governance, political economy, institutional development and economic regulation

Posts tagged ‘bankcrupt distribution utilities’

Grandfather stranded power assets equitably

Coal

Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.

De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.

Drivers of stranded power assets

The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.

The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.

India night lights

SHAKTI a transparent, effective resource allocation mechanism

Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.

RBI shakes complacent defaulting promoters awake with looming insolvency

Debt Recovery

Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.

Timely negotiated settlements better than the judicial option 

Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.

Enron solution redux- neither desirable nor feasible

Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?

Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.  

The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.

Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.

In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.

Why should electricity consumers pay to subsidise rail passengers?

Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.

Subsidise rail passengers explicitly via the budget

There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.

Spread the pain of low availability of domestic fuel across all thermal power generators

Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.

competition

Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.

Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/

Shrimatiji awaits achche din

Reposted from The Asian Age May 5, 2015 where it first appeared http://www.asianage.com/columnists/shrimatiji-awaits-achche-din-800

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India is on a roll. The “helicopter-top down” view looks good. Growth is to be 7.5 per cent this fiscal and 8 per cent by 2018 (World Bank’s India Development Update report 2015) outdoing China, which cannot but be a matter of satisfaction. We are now besting China at their home grown “game” of sustained growth.

Home loan rates are also down. Stalled infrastructure projects are being restarted. Government is “intervening” decisively with upfront public investment to reduce the commercial and political risk for private investors. There is more “method” now to the earlier “madness” in the allocation of natural resources like spectrum and coal mining rights. Gas exploration regulations have been “tweaked” to make them more “investor friendly”. On land acquisition, state governments are showing the way though political rhetoric still trumps consensual problem solving.

Overseas, India is stepping up to the plate forcefully. The global narrative on India is changing. Canada is selling us uranium once again. India’s risk-averse nuclear regulatory framework is being applied innovatively to fit with the international risk sharing, contractual norms. India is once again a part of the global and regional public decision-making chain.

A signal of strategic maturity is India turning down the offer to bid for the 2024 Olympic Games. The growth dividend from such mega public events is iffy. More importantly, this is a frank recognition that it is not yet time for India to party.

How do things look bottom up? High expectations but fewer results just about sum it up. The common woman is still waiting.

That inflation is no longer surging is a relief. More importantly, the subtle but unsavory regulatory dispute between the Reserve Bank of India and the ministry of finance is resolved. Both now have bright lines defining their separate roles for growth sustaining, macroeconomic stability. This augurs well for the poor, who suffer the most from inflation and instability.

The average Indian household is not resilient to “shocks” principally because their pockets are so shallow. Food, cooking gas or kerosene and electricity constitute more than 50 per cent of an average Indian’s household budget despite subsidies. All three perch on an unstable stool of administered prices.

There are huge political economy barriers to making food supply fiscally sustainable. But shaping food demand away from the monoculture production of water intensive, risky crops unsuited to the local agro-climatic conditions can drive local jobs and reduce subsidies.

India is trapped in the Green Revolution led productivity enhancement of fine cereals — rice and wheat — which led to south India consuming chapattis and the north wolfing down dosa, thus creating a pan-India balanced, administered market.

Cereals are a staple diet for the price-sensitive poor because of subsidised retail supply prices. But, more worryingly, administered high farm gate prices — used as an inefficient instrument of income assurance for farmers — have led to fine cereal production, crowding out other weather-resilient local crops. Weather-resilient coarse cereals and legumes languish for want of research and fiscal support.

No surprise then that a fine cereal-intensive diet has become the diet of choice even of the middle class (30 per cent of the population) which, whilst not rich, is not desperately poor either. One-third of even the wealthiest children in India are malnourished, not because they don’t eat enough but because they don’t eat healthy.

A second revolution must herald the end of the great Indian tradition of a cereal-intensive diet. The time is ripe for a second revolution in food demand. Six hundred million Indians, who can afford to eat healthy, need to move to a more balanced combination of lentils, milk products, fish, meat, vegetables, fruit and coarse cereals. Doing so could create the demand incentive for food growers to diversify away from the subsidised monoculture of wheat and rice into more weather resilient local food varieties and packaged options.

Prime Minister Narendra Modi is the gold standard for illustrating the ability of positive outreach and communication to shape opinion and events. He should lend his heft to a campaign for revolutionalising food demand away from fine cereals to more sustainable local substitutes. Associating private sector partners in research and NGOs in extension work for developing and mainstreaming these substitute crops would also be a rich source for productive, new jobs for our science graduates.

Energy (transport and cooking) is the second big-ticket spend for households, which is why cooking fuel and road and rail passenger fares are subsidised. But low oil prices are precariously dependent on the continuation of the current US and Saudi strategy to sanction Iran and Russia by bleeding their oil revenues. This is a temporary factor. Similarly, normalisation of world economic growth is likely to boost oil prices in the medium term, upsetting the “happiness” apple cart for both retail consumers and the stability of the foreign exchange balance of the country.

In electricity, the neglected, dominantly state-owned distribution utilities are crying out to be fixed. Some of their angst relates to their own inefficiency — they continue to lose 27 per cent of the electricity they buy due to theft, collusive metering and poor operations. But below-cost tariffs for domestic and agricultural users have resulted in an accumulated loss of Rs 100,000 crore ($16 billion). This is recognised by regulators as due to the utilities but remains parked as a notional asset with no assurance of when or how utilities are to recover it.

Things have now come to a head. Poor utility finances are holding up the conclusion of power purchase agreements with generators, which in turn negatively affects the operationalisation of 20,000 MW of new investment in generation and shall ultimately impact consumers with either poor quality or higher prices.

At the heart of improving the life of the common woman is to drive hard for stability, reduce the risks she faces and move quickly to dilute the inevitable shock. Traditionally the government has focused on the latter — better disaster management is one of them. But the far more fundamental work is to enhance individual risk resilience. Jobs help the most in meeting this objective.

Realty is a jobs-intensive sector. The construction splurge of the previous years — driven by bank loans available at low and mostly negative interest rates — created a two years’ over-supply of “inert economic assets” which generate no jobs post construction because they are empty shells. The challenge is to fill these empty spaces — shops, offices and homes — with people who are willing either to rent or buy and use them.

Intervening administratively — rent control and allocating vacant space, as done in the past, or even worse, caps on the sale price of property — would be a ham handed, extremely leaky approach out of step with the times.

A better way is for municipalities and banks to provide price disincentive — higher property tax and higher interest rates for loans on properties kept vacant. Having to pay more on vacant properties can discourage speculation, drive better utilisation of inert investments and generate social returns — jobs for people and taxes for the government.

A year is a lifetime in an intensely contested, democratic polity. This is why the government must squeeze out the “fat” in the system whilst planning for the future. Over the past decade, we had much more of the latter and very little of the former. Given the head winds building up, it is critical for the government’s longevity to redeem its compact with voters by delivering real, near-term, fiscally neutral improvements in consumer welfare. Think long but act now should be the mantra

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