Large numbers of thermal and hydroelectric power generation companies are facing bankruptcy. Reason is that the demand for electricity is not growing as expected despite a booming Sensex. This riddle becomes clear when we consider the relative movements of the Sensex and the GDP growth rate.
The profits made by the Sensex companies are distributed to investors who are, generally speaking, “rich.” These people already have washing machines and air-conditioners installed in their houses. The additional income received by them does not, therefore, translate into much increase in demand of electricity. On the other hand, the owners and workers of the small businesses have a desire to buy washing machines and air-conditioners. But the decline in their incomes has prevented them from buying these equipment and led to a stagnation in the demand for electricity. Thus the overall demand of electricity is declining.
Another reason for less demand of electricity is that the global economy is moving from manufacturing to services. The services sector includes call centers, movie studios, tourist hotels and the like. One rupee of GDP produced in the manufacturing sector requires ten times the electricity than the same one rupee of GDP produced in the services sector. The shift to services is leading to less growth in electricity consumption.
The combined effect of killing of small businesses and shift to services is that the electricity consumption is not growing. It grew at 5.9 percent in April-May 2017. This growth declined to 3.1 percent in April-May 2018. This low growth in electricity consumption has led to the spot price of electricity remaining flat. According to data from the India Energy Exchange the average price of electricity in 2017-18 was Rs 3.26 per unit. The thermal projects are viable at a price of Rs 5 to 6 per unit and hydro projects are viable at Rs 7 to 8 per unit. Thus, they are no longer profitable and are going bankrupt.
The growth of solar power has not helped. The price of solar power in a recent auction in Madhya Pradesh was a meager Rs 1.58 per unit. The cost of thermal power is about Rs 5 per unit and hydropower is around Rs 8 per unit. Thus, purchasers prefer to buy power from the solar projects and not from thermal and hydro plants.
The troubles of the thermal power generation companies are, therefore, due to: (1) The killing of small businesses by demonetization and GST; (2) Shift from manufacturing to services; and (3) Due to low cost of solar power. The first and second are due to the misplaced policies of the NDA Government. The second is a structural issue that no government can solve. Thus the thermal and hydro companies will continue to go bankrupt.
How did we get here? The mischief was done by the Central Electricity Authority. This statutory body has published highly inflated forecasts of electricity demand for many years now. For 2003-04, for example, the CEA had forecast a demand of 467 Trillion units in the year 2000. The actual demand in 2003-04 was only 362 Trillion units. The CEA has encouraged the establishment of large numbers of thermal and hydro power projects by making such false inflated forecasts. I along with Professors V Ranganathan and Vinod Vyasulu had given a representation to CEA in 2010 pointing out the flaws in the methodology used in making its forecasts. You can see the representation here. The response of the CEA was to stop giving details of the methodology while continuing to publish inflated forecasts. The officers of the CEA make moolah only if new projects, especially hydro projects, are submitted for approval. In the pursuit of their moolah they have made exaggerated forecasts, and encouraged establishment of large numbers of thermal and hydro projects that are now going bankrupt.
The NDA Government will do well not to bail out these projects and, in the process, throw more good money after bad. We should let these projects die, and focus on the development of our services sector which requires less energy and solar power which is much cheaper and suitable for our natural resources. We do not have much coal, hydro power is killing both our environment and culture; but we have plenty of sunlight.