Sunday, September 23, 2012

Reforming power sector: Right tariff with right management

World Bank economists and energy specialists argue that the solution to blackouts in India is to reflect cost of production in power tariffs (prices) and efficient management of and by power companies (plugging in leakages, expanding access to energy, good customer services, proper maintenance). It happened in Gujarat, West Bengal (public enterprise) and Delhi (private enterprise). The suggestions are quite pertinent to the ongoing works in reforming Nepal's troubled NEA (after tariff rationalization).

At their heart, blackouts boil down to two issues: underutilised capacity and insufficient capacity. The former is a result of inadequate maintenance of old plants and the persistent shortage of domestic coal. This can be resolved by using imported coal. But that is very expensive and the additional cost does not get reflected in tariffs.  For their part, most distribution companies have resorted to load shedding, rather than buying surplus short-term power, on account of their dire financial position.

Insufficient capacity requires a long-term solution. The financial viability of State utilities is a pre-condition for attracting investments in this sector. This requires a coherent set of actions involving reductions of system losses, adequate tariffs that are revised at regular intervals and transparent competitive bidding for new investments.

Fortunately, we don’t have to look far for solutions. India has a number of examples of public (Gujarat, West Bengal) and private (Mumbai, Delhi) power sector companies that have good management practices, are well regulated, provide homes and industries with uninterrupted power supply and earn reasonable profits.

So what have these states done differently? First, they have significantly reduced their transmission and distribution losses, which devour a third of the power in other states. These companies upgraded their networks and cracked down on power theft, which enabled them to generate additional revenues that further improved operations.  Note that peak power deficits in May 2012 were just 1% in West Bengal and 1.2% in Gujarat, as compared to 9.2% in the rest of India.

Second, these states have increased tariffs at regular intervals and consumers pay higher tariffs in return for regular, high-quality power supply. In Gujarat, for instance, consumers pay Rs. 5.3 per unit of power; in Mumbai, Rs. 5.86; and in West Bengal, Rs. 5.78. While these tariffs are only 10% higher than average tariffs in other states, lower losses and better efficiency imply that these companies are profitable.

So where can other states begin from? Power utilities in other states must reduce their financial losses through sound management practices and tariff rationalisation. But consumers will rightly demand regular power supply with better voltage before they are willing to pay a higher tariff. West Bengal demonstrated the importance of earning credibility with consumers before raising tariffs. Just three years after improvements in power supply and energy access, improved customer service and negligible dependence on state subsidies, the utility got approval for the required tariff increase under the new government. Similarly, in Delhi, private distribution companies were incentivised to reduce losses in a time-bound manner during the reform period, before receiving a tariff hike.
 More here.