Working out power economics

Working out power economics
Yoginder K. Alagh

Payments to power producers are in the news again. There is an amazing lack of understanding of competition and the working of markets in a country which seems to be experimenting with ``reforms'' for over a decade. A commentator reviled ``abuse of power'' and asked for rebellion against electricity boards and the public sector, rather than ``activism'' on ``foreign'' power producers. She didn't tell us, that the critics of competitive power pricing were not only the foreign power producers but also the Indian public sector power companies. Monopolies and large companies like fall cost pricing which compensates them for what they do and dislike competition, whether in the public or private sector.

A well-known `economics' commentator told us that if you hire a taxi on a daily basis you have to pay its charges whether you run it or not. But if cheaper taxis are available on short haul basis, you will be scratching your head on a contract which you signed to hire a taxi on a daily basis when you don't want to run it. The laws of the market are not only good for the goose, but also have to hold for the gander, as the late A.C. Pigou taught us and market economics gurus like Mumbai's D.T. Lakdawala practised.

Before I am lynched, let me at the outset say that I am a firm believer that a large open democracy like India has to honour any sovereign contract that it signs, even if it later begins to question it. But there cannot be any question that counter guaranteed projects with full cost prices make lousy economics. The reason why the so called fast track projects have in many cases not seen the light of day and other bigger projects which were promoted much later saw financial closure and are now in operation, is that finally it becomes very difficult for a finance ministry official to conscientiously sign an a document in which he commits to pay money to a large company to not produce power. The argument that the policy is weak, but it was needed in the initial phase is empirically incorrect, because it did not work, since most of these projects never got off the ground. Dr Manmohan Singh was generous enough to admit that the power policy of the early nineties was a mistake, even though privatisation wasnot.

It is this realisation that led to a lot of reform in the late nineties in power pricing which lobbies like to sweep under the carpet. The first was the ``availability tariff'', the origin of which goes back to 1996. As power minister in May 1996, I inherited an energy crisis with a low growth rate of 3 per cent and a high energy deficit. The Accelerated Power Development Programme and a rehabilitation programme was our response, but also since there were large intergrid supply demand imbalances, a programme of intergrid transfer was worked out. Powergrid had completed some large HDVC lines, and a back-to-back arrangement would make up to 2,000 MWs of excess capacity available to the power starved southern region. While the technical arrangements were worked out, we found to our horror that the economics were all wrong. Some power plants were going to charge around six rupees per unit since they worked out overheads on their low PLF. It is then that a World Bank proposal of the available tariff wasresurrected, since it forced the most inefficient plants to back down first.

Does this mean that Dabhol will not be given its full cost tariff? Of course not since contracts have to be adhered to. But payments for ``deemed generation'', or for not producing power, will be delayed, since the government accountant who will sign such cheques quickly, is not born. But if the IPPs who have such fixed price contracts, believe in and follow the market and supply power for interregional grids at the availability tariff, the payment will be quick.

On a more general plane, the Central Electricity Regulatory Bill I had the distinction of moving in Parliament and the Transmission Bill which we saw through the Parliamentary Standing committee, all emphasise efficiency principles. The Central Electricity Regulatory Commission has in its tariff policy discussion paper advocated a long range marginal cost system of pricing, which works on an efficiency and not full cost basis. The sooner large power companies in the public and private sector start working with these percepts, the better it will be. Anyway this is the only way to move to a real market for electricity in India. It is wrong to say that the farmer does not pay for electricity in India. Electricity charges for irrigation have increased by 89 per cent in the nineties according to studies. Also the farmer does not get electricity and pays through his nose for diesel. A lot of rural power is, in fact, pilferage by industry and urbanising areas. But, all in all, efficiency pricing will be better,even while the system reforms itself.

Counter guaranteed projects with full cost prices make lousy economics