Time for TOUGH DECISIONS

With inefficiency prevailing in the power sector, from generation to distribution, bringing in changes is a big challenge
Noor Mohammad Delhi

Another term for the incumbent UPA government at the Centre is good news for the Indian power sector as it would entail continuity in the existing policy. And what is more, this time the Congress-led government can pursue policy making without worrying about Left's pressure unlike the first term. However, fixing the Indian power sector remains a tremendous challenge, with inefficiency pervading from generation to distribution. The lack of political will in state governments on implementation of critical reform measures to cut power losses and improve fiscal health of electricity boards complicates things. Apart from persuading states on reforms, the new government at the Centre will also have to take some tough policy decisions if it wants to clean up the mess in the Indian power sector.

For one, the government will need to remove key policy bottlenecks hampering private competition in equipment supply if India is to add power generation capacity at a pace commensurate with the growth in electricity requirement.

The success of opening up key infrastructure sectors like telecom and civil aviation to private competition in the past decade should be enough to allay any misgivings the government might have. The government's move to introduce competition in these sectors has brought tremendous benefits to consumers. Entry of private players has helped to improve service quality and lower prices in these sectors. But at the same time, service providers have also seen exponential growth in their revenues as falling prices helped them to attract new customers.

So, there does not seem to be any logic in keeping barriers high for private competition in the domestic power equipment sector when empirical experience tells that liberalisation can work wonders. It only raises the cost of electricity supply for consumers. This also adds to the input cost of the Indian industry and dents its competitiveness vis-à-vis overseas players.

If the government were to open the sector for private competition, public sector equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) will feel the pressure to improve its efficiency and lower prices. The company has already cut its price by five per cent to beat competition from Chinese manufacturers. "We are trying to wean away customers from Chinese competitors," BHEL Chairman K Ravi Kumar was quoted as saying. He added that BHEL's margins would not be affected as the company had 20 per cent cost advantage over its Chinese competitors.

BHEL was forced to start manufacturing of 600 MW sets after it lost some contracts to Chinese companies. Since then, the company has bagged many contracts for the supply of 600 MW plants. BHEL is offering this set at a price just 12 per cent higher compared to the 500 MW plant package. That translates into cost savings of eight per cent per MW capacity for developers choosing 600 MW plant package over 500 MW equipment. The reduced equipment cost means lower electricity tariff for the installed plant. This shows how consumers can benefit from reduction in power equipment costs.

Apart from one-time profits on supply of main plant package, BHEL also makes money throughout lifetime of power plants by supplying spares and maintenance work. So, it is clear that there is a lot of rope in prices charged by BHEL for equipment supply through negotiations. Since Central and state governments provide budgetary support to utilities, they will also benefit if power equipment prices come down.