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Decimal Digest
09 May 2017

The Rationalization of subsidies in the power sector

The Indian government subsidizes the consumption of electricity, which leads to several distortions in the market. The average tariff per unit has consistently been lower than the average cost of supply per unit. This has led to heavy losses and accumulation of debt by the distribution companies. This forced the distribution companies to reduce the supply of electricity and also affected the qualitative aspects of electricity provision. Government intervention in the market by providing ill targeted subsidies has affected price discovery mechanisms of the market and in many cases promoted overuse of energy. Thus, the electricity demand and supply trends we see currently may not be the actual scenario but is a result of the subsidy regime. Distortion of information in the market leads to misallocation of capital and improper assessment about future demands and trends.

Subsidies should not flow from the balance sheet of the distribution companies as it distorts the market completely. Complete removal of subsidies is not a politically attractive option. So, there should be direct transfers by the government linked to Aadhar card which allow for price discovery to happen and stabilize demand and supply of electricity in a sustainable manner.

Apart from the current situation created by the subsidy regime, we have another situation at hand. Solar power is given preference when supply of power exceeds demand. The average Plant Load factor was 76% six years ago, and is now 58%. The thermal power plants were set up on the assumption of a 70% PLF(Plant load factor) and was financed by debt, but at 58% PLF it will be difficult to generate profits1. Since most of them are based on loans, interest must be paid even if the plant lies idle so a lower PLF as a result of increase in solar capacities seems to be the trend. Things will be worse for plants without power purchasing agreements from state governments.

The trend thereby threatens to create another set of NPA’s. The trend would have been welcome had it been the case that solar energy would overtake thermal power plants as a source of energy. But currently solar energy is intermittent and the storage solutions are not cheap, so a thermal and solar power mix will be required. The governments initiative to promote solar energy is a welcome move, but as with all government solutions it creates a new problem.

While people will cite that a lot of new storage technologies are being developed, but there is a time lag involved in developing and implementing the storage solution which is also a huge capital expenditure. The problem to be contended with is rationalizing the subsidy regime and reaching a proper solar – thermal mix of energy considering the impact of solar energy promotion on thermal power plants.



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