India’s power sector has the potential to generate profits by resolving several cost inefficiencies, instead of losing $9 billion each year, noted a research paper by Bank of America Merrill Lynch Global Research that examined the $116 billion power sector value chain in the world’s sixth-largest economy.
Power theft is the largest contributor to annual losses, representing $6 billion of the $9 billion total, the report’s analysts, Amish Shah and Sriharsh Singh, stated. This phenomenon, however, is concentrated in just five of India’s 29 states, with the former accounting for 45 percent of total power theft.
“Addressing power theft within these [five] states could generate significant savings,” they noted.
Cost savings of an additional $4 billion could be achieved if coal mining is made more efficient. According to the report, domestic coal in India is primarily sourced from Coal India and Singareni Collieries, which have an average cash production cost of Rs 1,050/ton ($16.1, €13.2). If mined efficiently, those costs could be slashed in half “as has been demonstrated by private sector miners”.
BofAML’s analysts also pointed to the discrepancies in tariff subsidisation. While power tariffs for industrial and commercial consumers are high compared to other countries in the region, the rates paid by agricultural and residential consumers – who account for 50 percent of power consumption – are extremely low, averaging Rs 3.1/kWh compared to a cost of Rs 6.3/kWh.
“While raising tariffs for these consumers is an option – it remains unlikely given upcoming elections/political pressure,” the analysts noted. But, they also warned against raising tariffs for commercial/industrial consumers which would make businesses uncompetitive.
One area that could and should be addressed, according to the analysis, is the massive overstaffing prevalent at most power entities. As a result, operations and maintenance and administrative costs account for 54 percent of total costs within the sector.
The Power Grid Corporation of India, which BofAML’s analysts classify as an “efficient entity”, transmits roughly 50 percent of the total power generated in India. Its O&M and administrative costs total $2 billion. However, the other state-owned transmission utilities that transmit the remaining 50 percent have a combined $17 billion of O&M and other costs.
The analysis also pointed out that the financial sector has $178 billion of loan exposure to the power sector. Of this, banks contribute 53 percent, followed by non-banking financial corporations at 35 percent, while the balance is provided by state governments.
Importantly, stressed assets account for 30 percent ($53 billion) of total loans, and are primarily from the power generation sector. The analysts added that most of the underutilisation is faced by private sector generators.
BofAML expects 71GW of private sector coal-fired projects to face bankruptcy issues as India has already oversupply of power generation and the structural power demand is unlikely to materialise.
“Unless cost inefficiencies within the value chain are resolved, we don’t expect structural power demand to pick up,” said the analysts, adding that they expect slow progress and it would result in a continued oversupply of power generation capacity in India if the structural demand does not pick up.