Time to pack a mean power sector punch

A clutch of states with unpaid dues to power plants have been barred from buying and selling power on energy exchanges as new rules with escalating penalties kick in. India's power sector has been hobbled by a persistent payment crisis that feeds on pre-election promises of free or cheap electricity and unchecked theft by vote banks. If 'freebies' have a posterboy, along with free irrigation water, it's subsidised power. The Centre has repeatedly tried to reform the power sector through bailouts linked to improving the health of power distribution companies and on undertakings by states that they will rationalise the price of electricity. A previous effort involving state governments taking over the debts of distribution companies failed as subsidies ballooned. In the middle of his government's third attempt to de-stress the sector, Narendra Modi last month urged states to clear ₹2.5 lakh crore of money that is stuck in unpaid bills and subsidies.

The latest package on offer to states has tied relief to distribution companies meeting financial and operational metrics. The aim is to close the gap between the cost of electricity generation and its price, and a reduction in transmission and distribution (T&D) losses. This is accompanied by an automatic system of graded penalties for delinquency, the initial round of which was triggered this week as loss of access to the spot market for electricity. These are followed up with reduced access to longer-term power purchase contracts.

States must heed the repeated call to reform electricity pricing without which India is unlikely to keep up its economic growth momentum. Additional investment in generation capacity is tied to price realisation by private producers, which are facing some of the biggest dues in the sector. Bills to renewable energy (RE) firms are mounting as well. The need for discipline becomes more acute when generation companies are required to import coal to meet a surge in power demand, like the ones during the heatwave witnessed this summer.