Power for growth

News: The coal shortage could worsen the power crisis in the coming months in India. According to news reports, an internal assessment of the power ministry shows the shortage could increase in the September quarter, which can lead to widespread outages.

The domestic production of coal is unable to keep pace with rising power demand.

What are the negative impacts of coal shortage?

Small businesses are suffering because of the non-availability of reliable power. Power shortage is the last thing Indian businesses, recovering from the pandemic-induced disruption, need. A continued shortage will delay the recovery and may push smaller units out of business.

What are the major issues faced by the power sector?

The trouble in the power sector is not limited to the production of power.

Poor state of the distribution companies (discoms): The state of state distribution companies, or discoms, is perhaps a bigger worry for the sustainability of the sector.

– The inability of discoms to clear their dues compels the Union government to announce one package after another to bail out the sector, but nothing changes on the ground.

What has the government done to address the problem?

On coal crisis

After pushing producers to import coal, the government has now reportedly decided that Coal India will buy from overseas and distribute it to power producers.

On poor state of discoms

The government has, once again, come out with another relief package. The latest scheme, notified recently, will allow discoms to pay their dues in 48 installments.

Further, the late payment surcharge will not be imposed.

– Distribution companies owe about Rs 1 trillion to generation companies. The cumulative late payment surcharge is in excess of Rs 6,800 crore.

Why the relief package for discoms might fail?

The government hopes that deferring payment without imposing an additional late payment penalty would help the discoms bring their finances in order. However, given the track record of the discoms, it is safe to argue that the scheme will not change much.

It’s worth recalling the government had announced a special liquidity scheme worth Rs 90,000 crore for discoms to help clear dues in 2020. But the dues started rising again in a few months. Even in the latest scheme, it is not clear how deferring payments will help.

If discoms are not able to clear their current payment, how will they pay past dues in addition?

Main issue with the discoms

The basic problem is that state-run discoms are unable to cover costs, which makes the business unviable.

No liquidity support or deferment of payment will help if discoms are unable to recover costs year after year.

This happens largely because state governments do not allow discoms to regularly increase power tariffs for political reasons.

Inefficiency in discoms adds to the problem.

Way forward

Higher coal prices would push up generation cost and if it is not passed on to the end consumers, it will increase risks for the entire value chain.

Therefore, in the absence of urgent systemic reforms, the power sector could become a drag on economic growth.

Source: This post is based on the article “Power for growth” published in Business Standard on 30th May 22.