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June 26, 2020Imperatives for Power Sector Reforms in Tamil Nadu
In an economy, sustained economic growth is achieved through the robustness of factor market efficiency, sound public policies, financial institutions, and its ability to lend worthy projects and core infrastructure facilities serving around the clock. More importantly, the power sector plays as a lubricant paving increased productivity in the economy, be it agriculture, manufacturing or services.
A study by TERI institute (2017–2030) found that in Tamil Nadu economy “not only did total electricity consumption have high correlation with total GSDP—industrial and agricultural GSDP—but consumption from different sectors was also correlated with the GSDP of the respective sector.” Tamil Nadu has been a pioneering State in the country providing power to all sectors. It achieved much earlier a rank among States with 100 per cent village electrification, besides being within the top 10 States with the highest per capita power consumption in the country.
To revive the Indian economy, which is hard hit by the COVID-19 pandemic, the Union Government has announced a slew of economic packages with several mutations. As part of the package, the Union Finance Ministry has sought few reforms by the State governments in the area of food subsidies, ease of doing business, improving urban local bodies’ revenues and power sector to get additional borrowings. The State finances are already stressed with huge spending beyond revenues and expect to borrow more.
The Government of Tamil Nadu (in a letter to the Prime Minister dated on May 18, 2020) criticised the reform measures urged by the Centre to be taken in the power sector stating that “to attach needlessly demanding conditionalities to the additional borrowing requirements appears to be unreasonable.” “Imposing needlessly onerous conditions on borrowings will constrain the State Governments in finding funds to meet essential needs.”
Further, the State criticised “aggressively pushing a reform agenda on which a consensus is yet to be developed…” and it hit hard to express that “the State Government has already undertaken the reforms without expecting any financial assistance, there are some areas, most specifically in the area of power distribution reforms, which are politically sensitive.” This is one area where the political mandates were time and again mutated towards alternative options, but did not touch the structural reforms. But why is the State, which is top-ranked in the overall governance index in the country, afraid to implement structural reforms?
The arguments on power sector reforms, which are politically sensitive in the State, also seem to be linked to vested interests. The simple truth is that the ruling political party in Tamil Nadu does not have the political will to carry out reforms by taking into account the importance of power sector sustainability. Even the former Chief Minister J Jayalalithaa had lacked the political will to do reforms in the power sector.
With the State Assembly Elections due next year in May, the power sector reforms and the proposed changes in the Electricity Act are beyond the priority area of the State government. However, the welfare polity pursued for decades by the Dravidian parties by providing free power to the rich, crony farmers and industries and other freebies is not a sustainable model for long term, both for the power sector as well as the health of the State economy.
The Union Ministry of Power had launched the UDAY Scheme to improve efficiency in power production and distribution. On January 7, 2017, Tamil Nadu joined as the 21st State under the UDAY scheme by signing an MoU with the Union Government to bring reforms in the power sector for the long-term sustainability of the economy.
Keeping in view of the above aspects, it would be interesting to look at the status of the power sector in Tamil Nadu. As per the Central Electricity Authority’s monthly report for April 2020 (the latest month available), the total installed capacity of power (in MW) of 21.8 per cent is with the State government, 59.2 per cent is with the private sector and 19 per cent is with the Union Government. The State’s share of installed capacity is 8.9 per cent in the country and its share in the southern region is 29.3 per cent. The private sector share is three times that of the State’s capacity. The State has the largest wind and solar power generation capacity in the country.
State’s Aggregate Technical and Commercial Loss (AT& CL) is 13.49 per cent, which is less than the all India level of 18.93 per cent. But the State’s AT&CL losses are higher compared to the States like Gujarat (5.45 per cent), Kerala (9.99 per cent), Andhra Pradesh (10.9 per cent) and Telangana (10.9 per cent), to mention a few.
In recent years, there have been improvements in the power production and distribution efficiency in the State. But the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) has continued to make losses for several years and is under severe financial constraints. TANGEDCO incurred a loss of Rs 40,000 crore between 2014–15 and 2018–19. It gets subsidies of around Rs 9200 crore from the State government to provide free power to farmers and 100 units free power to households, among others. In 2018–19, the power sector subsidy was the second largest with 21.1 per cent share after food subsidy which was 36.8 per cent.
Moreover, power producers’ (including the private sector) outstanding dues to TANGEDCO in the State have increased to over Rs 78,000 crore in August 2019. The State’s overall outstanding payments to power generators amounted to Rs 132.97 billion as of January 2020. Keeping in view of the input costs and AT&CL losses, the power tariffs were not raised periodically to make power production and distribution systems more strong to support the State economy. The power tariff was raised last time in 2014 and still there was a loss of Rs 4,400 crore in that year alone and this was partly due to the staff salary hike by the Pay Commission, incurring an additional cost of Rs 1300 crore. TANGEDCO has a manpower of 86,997. Tamil Nadu has 28.8 million electricity consumers, of which 2.14 million are farmers who get free electricity.
It is not just the free power supply to farmers and households that causes loss to TANGEDCO. According to Vikram Kapur, the then CMD, TANGEDCO, “the concessions the industry has been enjoying historically” also need to be added to it and this has to be revised “in order to make theutility healthy which is essential for the benefit of all stakeholders.” He also opined that the industry legacy concessions such as banking of energy, open access and group captive status were all hugely contributing to the loss-making TANGEDCO (The Business Line, October 17, 2019).
Further, the strange thing is that the industry people who claim group captive power status just do not allow the authority to verify them. Even if the authority tries to verify them, they go to the court and get a stay to prolong the litigation for years. The court procedure becomes another hurdle to the already stressed power sector. But why do the industry people go to court? If the authorities verify the people who claim group captive status, according to Vikram Kapur, “most of them will not be eligible for concessions such as waiver of cross-subsidy surcharge, which is a substantial portion per unit.”
To make the State power sector commercially viable and more sustainable for all stakeholders, the concessions enjoyed by the industry have to be revised on priority. Otherwise, TANGEDCO would become bankrupt and cause problems for all customers. Therefore, the State must take up reforms in the power sector and strengthen them for sustaining an efficient and competitive economy.
Views expressed are personal and need not reflect or represent the views of Centre for Public Policy Research.
Chandrasekaran Balakrishnan is Research Fellow (Urban Eco-system and Skill Development) with CPPR. His areas of research interest are economics of education, vocational education and skills development, economic reforms, liberal vision for India, water management, regional development, and city development. Chandrasekaran has an MA in Economics (University of Madras) and an MPhil in Social Sciences (Devi Ahilya Vishwavidyalaya University, Indore).
