Not Enough Takers
The last year has seen a somewhat strange series of news
items. A country that has for years known only power shortages and load
shedding is witnessing reports about many thermal power plants idling because
there is no demand for the electricity they can generate. For example, a report
in Indian Express dated 24 June 2015 talked about “57 thermal
power units across the country that are shut down due to lack of demand despite
the onset of peak summer”.
Apparently, the reason is that the electricity distribution companies – or DISCOMs – do not want to sign long term power purchase agreements (PPAs) with power generation companies, as their (DISCOMs’) financial position is under huge stress. As DISCOMs are forced to supply power at a price less than cost to agriculturists and domestic consumers, they face losses. These are only partly covered by subsidies from the government and cross-subsidy from customers who are charged higher than cost. Since DISCOMs are not buying power, there is less off-take, and capacity running into several thousand megawatts is being forced to idle.
A July 2015 report[1]
by CRISIL Ratings, a credit rating agency, says that at least 3000 MW capacity
is idle because of no demand or absence of PPA, and indicates that if PPAs are
not signed by 2016, 15% of private capacity or 10,000 MW would be exposed to a
similar risk. More recent news reports indicate even higher capacities may be
idle because of lack of demand, in spite of improved supply of domestic coal
and falling prices of imported coal. Some time back, coal shortages were also
among the factors responsible for power plants not being able to generate power, but power plants
continue to generate less in spite of these factoring being tempered. Another
indication of the demand being less is the sharp fall in price of electricity
in the short-term market on the power exchanges.
Need Exists, But Not Demand
This trend raises an important question. Let us leave aside
consumers like industries - who are charged power at higher-than-cost prices
and the issue of why the DISCOMs are not buying all this idle power to supply
to them. May be their demand is fully satisfied, or may be, as is being
discussed, the industrial demand itself is not growing as expected. However,
there certainly exists huge latent demand in the agriculture and domestic
categories, given the fact that several hundred million people do not yet have any
access to electricity, and millions more have poor quality, irregular supply. DISCOMs
are reluctant to buy power at higher cost and supply it to these consumers at
lower cost. On the other hand, these consumers appear to be unable or unwilling
to pay higher costs for electricity, for otherwise the DISCOMs would have been
happy to supply to them. Thus, there is ‘surplus’ electricity, but it’s too
costly for those who need it. So, there is a huge need for electricity, but not
a proportionate or equivalent market. Or, in other words, there is a need, but
not demand – where ‘demand’ is ‘need’, backed by willingness and ability to
purchase, expressed on the market.
Some Food For Thought
This reminds one of a very similar situation, in a sector
equally, or possibly more critical: food. It may be recollected that about a
decade back, newspapers were full of stories about how godowns were overflowing
with foodgrains. There were stories of grains needing to be stacked in open
grounds as there was little space anywhere. There was huge production of
foodgrains – India is ‘self-sufficient’ since some time – but somehow, people
were not able to buy these foodgrains as they could not afford the cost. It wasn’t
anybody’s case that at that time, foodgrains were rotting in the godowns
because people’s cupboards and stomachs were full. Far from it, millions were
going hungry then (and even now).
Our analysis of the situation at that time[2]
showed that the root causes of this situation included some fundamental systemic
elements. Primary among them was the fact that the approach adopted to increase
food grain production was inherently a high cost one. This was of course, the
green revolution model, with high external inputs, which increasingly needed to
be purchased. At the same time, the model was based on centralising, or at
least concentrating, high production on a limited land area – with the result
that fewer farmers and farm workers shared the profits, or benefitted from
employment. This meant less purchasing power in the hands of large number of
people. Costly production and less purchasing power was the deadly combination
that led to overflowing godowns and a hungry population. Such a situation has persisted
since then in various forms even if not manifesting so dramatically.
For example, in a paper published in 2010, the then Chief
Economic Advisor to Government of India, Kaushik Basu commented on the situation of high food prices combined with
the huge food stocks with the Government. He said[3]:
“…in December, 2009, with
food-price inflation above 20%, it was decided to release wheat. Ever careful
not to cut deeper into the government’s coffers, it was decided to set the price
of wheat above the Minimum Support Price (MSP) at which the Food Corporation of
India (FCI) had acquired the wheat, with some add ons for storage and
transportation. There are no surprises in the fact that there was no demand for
the wheat thus put on sale; the sales in Delhi were actually zero. Evidently,
the strategy used for releasing foodgrains has scope for improvement.”
In other words, the need for food was there, but there were
no buyers for it as the price was too high.
Common Threads
Can we draw parallels between what happened in the food
sector with what is happening in the power sector today? A common question is –
are these a transient phenomenon, an unusual occurrence as the economy moves
from a low production, scarcity dominated state to a high production, high
consumption state? Are these a result of a temporary imbalance between demand
and supply? Or do these represent a more fundamental attribute? Is it that in
attempting to meet the scarcity (of food
or electricity), we are pushing up production, but the very process adopted for
increasing production is putting the commodity out of hands of people as it is
inherently high cost? And is the process of production itself concentrating and
cutting down employment opportunities, resulting in lesser purchasing power in
the hands of the masses?
One very interesting example that vividly extends the
analogy of overflowing godowns and rotting foodgrains to the power sector is
from Gujarat. The Gujarat State Electricity Corporation (GSEC) had recently filed
a petition with the Gujarat State Electricity Regulatory Commission, requesting
that the Commission order the central procurement agency, Gujarat Urja Vikas
Nigam to mandatorily buy power from its (GSEC’s) coal based generating stations.
The Nigam was not buying this power
because it was more expensive than other, more modern, coal based plants. While
the merits of the case are not relevant for us here, what is interesting is
that the Gujarat State Electricity Corporation states that it is forced to
partially shut down its plant as the power is not being purchased, and laments
that[4]:
“Due to the backing down/Reserved Shut Down of the generating
stations, huge stocks of coal have accumulated without much use…
“The coal management is becoming extremely difficult and
critical for the petitioner, as the coal looses (sic) its heating value with
time due to oxidation and spontaneous coal burning which cannot be quantified
or measurable”.
In other
words, an accumulating pile of coal that is rotting!
In Conclusion
I am not an expert in food production and food security
issues, nor in power generation and distribution. But as India continues to
face challenges in providing food and energy to millions of people, a
layperson’s instinct makes me feel that it may well be worth exploring these rather
strange similarities in two very different sectors.
---------
(I would like to thank Ashwini Chitnis and Ann Josey for
some very interesting discussions on this topic, during the course of which they
provided many insights and lot of useful information, particularly on the power
sector related sections.)
A follow up blog post, titled “Coal Assets at Risk of BeingStranded?”, takes off from some points in this post.
[1] Crisil
Insight: Current Worries; July 2015, by Crisil Ratings.
[2] This
was a part of our (Manthan Adhyayan Kendra) study of agriculture in Punjab and Haryana, which in turn was a component of
our study of the impacts of the Bhakra Nangal dam and irrigation project. The
study was published in 2005 under the title Unravelling Bhakra.
[3] Kaushik
Basu (2010): The Economics of Foodgrain Management in India, Ministry of
Finance, Government of India, new Delhi. Downloaded from http://finmin.nic.in/workingpaper/Foodgrain.pdf
[4] Order
of the Gujarat State Electricity Regulatory Commission, dated 4.1.2014, in
Petition 1343 of 2013.
