In today's Finshots we talk about the government's plan to revive the faltering power sector in India.
The Story
Before we get to the actual story, a note on the power industry from one of our previous articles. There are three main stakeholders here.
First, we have the Gencos — The power generators. The good folks that tap into nature’s abundance and whip up electricity. Second, we have transmission companies — Institutions responsible for transferring the electricity from power stations to states far and wide. Finally, we have the distributors, the Discoms — people responsible for bringing electricity to your home.
In an ideal world, once power makes its way to the Discoms, they ought to be able to sell it to the end consumer, as is. Unfortunately, that doesn’t happen. Instead, there are leakages at multiple touchpoints. Maybe the transformers are old and dingy. Maybe the power lines are poorly maintained. Maybe the chap next door is siphoning electricity by tampering with the meter. It’s all on the cards and therefore Discoms are rarely able to monetise all the electricity that comes their way. Some of it is forever lost in the void.
Tragic!!!
But then, even if Discoms somehow manage to bill the end consumer, there’s no guarantee they’ll get paid in full. As of December, cash strapped consumers owed as much as $11 Billion to power distributors across the country. And then there is state intervention — Perhaps the greatest bottleneck in the ecosystem.
You see, most Discoms are still owned and operated by state-run governments. And governments, unlike private institutions, have other more pressing compulsions. For instance, most governments force Discoms to supply power at throwaway prices in a bid to appease their vote bank. And although this offers extra leeway to people who simply can’t afford the standard rates, it’s still a suboptimal solution.
Also, there is the promise of compensation i.e. The assurance from governments to fully compensate for losses arising out of these arrangements. Now state finances are almost always in a state of shambles. So they simply defer their payments and starve Discoms of much-needed funds until they are pushed to the brink of disaster.
And this creates ripple effects that percolate through the entire industry. When Discoms run out of cash, they go on a borrowing spree or simply start deferring their own payments to the power generators and the transmission folks. The power generators, in turn, will have to figure out a way to deal with cash flow problems and if these institutions start failing, then you’ll have the electrification problem. There’s no end to this mess.
And look, this is a very complicated problem. But the government knows what doesn’t work. For instance, they fully understand that there’ no point in helping Discoms manage their debt burden if they keep faltering in the future. You pair down debt today. They’ll borrow more tomorrow. Meaning, you need to address the systemic issues plaguing the industry. And here’s how the government wants to go about things.
1. Get the basics right
The government has set aside about 3.1 lakh crores to upgrade the last mile infrastructure. This money will be spent on installing prepaid smart meters, feeder separations, upgrading the power transmission architecture etc. The hope is that this solves a few problems. Maybe it will lead to efficient bill collection, maybe it will scuttle the scourge of power theft, maybe it will boost revenue for Discoms. And if it works out well, maybe it can address some of their cashflow problems. Maybe they could script a turnaround. Maybe…
2. Introduce competition
I will let the power and renewable energy minister explain this bit.
The existing distribution companies [DISCOMS] will remain as they are. They will continue functioning but now they will be open to competition. Any company wants to take up distribution anywhere, they can. As we delicensed [electricity] generation in 2003, we are delicensing distribution. Our objective is to empower the consumer and our belief is the system exists for people and not vice versa.
Right now the distribution companies are monopolies... We want consumers to have choices. Idea is to open it up by removing restrictions. Let more companies come in the same areas and if they offer better services you and I will choose that company. The regulator will fix only ceiling [maximum] prices — Excerpts from an interview on Economic Times
Now at first, this might seem counterintuitive. After all, if you want to support Discoms, allowing private players to compete with these institutions doesn’t exactly sound prudent. But here’s the thing — If you never ween off these dependencies, then consumers will always be at their mercy. Meaning anytime their financial condition deteriorates, the government will have a major problem on its hands because consumers have no alternatives. It’s a chicken and egg problem. So the government wants to let private players compete and see how it benefits consumers.
3. Monetizing power transmission assets
Now this one isn’t particularly about solving problems. Instead, it’s more about unlocking value. In a bid to fund new projects the government wants to raise more money. And perhaps the best way to do it is through an InvIT. So here’s how it works. First, you take all your power transmission assets and put them in a trust. And the trust holds these assets for the beneficiaries. Who are the beneficiaries you ask? Well, technically you could become a beneficiary by holding a small part of this trust. You pay some money upfront and you get units of the trust in return. It’s like an IPO, but in this case, the investors receive some cash (in the form of dividends) whenever those power transmission assets generate money.
So yeah, the government wants to do a bunch of things to revive the faltering power industry in India. And we hope some of them yield the desired results.
Until then…
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