The government’s muddling in sectoral policies to favour public sector undertakings and dissuade competition and investments ultimately results in hurting the larger consumer interest. This governance issue and a subsequent loss of confidence in decision-making by the government has been flagged as a major factor for the non-performing asset (NPA) malaise plaguing India’s banking system.
Recently, in a communication to the government, the RBI cited preferential treatment towards public entities as one of the key reasons for the stress in the generation segment. This bias has led to a piquant situation, wherein public sector power plants that levy tariffs at ₹5.30 and ₹5.68 per unit have assured coal and PPAs (power purchase agreements), whereas private sector plants willing to sell power between ₹3 and ₹3.25 per unit are struggling for want of PPAs as well as coal. The adverse consequences of this bias are being borne by consumers by way of higher tariffs.
Unfortunately, we are set to commit the same mistake in transmission — by giving preferential treatment to incumbent public entity.
Competitive bidding
India opened up its transmission sector for competitive bidding in 2010, under which it allowed all companies — local and international, government-owned and privately-owned — to compete with each other and offer the lowest possible transmission tariffs to the end-consumer.
This process has resulted in a 30-40 per cent reduction in transmission tariffs on an average, and about 30 per cent reduction in construction schedules. These competitive forces have resulted in more innovation in the last five years than in the previous 30 years. Despite these results, the government has awarded around 60 projects on regulated-tariff mechanism. It is estimated that the higher tariffs realised through the regulated-tariff route will put an additional burden of over ₹50,000 crore on the discoms (distribution companies)and gencos (generation companies) in the next few years alone.
Costs rise
The Central Electricity Regulatory Commission (CERC), in its recent Tariff Approach Paper, has mentioned that the cost of inter-State transmission has increased by 69 per cent in the last seven years. This has been largely due to a significant share of projects being executed under regulated-tariff mechanism.
In these projects, the developer has little incentive to optimise cost and reduce tariffs and sometimes has the perverse incentives to increase costs, because the higher the approved costs, higher are his realised tariffs.
It is interesting to note that in the same period, the fixed cost of generation fell by 21 per cent. This was possible because during this period, between 2009-10 and 2016-17, 60 per cent of the incremental capacity was built under competitive bidding. Imagine the reduction in transmission tariffs that would have accrued to the end-user had more transmission projects been built under competitive route.
The ambitious vision of 225 GW renewable energy and achieving 24x7 power for all depends entirely on the creation of a robust cost-effective transmission network, which is built in a timely manner using the most advanced construction techniques.
This vision also requires that transmission tariffs are kept as low as possible so that the benefit of falling renewable prices reaches each and every underprivileged household of India.
Recently, the Empowered Committee (now renamed National Committee on Transmission) recommended only one out of a total of 19 projects to strengthen the national grid for implementation through the competitive bidding route.
The total value of the 19 projects is about ₹3,000 crore. This stems from the composition of the committee, which allows an unfair advantage to the incumbent public company, being a member of the decision-making body for deciding the mode of project execution — competitive or regulated mode.
Committee’s composition
The composition of the committee defies the basic principle of natural justice, Nemo iudex in causa sua — “no-one should be a judge in his own case”. This cardinal rule against biased decision-making suggests reconsideration of the committee’s composition to ensure an even field for all stakeholders.
If this trend continues, then it will adversely impact plans of achieving global leadership in clean energy and affordable power for all. Transmission may become so expensive that it may negate all the good work done in reducing the price of wind and solar power (which we all know was achieved through auctions!).
All in all, the government is on the cusp of a major decision. It needs to send a clear signal to the world on its intentions: whether the benefits of affordable green energy revolution shall reach all or the process may be allowed to be hijacked — making this cheap power unaffordable just because costly energy-delivery mechanism based on regulated tariff principles is to be pursued.
It can either completely throw open its key sectors like transmission to global competition (as Brazil has done successfully) by putting a complete stop to the regulated tariff mechanism and reap the fruits of innovation, cost reduction, and FDI. Or, it can continue its current “policy bias” and create even more stress in an already crippled sector.
The writer is Director General, Association of Power Producers