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“There is a strong need to reduce the losses”

Issue Date - 24/11/2011
B&E: The financial health of the power sector is under scrutiny, given the rising stress in the sector.  What kind of policy actions are needed to reform this sector?

H.D. Khunteta (HDK) Basically the regulators’ job has become more important because it takes all the inputs into consideration — the cost of purchase of power, T&D expenses, interest payments and the tariffs fixations. And it should also emphasize on the SEBs and discoms to reduce the losses and improve efficiency. Over the last 7-8 years, many states have not increased the tariffs. Now the Shunglu Committee is recommending that the role of the regulator is to revise the tariffs every year. At least the shortfall in the average revenue realisation (ARR) and average cost of supply (ACS) may reduce and if the government wants to provide power at a subsidized rate then it should make the payment in advance so that SEBs & discoms can meet their obligations on account of purchase of power and payment of interest. In the present situation, the losses are Rs.600-700 billion, excluding the subsidy but if we include subsidy then the losses are lower around Rs.400 billion. So some steps are required to reduce the gap between ARR and ACS and to improve the financial position of the discoms.

B&E: Do you feel that the initial promise of the power sector is coming off?

HDK: On a long-term basis, the future of power sector appears to be good because nobody can live without power and it is necessary for everybody whether it is industry, consumer or agriculture. But in the short-term problems are there like fuel supply, financial health of SEBs and the efficeincy needed to improve their operations. The losses are more than 30% and there is a strong need to reduce the losses to upto 15% at least.

B&E: As a power sector lender, is your exposure to the sector safe?

HDK: As far as REC is concerned, several steps are being taken to mitigate the risk. As on date NPAs of REC is only Rs. 2.7 billion on the loan book of around Rs.880 billion, so it is very negligible.

B&E: What are the immediate issues impacting the health of the power sector?

HDK: In the coming months, the biggest issue is of coal supply and the second is the discoms’ financial position, which needs to be taken care of. If the coal issue is being sorted out or in case of increase in the cost of generation which is possible because of the import of coal, it will actually increase the input cost and definitely it will increase the cost of generation of power. States purchase power on average cost of generation of Rs.3.50 paise or Rs.4.23 paise, so adding the other expenses will certainly increase the average cost of power. But if discoms are able to improve their efficeincy, then the issue will not be there.

B&E: REC in recent times has shifted its focus to funding power projects. How important is this shift? 

HDK: We have traditionally been funding for development of the country’s transmission and distribution system with focus on rural electrification and micro generation projects up to 25MW. The break for us to fund power projects came in 2002. Given the constraints in funds requirement for the sector, the Ministry of Power expanded the mandate of REC to include generation projects as well and that too without any cap on size and location.



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