In today's newsletter we talk about the problems plaguing the power industry and how the government is trying to fix things.
Before we get to the headline, a note on the power industry itself.
First, we have the Gencos — The power generators. The good folks that tap into nature’s abundance and whip up electricity.
Second, we have the transmission companies — Institutions responsible for transferring the electricity from the power stations to states far and wide.
Finally, we have the distributors, the Discoms — good folks responsible for bringing electricity to your home.
And these entities happen to be the focus of today’s story.
In an ideal world, once power makes its way to the Discoms, they ought to be able to sell it to the end consumer, as is. Unfortunately, that doesn’t happen. Instead, there are leakages at multiple touchpoints. Maybe the transformers are old and dingy. Maybe the power lines are poorly maintained. Maybe the chap next door is siphoning electricity by tampering with the meter. It’s all on the cards and therefore Discoms will never be able to monetise all this power — which unfortunately is forever lost into the void.
But then, even if Discoms somehow manage to bill the end consumer, there’s no guarantee they’ll get paid in full. In fact, as of January, cash strapped consumers owed as much as $11 Billion to power distributors across the country.
And then there is state intervention — Perhaps the greatest bottleneck in the ecosystem.
You see, most Discoms are still owned and operated by state-run governments. And governments, unlike private institutions, have other more pressing compulsions. For instance, most governments force Discoms to supply power at throwaway prices in a bid to appease their vote bank. And although this offers extra leeway to people who simply can’t afford the standard rates, it’s still a suboptimal solution.
Also, there is the promise of compensation i.e. The assurance from governments to fully compensate for losses arising out of these arrangements. The only problem here is that state finances are almost always in a state of shambles. So they simply defer their payments and starve Discoms of much-needed funds until they are pushed to the brink of disaster.
And this creates ripple effects that percolate through the entire industry. When Discoms run out of cash, they go on a borrowing spree or simply start deferring their own payments — to the power generators and the transmission folks. The power generators, in turn, will have to figure out a way to deal with cash flow problems and if these institutions start failing, then you’ll have the electrification problem.
I mean, the government managed to mobilize enough capacity to meet the country’s needs only last year. So surely, this won’t be palatable to anyone.
And it’s not like nobody’s noticed this bit. The central government saw this coming a long while ago.
Back in 2015, they launched the UDAY scheme in a bid to alleviate some of the industry's major concerns.
The premise was extremely simple. The state government takes 75% of the Discom’s debts and then it charts out a plan to improve efficiency and reduce costs across the board. In the event that state Discoms meet these targets, the central government incentivises them with extra funding.
A win-win for all parties concerned.
In fact, The Honourable Minister Piyush Goyal noted that this was a — “classic example of Comprehensive, Cooperative, Collaborative, Competitive, Consensual and Compassionate Federalism”
Yes, that’s right — He got in The 6C's.
Unfortunately, despite the initial promise, Discom debt has now gone back to the pre-UDAY levels, and their outstanding dues to the power generators are higher than ever.
Which brings us to — today!!! The post COVID world.
Right now, most industries in India have shut shop and power consumption has fallen off a click. The meter readers can’t check the readings and Discoms can’t collect payment (in most cases). All things considered, these institutions are expected to lose thousands of crores in revenues. This is income they’ll never be able to recoup, because unlike other goods and services, there’s no scope for ‘pent up demand’ when it comes to electricity.
It's gone forever. At least most of it.
But here’s the thing. Almost three-quarters of their costs are still fixed in nature. Meaning, even if power consumption drops, they’ll still have to keep paying these dues. And considering they have been in a world of trouble since forever now, the government had to intervene.
So on March 28th, the government allowed distribution companies to defer payments to Gencos for three months offering some much-needed relief.
However considering they already owe Gencos a whopping Rs 92,000 crores, it wasn’t all that appealing to the power generators.
And so, the government had to intervene again and is now working on another fund to help the Discoms pay their dues to the Gencos — Which happens to be the headline we wanted to cover.
Until next time…