Business Today

A Catch-22 Situation for the Power Sector

The ongoing coal auctions have been hugely successful so far, but raise an interesting question. What is our strategy for the power sector?
Hemant Kanoria | Print Edition: April 12, 2015

Hemant Kanoria, CMD, Srei Infrastructure Finance
Hemant Kanoria, CMD, Srei Infrastructure Finance
The ongoing coal auctions have been hugely successful so far, but raise an interesting question. What is our strategy for the power sector? That is because no decision on coal can be seen independent of its impact on our power sector. And, therefore, to understand the impact of the coal auctions, which has already raised Rs 2.01 lakh crore from 32 blocks, we need to understand what kind of spin-off effect it will have on the power sector.

While many new power plants have come up in the last few years, several have been existing for many years. Several thousands of crores have been invested in coal-based power plants. Banks, public and private utilities and institutions have high stakes in them.

Electricity is the lifeline of an economy. It is an essential need for the common man in daily life - agriculture is dependent on it, the services sector could come to a standstill without it, and manufacturing cannot happen without power.

If the price of electricity is high, it will fuel inflation, make things expensive; will render agriculture uneconomical; create uncompetitiveness for the services sector; and manufacturing will be unviable.

Therefore, it is important to ensure that the power sector can generate, transmit and distribute electricity efficiently and economically. It is not rocket science, but needs appropriate planning.

At present, however, there seems to be some confusion. It apparently seems that, as a country, we have got into a vicious cycle, where profit maximisation by auctioning natural resources is the end game. Days are not far when, may be, even water will be auctioned. This is the philosophy of free markets. But free markets need to take into account the development stage of a nation as well.

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While we want to create an environment where the aam aadmi can live comfortably, we seem to be getting ourselves into a situation where cost of living will actually go up. While we want the Prime Minister's 'Make in India' vision to be a grand success, the input costs are more likely to go up, which can jeopardise the future of the dream project. The trillion dollar question, therefore, is whether the auction route is aligned to the growth path envisioned for India?

We are a country with 300 billion tonnes of coal reserves, so our clear cut objective should be to produce cheapest power in the world; so that our input cost for agriculture, services and manufacturing is one of the lowest. However, we seem to have made our thinking process so complex that we have actually made it difficult for ourselves to achieve this simple objective.

Auctioning of coal mines is one step that can push up production cost across the economy. While we may be basking in the billions of dollars that we would be making out of the auction, the country may be heading for difficult days as electricity tariff is bound to rise. That, in turn, may make electricity for all a distant goal because the very poor will simply not be able to bear the cost of power. And, it could make industry uncompetitive if they pay more for their power consumption than their rivals in other countries.

The auction was bound to be a big success because of a simple issue. The bidders were caught in a Catch-22 situation because they have already made substantial investments in building power plants and need to keep them operational, and, for that, they need coal. So, they would have to pay whatever it takes, oblivious of the final cost of power, which they will eventually pass on to the consumer.

The simple answer to this seemingly complicated problem would have been to increase coal production and allocate coal to user industries in a transparent manner and not by maximising profits out of the auctions.

I only hope and pray that the government takes logical and transparent steps so that our country does not slip into an unviable and unaffordable economy. It is not late for taking corrective actions for creating an affordable and infrastructurally-strong Bharat.

(Hemant Kanoria is chairman and managing director, Srei Infrastructure Finance)

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