Page 1 of 21.0 General Principles
In order to understand the proposition of privatisation of electrical power industry it is necessary to first understand the dynamics of the industry. Electrical power industry has the following characteristics:
(i) It is highly capital and skill intensive.
(ii) It has no finished goods inventory - the generation and consumption is simultaneous.
(iii) Being versatile it has a large number of users at different voltage classes and use patterns resulting in different tariffs for each class of customers. In India the tariff is essentially a political decision.
(iv) Indian power systems are import intensive in terms of capital, technology and equipment. At the same time the power equipment manufacturing industry is badly hit with recession and dependent on a high degree of export intensity.
Each of these issues needs to be discussed in detail:
2.0 Capital and skill intensity
2.1 The peak load requirement in the year 2004-5 is anticipated to be 174 thousand MW as against this the present installed capacity is about 63 thousand MW. That is approximately 100 thousand MW has to be added in about 15 years. It is reasonable to consider that the average escalated cost of power generation, transmission and distribution would to be of the order of Rs.3 crores per MW. That would mean an average investment of the order of Rs.300 thousand crores in the next fifteen years. The total investment in the power sector from the private sector to date is of the order of 2.6 thousand MW or about 4 percent of the total installed capacity. Most of this is in the form of captive power plants of industries. Apriori we can conclude that the private sector would only be on the fringe of the power development programme considering the magnitude of the investment called for.
2.2 The industry is also skill intensive. The need is to augment the skills rather than to fragment the industry into small size organizations which would be dependent on learning on the job.
3.0 No finished goods inventory
3.1 Since there is no finished goods inventory the investment must precede the requirement by an average of six to eight years. Also the investments pay returns according to the nature of consumption. For example, if a power house is captive to a process industry the power generated would be consumed continuously and the equipment installed would be working to full capability resulting in very good returns on investment. On the other hand if the power station were to supply exclusively to domestic and agricultural consumers the requirement would be either at night or during certain agricultural seasons and consequently the equipment would be generating to full capacity only at certain times of the day or the year and the returns on investment would be accordingly lower. Since there is no finished goods inventory, it is absolutely necessary that with the exception of a captive power plant, any power utility (i.e., a power generating company) should have a mixture of consumers so as to ensure that the generation capability and the consumption requirements are balanced.
3.2 Instead if the private power generating companies should be selling bulk power to the electricity boards, then the boards will be left to soak up the losses in providing the distribution networks and free electricity to the fanners and in providing peak power. For example, in the Eastern region in spite of there being energy intensive industries the night peak is almost a third of the day peak. Let us say the night load is 750 MW and ;a private sector unit of 500 MW is set up, it will be argued that this station should get continuous load as a base load station. The Electricity Board would have to invest and provide the day peak of say 2250 MW. In such a situation the Public Sector will not only be providing the bulk of power but would also be having under utilised capacity leading to losses.
4.0 Voltage Classes and Political Tariffs
4.1 Electrical power is versatile since it can be convened into light, heat, sound, mechanical energy. Therefore its requirement would be at various levels - bulk consumers and retail consumers all drawing from the same grid. Also electric power has to be transported to the point of consumption. This implies that a process industry would be a bulk consumer drawing power at high voltage and if it is located near the power generator the losses would be minimal. On the other hand if a single pump set-has to be energised in the middle of agricultural land or an isolated hamlet has to be electrified then distribution lines have to drawn far away from the generation point and since the consumer wants power at low voltage and not only has investment to be made for the voltage to be stepped down through a series of transformers but also to draw the line till the pump set. In addition to investment there would be both transmission and distribution losses to account got.
4.2 The average cost of generation in India is around 87 paise per Kwh the average tariff is around 67 paise. That is on every Kwh there is a loss of about 20 paise. The power consumption in India today is about 270 thousand million Kwh the average loss to the Electricity Boards is about Rs.540 Crores per year. (Enough to set up a 500 MW thermal power station at the current prices). Since electrical power is an infrastructure the effect of 10% increase in price^would reflect in both average sectorial prices and consumer prices by 54% to 64% and a decrease in the Gross Domestic, Product by 32 to 37%. These economic considerations apart there are political considerations.
4.3 The political considerations is best illustrated by the example of agricultural or rural tariff. The Committee on Power (Rajadhyaksha Committee) stated in 1980:
'The major beneficiaries of the tariff subsidies are large and medium farmer: most of whom can well afford to pay the full cost of power including the recommended return on tlie capital employed. The committee, therefore, recommends that general agricultural tariffs must reflect the full cost of supplying power including the full rate of return."
Ten years later in 1990 the Tamilnadu Government has made the supply of electric power to the agriculturist free. The political economy of this is clear from the example of U.P. Dale in the agricultural census show that 84% of the holding in U.P. are less than two hectares, 67% being below one hectare showing that, numerically small farmers still predominate in U.P. This census also shows that, of the area irrigated by private tube wells / pump sets, only 10% comes in the size - class of holdings up to one acre and 19% up to two acres. It would thus appear that 80% of the area irrigated by pump sets belongs to medium and large farmers, who comprise about 16% of the farming population. It is this section of the rural population that enjoys political patronage.
4.4 The privatisation proposal includes invitation to the foreign investors to enter the power industry. Foreign investors have been asked to bring hard currency to finance power projects. There stream of income will be a guaranteed return of 15 percent on net worth. The apprehension of the foreign investors is that a large pan of the income will have to be written off against a continuous devaluing rupee and they demand that the tariff must be linked to currency devaluation. It is obvious that the key to investment in power industry is tariffs. If the Government is willing to guarantee a return of 15 percent to the private sector why not provide the same guarantee to the public sector by a political will to increase the tariff and make tile Electricity Boards financially viable.