The government is planning a complete overhaul of the way the power sector is financed and subsidies are delivered, attempting to address a funding shortfall delaying the construction of electricity projects and worsening a chronic power deficit that threatens to sap growth in India’s energy-hungry economy.
This exercise is based on a report submitted by a panel headed by Montek Singh Ahluwalia, deputy chairman of the Planning Commission, to the power ministry.
The panel was formed by a group of ministers dealing with the power sector.
Significant recommendations made in the report include direct disbursement of power distribution subsidies to consumers such as farmers through a smart card linked to a unique identity card (UID) number and a special dispensation for hydropower project financing that would see loan tenures extended at low interest.
The panel also looked at ways of increasing bank lending to the power sector, especially so-called ultra mega power projects that are capable of generating 4,000MW and more.
Such projects typically cost around Rs.20,000 crore each, straining the ability of banks to fund them.
“Distribution companies are not receiving timely subsidy from the state government. Therefore, subsidy is proposed through a smart card linked to the UID number to ensure that the benefits reach right to aam aadmi,” or common man, said a copy of the report reviewed by Mint.
While the Electricity Act, 2003, states that any subsidy declared for any consumer or class of consumers must be paid by the state government in advance to the distribution licensee, it has not been followed in practice by the state administrations.
The proposed new system will help “eliminate the under-pricing of electricity and move towards explicit subsidy given directly by the state government…especially (to) farmers based on land holdings,” said the report.
Political promises of free power for farmers has led to misuse of such electricity. Even as soaring subsidy costs have begun to eat into their budgets, state governments are not ready to end free power supply for fear of a backlash.
Energy losses arising from supply to farmers account for up to 25% of total losses in supplying electricity in states such as Andhra Pradesh, Karnataka, Punjab, Haryana and Rajasthan.
Because supply of power to the agricultural sector is unmetered, most utilities write off all the losses due to transmission and distribution as agricultural consumption.
“The committee has submitted its report. We agree with its recommendations. The report along with our recommendations will go to the cabinet committee on infrastructure (CCI) shortly, which will take a decision on them,” said a top power ministry official who did not want to be identified.
Various ministries of the government are toying with the possibilities of leveraging the UID project being implemented by the Unique Identification Authority of India (UIDAI) to ensure delivery of benefits promised by the government to the right target groups. UIDAI, based in New Delhi and chaired by Infosys Technologies Ltd co-founder Nandan Nilekani, aims to assign 12-digit ID numbers to at least 600 million people over the next four years.
“It is a major recommendation. Let the farmer pay his bill and get the subsidy through a smart card,” said former power secretary Anil Razdan. “The dependence on subsidies and the political compulsion of providing free power to farmers wreaks havoc with the financials of most state electricity boards.”
Other recommendations include the establishment of a power debt fund to meet long-term financing needs and allowing state-run Power Finance Corp. Ltd, Rural Electrification Corp. Ltd and Indian Renewable Energy Development Agency Ltd to issue tax-free bonds.
These recommendations have been made after the committee’s interaction with the officials of the Reserve Bank of India, department of revenue and the power ministry.
Mint had reported on 27 July about the government’s plan to create a Rs.50,000 crore debt fund to raise low-cost and long-term resources for refinancing power projects.
India currently has a power generation capacity of 167,000MW. The 11th Plan (2007-12) has set a target of adding 78,577MW of power generation capacity, requiring at current estimates, some Rs.10.31 trillion of investment. According to the power ministry, the government expects a Rs.4.51 trillion funding shortfall. With the funding ability of Indian institutions being stretched, adding capacity hinges on the ability to mobilize debt.
Power shortages due to limited generation capacity have been identified as a key hurdle to economic growth. Around 57% of rural households and 12% of urban households in India have no access to electricity, according to a report by PricewaterhouseCoopers and the Indian Electrical and Electronics Manufacturers Association.