When the NDA Promised Power for All, it Took on its Greatest Challenge

This piece was originally published in Business Standard.

Part 1: The government’s promise of power for all

The National Democratic Alliance (NDA) government’s ambitious plan to provide 24×7 power to households by 2019 was announced well before the Union government could even prepare a detailed blueprint or tot up an estimate of the costs involved.

More than six months after the NDA government announced it would electrify entire India by 2019, plans for only three geographies are ready – Delhi, Rajasthan and Andhra Pradesh.

The scale of the challenge the government has set itself to achieve in four years is nothing short of astonishing. It will have to provide an electricity connection to roughly 80 million households that are still not connected to the grid (2011 Census). Then it will have to ensure the connections actually buzz with uninterrupted power that reaches 246.7 million households.The government can take some solace from the fact that substantial connections provided between 2011-14 will lower the targets to be met in four years.

To put this in perspective, between 2001 and 2011, an additional 61.6 million households got access to electricity. The government will have to more than double the rate of electrification to cover the remaining by 2019.

Fiscal implications

This is not just a logistical challenge. It has large fiscal implications. Andhra Pradesh, for example, has to provide connections to only 1.6 million additional households in four years – it is already 92 per cent electrified. It requires an investment of Rs.54,332 crore to connect these households and provide 24×7 power to all. By contrast, Rajasthan, which has to provide connection to an additional 3 million households, requires approximately Rs.78,500 crore. Costs for just these two states add up to Rs.1.33 lakh crore. But Rajasthan envisages adding more renewable power than the state will need (9,615 MW) at an additional cost of Rs.67,000 crore.

The government’s promise is to provide reliable supply to all consumers, except agriculture, which according to the two states’ plans will get 6.5 to nine hours of power a day by 2019.

Then there are states such as Uttar Pradesh and Bihar. The connections previous governments added in the entire country in five years will have to be added in just these two states in four years. Put together, 36 million houses in these two states were without power, according to the 2011 Census.

Ramp up CIL production

To map out reaching the national target, sources in the power ministry say, CRISIL, Mecon and Deloitte have been hired as consultants to draft the remaining 26 states’ plans. In three months, these consultants will finalise three states’ plans each. The officials insist that the remaining states will be ready by December, leaving the government with about three-and-a-half years to fulfill the promise before the general elections in 2019. The total investment required by all states, along with the additional central funding and private investment needs, would give an indication of the cumulative costs of achieving the 24×7 target. That will take at least another six months to be put together.

The power ministry did not reply to a detailed questionnaire from Business Standard, which included queries on the total cost calculations and estimations, if any, done so far to achieve the 24×7 electricity supply target.

Over the past few months, the government had announced some estimates of how much the grand scheme would cost and what it would entail.

Coal India (CIL) would have to increase its production to one billion tonnes annually from 494 million tonnes in 2014-15 – requiring a 15% annual rate of growth. Last year, CIL ramped up production by about 6.9%, though in the previous five years the average annual growth has been only 3.5%. CIL would need to more than double the growth it achieved last year to achieve the target set by the government. For this, Coal Minister Piyush Goyal had estimated investments of Rs.1.27 lakh crore.

Reconciliation with state plans

Goyal has also suggested that an investment of Rs.10 lakh crore would be required in the renewable energy sector to ramp up solar power from to 100 GW by 2022 and wind to 60 GW – at a growth rate that no country has achieved so far. At the beginning of 2014, India had installed 2,631.93 MW of solar power projects and 21,136.40 MW of wind power.

To upgrade the transmission and distribution systems, he has said Rs.1 lakh crore is needed over four years. In contrast, the Central Electricity Authority had prepared a 20-year plan to ensure a country-wide transmission network as the backbone of the 24×7 power supply system. This, the authority assessed, would cost Rs.2.6 lakh crore. Goyal and the government have assured funds should not be a problem.

Considering the power sector is one of the most indebted today, the government has its task cut out. The total debt burden on the power sector is pegged at Rs.4.70 lakh crore, according to Business Standard‘s analysis. Accumulated losses of the distributors – state electricity boards – are Rs.3 lakh crore, according to the government.

These macro numbers will eventually have to be reconciled with the state-specific plans still being fleshed out.

In a three-part series, Business Standard looks at how the government is gearing up to meet its promise of power for all. The second part will look at the two plans that are ready and available publicly – those of Andhra Pradesh and Rajasthan – and how generation of power will have to be dramatically ramped up in four years.

Part 2: How power generation will have to be ramped up

The government has not announced how much power is required to ensure 24 x 7 supply to all Indian households by 2019. But in its reports it talks of an addition of more than 200,000 Mw of power capacity in eight years by 2022. This is more than three-fourths of the power capacity added by the country over six decades.

To put this 200,000-Mw target in perspective: In the 11th Five-Year Plan, India added only about one-fourth of it. The addition in 2007-12 was 54,964 Mw, against a target of 78,700 Mw.

The 12th Five-Year Plan (2012-17), prepared under the United Progressive Alliance (UPA) government, had planned to add 118,536 Mw. Of this, 51,795 Mw was added in the first two years of the Plan, while the remaining 66,740 Mw was to be added by 2017 . But the current government hopes to double this and add 115,603 Mw by 2017. From 2017 to 2022, the government aims to add 101,745 Mw.

This means the power added in three years from 2014-17 will be more than what will be added in the five years after.

Rs.55,000 crore for two states

Even this unprecedented target may not be sufficient to meet the requirements for a 24×7 target, as the government report acknowledges, noting, “these assessments have been for the purpose of transmission planning, and not for assessing generation capacity required for meeting the demands.”

The UPA government had planned to provide power access to all. But the current National Democratic Alliance (NDA) government promises much more – electricity all through the day. This, obviously, requires an unparalleled increase in generation capacities, given the short deadline of 2019. Precise estimates of total energy requirement will be ready at the earliest by December this year when all state Plans are finalised.

This massive addition of power capacity would make India the second-largest consumer of coal-based energy. Alongside, the government wants to increase solar and wind power at rates that no country has so far achieved . Not even China.

A look at the power-generation plans of the two states that are ready gives an insight into the costs. Together, Andhra Pradesh and Rajasthan require Rs 55,000 crore.

Andhra Pradesh looks to invest Rs 21,593 crore to shore up generation capacity. Rajasthan requires Rs 34,772.19 crore to generate 6,570 Mw of conventional power. While its requirement is only an additional 625 Mw of renewable energy, it talks about generating more than 10,000 Mw at Rs 50,000 crore. The two states have also asked for 37.5 million tonnes of additional coal over five years. This still might not be enough for Andhra Pradesh to run thermal power plants at peak efficiency.

Since the Supreme Court cancelled allocations of 206 coal blocks, the government has conducted two rounds of auctions. The third is on the cards. But most of these will require time, of a year or more, to come online. The government also faces a slew of litigation against the auctions.

“The numbers are truly ambitious. The highest growth achieved in 10 years from 2004-05 to 2013-14 was 6.8 per cent. The target growth rate is more than double that figure,” says a coal sector expert. “Central to achieving the target is the addition of three railway lines and ensuring greater rake availability.”

Dependence on coal

Key to easing this constraint is building three railway lines – in Chhattisgarh, Jharkhand and Odisha – which could potentially help move up to 200 million tonnes annually.

“Of the three lines, movement is seen only in the Jharsuguda-Barpalli-Sardega railway line in Odisha. The deadline for this line is December 2017. The other two projects are yet to take off,” says the expert. The cost of setting up the lines, pegged at Rs 7,045 crore, is an underestimation, he adds.

India’s dependence on coal could have been reduced if there was clarity on how gas production would ramp up. But the state Plans reflect uncertainty on this front. The Andhra Pradesh Plan notes that 2.5 mscmd of gas is being supplied against a requirement of 13 mscmd, just enough for 500 Mw, leaving 2,270 Mw of capacity stranded. It does not clarify how much gas supply it will get in the future. The power ministry calculated that 14,305 Mw of gas-based plants were left stranded in the April 2014-January 2015 period . The government has formulated a new scheme for import of gas to ease the mess in the sector.

The other potential source of energy, large hydropower, locked up in issues of litigation, displacement and environment, has grown at a much lower rate than expected . Only 5,544 Mw of hydro power was installed during the 11th Five-Year Plan, against a target of 15,627 Mw. The government is pushing states in the Northeast to cancel memoranda of association with private players and hand over hydropower projects to the public sector.

Even as the NDA government disentangles the hydropower sector out of the mess, it has given a thrust to the emerging renewable energy sectors, setting a 100-GW target for solar power and a 60-GW one for wind power. The rate of growth it desires is unprecedented. But the government is not inclined to formally announce these numbers as official targets under the UN climate change agreement, to be signed in December 2015 – an indication that these may be more aspirational than real.

Part 3: Distribution and connectivity lag behind

In its first year the National Democratic Alliance (NDA) government was able to electrify only 0.2 per cent of census villages, according to the Central Electricity Authority (CEA). About 1,100 census villages were put on the power grid map. In contrast in the previous five years under the United Progressive Alliance (UPA), the percentage of villages electrified had risen from 84.4 per cent to 96.5 per cent, reports the authority.

Of the 5.97 lakh villages, 19,766 are still grid connected. The remaining ones are more difficult to reach. The numbers on census villages also hide underneath the hamlets and habitations within that are alsohooked up individually to the grid. If one looked at these as well the NDA’s performance would seem better. The government could easily ramp up its efforts as the UPA record shows.

It’s the last-mile connectivity that lags behind at the moment; 96.7 per cent villages are connected but 33 per cent households – around eight crore out of 24 crore (according to 2011 census) – do not have electricity. This too could be fixed with just a little more effort. In just three years (2011-14), Andhra Pradesh provided connections to roughly 11 lakh households. Rajasthan added five lakh over the same period. Thus, cumulatively all states put together would have added substantial numbers in the period from 2011-14. The RGVY scheme for BPL households alone added over 55 lakh households between 2011-14. By the time the NDA government took over, the target would have been reduced substantially. Merely working at the pace that AP has, could add roughly four crore households by 2019.

Non-financial interventions

Ensuring household connectivity could be relatively easy. The real test is twofold: One, to spread the transmission grid widely and efficiently from power producers to distributors by 2019. Two, the more difficult test to pass is to ensure that debt-ridden distributors bounce back to health and are able to set progressive tariffs that reflect the true cost of power. This is where politics could trump even a very determined government.

The current transmission system is insufficient to transfer power from surplus parts of the country to deficit parts. A former head of Central Electricity Regulatory Commission says, “States are not being able to buy cheaper power because of transmission bottlenecks.” With lack of grid connectivity, states get locked in to buying power from costly but linked up generators in the vicinity.

At the end of the 11th Plan, the inter-regional transmission lines capacity stood at 27,750 Mw. The target for the 12th Plan was 65,550 Mw. As on May 2015, 46,450 Mw was achieved, leaving a balance of 19,100 Mw for the remaining two years of 2015-17. But the NDA hopes to achieve a target of 27,400 Mw in these remaining two years. Then, in the 13th Plan period (2017-22), it plans to add another 52,800 Mw of inter-regional transmission lines to cater to power generation capacity of 4.6 lakh Mw. For this, the CEA estimates in its perspective plan that another Rs 2.6 lakh crore would be required in the 13th Plan. The power minister has suggested the transmission sector needs Rs 1 lakh crore, for now.

The perspective plan by CEA, which includes targets to be reached by 2022, was developed before the AP plan for 24/7 power was ready. So there is some mismatch in deadlines. The AP plan looks at creating the full transmission capacities by 2019. It estimates the inter-state transmission network strengthening, which includes building a green energy corridor, to cost about Rs 23,284 crore. The AP plan also notes the crucial role the center would have to play. It says “Apart from financial assistance, non-financial interventions, some as directions to public sector companies are requested from the government of India”.

Upward restructuring of tariffs

A greater financial commitment from the union government bundled with political heft would be needed to fix the most trenchant of problems the Indian power sector faces – the mounting losses of state distribution companies. The burgeoning fiscal burden leaves them with no choice but to manage their finances by curbing power purchase and limiting supply to consumers. Power minister Piyush Goyal writes, “Annual operating losses of distribution companies are at around Rs 70,000 crore every year, with accumulated losses of Rs 2,52,000 crore and total debt of Rs 3,04,000 crore.”

Goyal adds, “This situation persists largely due to rampant and unbridled power theft. The national average for Annual Technical & Commercial losses is around 25 per cent.” Competition in the distribution sector could bring down these losses but could increase the burden on state-owned companies unless their tariff structures are also freed.

Sorting out problems of distribution to provide 24×7 supply will depend on how well Prime Minister Narendra Modi can implement his mantra of ‘cooperative and competitive federalism’.

While issues of fuel supply, logistics, generation and transmission fall under the central government’s domain, distribution is under state governments. All the reforms proposed in the distribution sector such as open access, privatisation of distribution networks, tariff increases fall in the domain of the state. Rationalising tariffs is the toughest task. But it is must, as the former head of CERC explains: “Many states are simply not purchasing power. This is because of a complete mismatch between the cost of buying power and the tariff charged from the consumers.”

Any upward restructuring in tariffs is, quite naturally, a political minefield that few states can afford to tackle. Take the case of Rajasthan, where an analysis was carried out to look at distributors would fare under different tariff regimes. Only when tariffs were projected to increase at a high rate of 16 per cent for three years consecutively did the distributor cross the red line.

With the agricultural sector in deep stress, charging farmers for power at higher rates looks politically unfeasible. For the Union government to convince and help states move to a more rational tariff regime perhaps is the leap that could help NDA reach its 2019 deadline of power for all.

Read the original pieces of the three-part series in Business Standard here, here and here.