock market) the powers of the ministry were replaced by an independent regulator, the Central Electricity Regulatory Commission (CERC) which now monitors trading, pricing etc in the power sector. At the state level, the CERC is represented by the state level bodies, the SERCs (the DERC for Delhi). At the same time, private power generation was to be allowed. This has actually grown so that, in 2012, private generators (Essar, Relaince etc) accounted for about 30 percent of the total power generated in the country. Balance is with central bodies (like NTPC) and state utilities.
The supply of electricity is based on bilateral trading: between states (inter-state trading) and between the distribution companies (DISCOMS). The inter state trading is largely done through listed private intermediaries (licencees of CERC) whose margins are fixed by the CERC. Apart from this power can also be traded multilaterally via the two power exchanges but this is only a small percentage of the total trade. The dominance of bilateral transactions rather than those through the power exchanges is mainly because of technical problems (transmission congestion) of taking all transactions through the national grid.
The next thing to understand is the peculiar nature of power: it cannot be stored. Consider the issue of a city like Delhi. Its demand for power can vary from 3,000 MW to peak (in summer) demand of 6,000 MW (expected this year). At the same time, a surplus state like Sikkim would like to sell its power to someone else in summer when its own demand is low. Since power cannot be stored, Sikkim would incur excessive maintenance costs of generating plants in summer when its own demand is low. It would therefore prefer to contract to sell its excess power in summer to other states. By the same logic, it actually makes sense to sell/buy not only monthly but daily and hourly based on anticipated demand. This also allows states to maintain their power generation at maximum levels throughout the year. This short term market for power (contracts of less than one year) accounts for about 11 per cent of the total electricity procured. The balance 89 per cent is procured mainly by DISCOMS through long-term contracts and short-term inter-state transactions. The power purchased by DISCOMS is based on what are now called power purchase contracts (PPCs).
Based on these PPCs, the DISCOMS then apply to SERCs for a rate increase with a 16 per cent profit margin. This allows SERCs to fix the power rates in their states. How is electricity priced in these markets? According to a CERC report, the lowest price of electricity in bilateral trades (including Reliance as one producer) in December 2013 was around Rs 2.74 per unit (kWh) going upto a high of almost Rs 7. The peak time rates were almost 60 per cent higher. The corresponding prices in the (limited) exchanges are substantially lower but the peak prices are almost 15 times higher. Hence, after the rates notified by the AAP government, about 67 per cent of consumers will be subsidised as their tariff will be well above the minimum rate at which electricity is traded. It is not surprising that, in its last action, the AAP government had to arrange for an amount of about Rs 370 crores to meet this subsidy. This will go up dramatically in summer when electricity consumption peaks. Who will pay for this? In any case, even after the new rates, the electricity bills of consumers cannot be half of the December 2013 rates. This will surely be played up by the other political parties. Maybe the audit of DISCOMS will reveal some padding of PPCs. Frankly, this is unlikely given the way the national electricity market works. At best the DISCOMS will be grilled on their savings in cutting distribution losses but these are now only about 20 per cent of costs. Yet, the way to cut rates surely lies in increasing competition among DISCOMS by extending ‘open access’ to residential consumers (as, for example) in the telecom sector. We have heard little on this so far.
I have no brief for Ambani and Kejriwal’s general beef with him may be well taken. But what interests me is not their personal battles but my electricity pricing. What concerns me is not the general corruption in high places but my power bills. I can only wait for the peak summer days with a fair degree of trepidation.
The author is professor of Economics at JNU
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