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Explained: why the government had to inject money into the power sector

by Admin

Author – Anil Sasi
| New Delhi |

Published : 17. May 2020. 18:53:32

Electricity Stimulus Plan, Nirmala Sataraman, Government Cowid, Discotheques, Gencos Indian Express, Problems in the Indian Power Sector, Government Cowid, declares Express, Indian Express In India, electricity prices for certain segments such as agriculture and households are subsidised by industry and commerce. (File/Reuter)

Part of the package announced on Wednesday (13 May) by Finance Minister Nirmala Sitaraman was a cash injection of Rs90,000 for an electricity company (or discos). This measure is intended to help discotheques to offset their contributions with the help of Gencos (or power generation companies), which in turn can offset their unpaid contributions from suppliers such as coal mining companies, thus alleviating some of the working capital problems of Coal India Ltd and the contract miners.

Provided that the Centre guarantees loans from public utilities which finance the electricity sector, such as PFC and REC Ltd.


The main cause is the poor financial situation and the ability of most government records to generate revenue. This is despite a number of measures, including a programme called UDAY, introduced in 2015 to solve the problems of a sector where the top (power generation) attracts investment while the bottom (distribution) flows like a sieve.

To understand how the sector works, we have to imagine a three-step process.

Step one: Electricity is generated in thermal, hydroelectric or renewable power plants operated by public companies such as NTPC Ltd, NHPC Ltd or private companies (also known as independent power producers or IPPs) such as Tata Power, Adani Power or renewable energy companies such as ReNew Power or Greenko.

Step two: The generated electricity then passes through a complex system of electricity grids consisting of substations, transformers and transmission lines connecting producers and end users of electricity. The transmission segment is mainly dominated by public companies, such as the Power System, which manages the grid. Similarly, each State has a public transmission company (PTE) and private transmission companies responsible for setting up national transmission projects. Companies such as the Power System Operation Corporation (POSOCO) and national, regional and national transmission centres (NLDC, RLDC, SLDC) work together to ensure safety and balance on the grid.

The entire electricity network consists of hundreds of thousands of kilometres of high-voltage lines and millions of kilometres of low-voltage lines with distribution transformers that connect thousands of power stations to millions of electricity consumers across the country.

Step three: This last kilometre is where the discos are built, most of which are run by state governments. However, in cities such as Delhi, Mumbai, Ahmedabad and Calcutta, the distribution company is wholly or partly privately owned.

Why is there a problem?

Under Power Purchase and Sale Agreements (PSAs), discotheques purchase electricity from generation companies and then supply it to their customers (in their distribution area). The main problem in the electricity sector at present is the continuing problem of the poor financial situation of the state diskettes.

This has affected their ability to purchase energy for supply and to invest in improving their distribution infrastructure. This affects the quality of electricity consumers.

There are two fundamental problems.

Firstly, in India, electricity prices for certain segments such as agriculture and the category of households (what we consume at home) are subsidised by industry (factories) and the commercial sector (shops, shopping centres). It affects the competitiveness of the industry. Although the government has initiated a process of gradually reducing the degree of cross-subsidisation, this is easier said than done, because states are reluctant to increase tariffs for politically sensitive voters, such as farmers. As a result, these categories are still subsidised by the industry.

Secondly, there is the issue of AT&C (Total Transmission and Distribution Loss), a technical term that refers to the difference between the cost of the electricity a reader receives from the generation company, the bills it bills, and the final completion of the recovery process by end-users like you and me.

Although there are regulators such as the National Regulatory Commission (NRC) who are primarily responsible for ensuring that tariffs are regularly reviewed and that the floppy disk generates money for the electricity it supplies to each consumer, this has not been as successful at local level. As a result, readers are constantly running out of money, even to pay those who supply them with electricity, creating a cascading effect in the value chain.

For example, the intervention announced last week aims to provide temporary financing to discos through the MFC and the RECs to enable them to pay their bills. In return, the burden on production and transport companies at the top of the value chain is reduced and they can in turn pay their suppliers, such as Coal India Ltd or GAIL (coal and gas suppliers) and L&T or BHEL (equipment, contractors).

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