With great power comes great…bills?

article image

With great power comes a great electricity bill. What was once a Spiderman-reference joke could soon become a reality for Indians. But the power crisis that the country is currently facing, is no joke. Certainly not for Indians facing power cuts in parts of the country that witnessed the hottest April in 122 years! But how does a country with excess power generating capacity even reach such a stage? 

For one thing, the coal shortage coming right at a time when demand for electricity is shooting up in step with mercury levels are all contributing factors. But that’s not the whole picture. And before you go blaming the pandemic, China’s zero-Covid policy or the Russia-Ukraine war, let’s take a step further back and look at what led us to this situation. 

What ails the power sector

India’s power sector can be broadly divided into three sub-sectors - power distribution companies (DISCOMS), power generating companies (GENCOS) and coal mining companies (80% of India’s power is coal-based). 

Here’s how it works - Coal India Ltd (CIL) supplies coal to thermal power plants. They in turn,  transmit electricity to DISCOMS who then supply power to end-users. And the money flows in the opposite direction starting with your electricity bill.

If that sounds simple enough, it’s not. A large part of the problem with India’s power sector has to do with the money flow. A majority of DISCOMS are government-owned. Governments use power subsidies such as ‘free power for the agricultural sector as a political tool. 

And if you’ve ever dealt with government offices, you know how long it can take to get things done. The result is as of May 2022, DISCOMS owe GENCOS a grand total of ₹1.22 lakh crore!    

Compounding of crises

Ultimately, all these unpaid dues get compounded at CIL’s end. The interrupted cash flows puts CIL in a position of inefficiency where it cannot revamp its ageGENCOSing infrastructure, cannot direct resources towards more exploration and even makes running certain coal mines unviable. As a result, the mining capacity of India’s largest coal mining firm has been severely curtailed, forcing more dependence on imported coal. 

And that brings us to the current coal crisis India is facing. The pandemic certainly had its part to play by accentuating the perpetual loss-making cycle of the power sector. And the cash crunch couldn’t have come at a worse time. The early summer has pushed electricity demand through the roof. And it's likely to only increase in the summer months of May-June. 

In comparison to demand, domestic coal supplies fall far short. At the same time, international coal prices have shot up on account of the Russia-Ukraine war. Imported coal prices nearly touched $380, forcing many imported coal-based power plants in the country to shut down. The government has ordered these GENCOS to restart operations in light of the power crisis, but they say they simply cannot until they get paid by DISCOMS. 

How does this impact you?

Now, economics 101 tells us that prices are shaped by demand and supply. One solution is to allow the free market to determine consumer power prices. The government has allowed a few GENCOS to raise power tariffs but this remains subsidised. The burden is likely to fall on affluent urban consumers. But again, that’s not the whole picture. The power sector is central to the economy and any changes are bound to have a wider impact. 

To mitigate the budgetary impact of power subsidies, the government pulls a little trick called cross-subsidising. It charges a higher rate to businesses and factories. A price increase here is likely to compound the strain businesses are already experiencing from increasing raw material and input costs. But power cost inflation is already seeping into consumer prices. 

Industrial hubs across the country are grappling with power shortages.. This means factories cannot produce goods at capacity leading to supply shortages (read price hikes). Some businesses use backup diesel generators but end up paying up to 4x the cost per unit of power. A cost that will likely be passed on to consumers. 

The coal shortage is likely to get worse as we move into the monsoon season because rain tends to disrupt mining activity. On the external side, global volatility is showing no signs of letting up anytime soon. Meaning imported coal prices could remain elevated. And that means for the foreseeable future, you might have to deal with a great electricity bill only minus the great power.

Related Posts