This is the first article in a series of two articles on the electricity situation in Maharashtra.
In 2003, MSEB had projected that in 2013, Maharashtra would have a demand of 24,000 MW. They had also projected that Maharashtra would generate 30,000 MW and would therefore be 6,000 MW in surplus. The actual situation in 2013 turned out to be vastly different; Maharashtra had a demand of around 18,000 MW while the generation was only around 15,000 MW, which meant that the state had a deficit of about 3,000 MW. The situation isn’t a whole lot different a couple of years later in 2015.
The generation capacity has not grown as expected and is only half of the projected capacity. That is obviously a cause for concern. But the demand is much less than predicted and that is more disturbing and disheartening because it means that the existing industries didn’t grow as expected and the number of new industries that came to Maharashtra wasn’t anywhere near the expectations; on the contrary, Maharashtra has lost many industries to Gujarat and Karnataka. The gradual growth in demand correlates strongly with the gradual growth in the population rather than a sharp growth in industrial consumption.
So what should be done so that industries get a reliable power supply at an affordable rate? If Maharashtra is able to provide that to them, then the existing industries will be able to flourish and therefore won’t think of going to other states, and new industries will come to Maharashtra. In other words, what should be done so that Make in Maharashtra becomes a grand success?
Before I proceed with the rest of the article, I would like to make a disclaimer. I have tried my very best to be accurate and precise in everything, especially when it comes to stating numbers. But if the sources that I have referred to are inaccurate, there could be inaccuracies in my article as well; sometimes, it is difficult to get accurate information from public websites. Having said that, even if all my numbers are off by a little bit, the recommendations that I have made are all still valid, and might require only minor tweaking, if at all.
Before we try and understand what can be done what can be done to ensure that Make in Maharashtra is successful, it is important to understand what the present situation is.
- Maharashtra’s electricity requirement, as already stated above, is about 18,000 MW whereas its installed capacity is about 15,000 MW. The peak deficit is around 15% whereas the energy deficit is around 12%.
- Even in today’s day and age, there are around 1.5 crore people in Maharashtra who don’t have access to electricity. That’s almost 10% of Maharashtra’s population! While most of these people are in the rural areas, some of them are not more than 20 kms from Mumbai, the financial capital of India! Unbelievable but true. If you accept that all these people should have access to electricity, then the actual deficits are much higher.
- Although most parts of Maharashtra do have access to electricity, it is not 100% reliable. There are power cuts, even in a city like Pune, which is second in importance only to Mumbai; other cities have more frequent and more prolonged power cuts. In rural areas, there are power cuts almost every single day and they can last for many hours, which makes doing anything reliably an almost impossibility.
o A side-effect of this is that industries rely on diesel generator (DG) sets for reliable power.
o However, as their name suggests, these DG sets burn diesel to produce electricity. Therefore, they cause a pollution and put a strain on the state’s and country’s economy.
o Why so? Because diesel has to be imported and is becoming more expensive with every passing day since it is a scarce resource. The current dip in rates is an anomaly of sorts. In the longer run, oil will become expensive. Since it is a scarce resource.
- Mumbai gets the most reliably electricity supply in Maharashtra, and the entire country for that matter. But the rates are sky high.
o Electricity for advertisements and hoardings is close to Rs.20 per unit, which is high even when compared to the rates in most Western countries!
o Commercial consumers pay anywhere from Rs.12 to Rs.15 per unit.
o Industrial consumers pay Rs.8 to Rs.10.
o Although most residential consumers pay close to Rs.5 per unit, those who consume a lot of electricity pay anywhere from Rs.7 to Rs.10 per unit.
- All the renewable energy companies are finding the going very tough.
o Most of the action in the renewable energy space in Maharashtra has been in the area of wind energy. But the rates for wind energy have plummeted.
o MSEB has to buy the energy produced by the wind energy companies but they don’t like to do that since most of it is generated during the night, when there isn’t much demand.
o Solar PV has the potential to take care of the daytime consumption of industrial and commercial consumers but nothing much is happening on that front barring a few big projects that have been commissioned.
o All the obligated entities have a Renewable Energy Purchase Obligation (RPO) which if enforced can generate a huge amount of business. But it isn’t being enforced.
o Maharashtra doesn’t have a renewable energy policy. At the very least, it could have a net metering policy, but it doesn’t have that either.
- Because of all these (and many other) problems, many industries have not been able to grow as expected, and have therefore shifted their base to Gujarat or Karnataka. Many new industries which could have come to Maharashtra – because of the top-quality human resources available here – have not come.
Now you might ask: why is it so? Well, that is a question that I have asked myself many times too, and tried to answer as well since I work in the field of solar PV. I will not claim that I understand it completely, but I do have a few insights into why the situation is the way it is and I will do my very best to explain it in the following sections.
MSEB – An Overview
Maharashtra is the largest power generating state in India with an installed capacity of 38,372 MW as of July 2015, which constituted 13.91% of the total installed capacity of India.
Its State Electricity Board (SEB) is popularly called MSEB, short for Maharashtra State Electricity Board. The holding company is called MSEB Holding Company Limited which has three subsidiary companies:
1. Mahanirmiti or Mahagenco (Maharashtra State Power Generation Company Limited, or MSPGCL in short)
2. Mahapareshan or Mahatransco (Maharashtra State Electricity Transmission Company Limited, or MSETCL in short)
3. Mahavitaran or Mahadiscom (Maharashtra State Electricity Distribution Company Limited, or MSEDCL in short)
As their names suggests, MSPGCL is responsible for generation of electricity. MSETCL’s job is to take care of the transmission. And MSEDCL provides the last mile connectivity, i.e. it distributes the electricity to the end consumers.
MSEDCL has around 2 crore consumers in Maharashtra and revenues of around Rs.60,000 crores! Out of these, the top 2,500 consumers contribute approximately 41% of MSEDCL’s revenues. That’s a mind-blowing statistic!
Agricultural consumers, on the other hand, consume 26% of the electricity distributed by MSEDCL, but account for only 3% of the revenues. And that is if they pay, which many don’t. Again, that’s a mind-blowing statistic!
If you ask me, “Why should agricultural consumers consume 26% of the electricity distributed by MSEDCL and contribute only 3% of the revenues, if they pay?” I will first of all say that, “It is a perfectly valid question.” But there are good reasons why agricultural consumers should be given electricity at subsidized rates. Here’s why.
India has always been and still is an agricultural country. Today, it ranks second in farm output worldwide. It – along with allied sectors like forestry, logging, and fishing – employed 51% of the total workforce! However, it contributed only 17% to India’s GDP in 2012, a number that has been decreasing steadily since Independence. The declining share of agriculture in its GDP is because India has one of the fastest growing service sectors, which has been growing at 9% year-on-year (YoY) since 2000 and contributed to 57% of the GDP in 2012-13. The service sectors include the IT (Information Technology), BPO (Business Process Outsourcing), KPO (Knowledge Process Outsourcing), and LPO (Legal Process Outsourcing) services among others.
However, we can’t eat these services, can we? We need to eat food and that is always going to be the case. So we need to grow it in our farms, which we most certainly can. And we can do that despite the fact that our population is now almost 3.5 times what it was at the time of Independence, while our average yield is said to be only 30% to 50% of the highest average yield in the world in spite of steady improvements in irrigation and agriculture technology, and application of modern farming practices. And what do you know? We even manage to export many products like Basmati rice, wheat, cereals, spices, fresh fruits, dry fruits, beef, cotton, tea, coffee, and many cash crops, particularly to the Middle East, Southeast Asia, and East Asia. These exports contribute about 10% of the total exports, which is not bad at all.
It would be incredibly stupid to lose this self-reliance, and therefore we have to support our farmers. If we need to give them electricity at highly subsidized rate to make that happen, then so be it. And what do they need electricity for? To pump water out of the bore-wells in their farms for irrigation.
The Political Economy
While it is abundantly clear that we need to support our farmers and give them electricity at subsidized rates, the question is how much electricity should be provided and at what rate?
Currently, most farmers are charged on a “per hp” basis, as opposed to on a “per unit” basis like most of us. And the rate is Rs.3,000 per hp, in return for getting 24/7 electricity supply. So if a farmer has a 3 hp pump in his farm, he will be charged Rs.9,000 per year, irrespective of how much electricity he consumes.
However, farmers do not get 24/7 electricity; they typically get it for eight hours, and many times they get it from midnight to 8 a.m. To that, the farmers say, “This is not what we bargained for. Our helpers refuse to go to the farm in the middle of the night. If they don’t, then we have to do it. Irrespective of who does it, it has risks, with snake bites being at the top of the list.”
So the situation is far from ideal to say the least. MSEB needs to provide electricity to farmers when they need it. And farmers need to pay for what they use. Granted that MSEB is not giving them 24/7 electricity as promised, but if they are giving them electricity for eight hours, shouldn’t the farmers pay at least 1/3rd of the amount that they owe to MSEB? As far as I am concerned, the answer is obvious to me but apparently it isn’t that obvious to many. So I urge all farmers, who aren’t paying what they owe to MSEB, to ask themselves this question.
So to reiterate, I am in favour of giving electricity to farmers when they want it and at subsidized rates, but I think that the current scheme of charging the farmers on a “per hp” basis and not on a “per unit” basis just like everybody else, and thus essentially giving them unlimited electricity, is a bad idea any way you look at it. Why? Because we don’t optimize anything that we have an abundance of, do we? I firmly believe that the current scheme leads to wastage of electricity and water, both of which are precious resources. A more rational approach would be to give “reasonable” amounts of electricity at highly subsidized rates, but heavily penalize overuse beyond that.
But there is a reason why things are the way they are. And the reason becomes clear when you take a closer look at how much subsidies are given (by way of giving electricity at subsidized rates) and to whom.
Maharashtra government gives Rs.6,000 of direct subsidies to farmers. But it also gives Rs.8,000 crores of indirect subsidies, where the consumers paying higher tariff subsidize the ones who are paying lower tariff. So the total subsidies come to a staggering Rs.14,000 crores! This amount is just over 23%. So, 23% of the revenues of the largest SEB in India come from subsidies.
Although you will hear MSEB and government officials saying that these subsidies are going to farmers, they are not going to all farmers; these subsidies are primarily going to farmers in eight districts: Pune, Baramati, Satara, Sangli, Kolhapur, Ahmednagar, Solapur, and Jalgaon. So the subsidies are going to farmers in Western Maharashtra and Solapur.
Now if you look at what crops are grown in these districts, you will find that these districts grow cash crops, sugarcane being the most important of them without a shred of doubt. So in essence, the subsidies are going to the rich farmers, the semi-feudal rural elite of Maharashtra. If you do a study of the backgrounds of all the past and present MLAs of Maharashtra, you will find that many of them come from these very districts!
That’s no coincidence. It isn’t much of a surprise either. The people who have been in power in Maharashtra come from these districts. They have a direct or indirect involvement in the production of these cash crops. Even if they are not involved in any way, the ones who are involved are the ones who have brought them to power and are keeping them there. So by creating the present system, the people in power have been protecting their own interests and/or the interests of their benefactors. And no person in power will pass a law against their own interests. That is the political economy and that is the crux of all the problems that plague the electricity sector of Maharashtra.
However, this isn’t something that is specific to Maharashtra. What is true of Maharashtra is equally true of all other states. The specifics might be different – the class of the people, the districts that they belong to, the crops that they are growing, the schemes that they have deployed – but the basic principle is the same.
Rhetoric vs Action
Economics talks about two very important concepts: perfect competition and perfect monopoly. Perfect competition achieves allocative efficiency and ensures maximum benefit to the consumers. Perfect monopoly, on the other hand, ensures maximum benefit to the producers, suppliers, and investors since there is no competition at all. Needless to say, perfect competition and perfect monopoly are at the two opposite ends of a spectrum. Producers, suppliers, and investors do not like perfect competition; in fact, they hate it and always try to get to the other end of the spectrum.
So, the political class, in rhetoric, will always talk about perfect competition to please the masses. However, in action, they will always do everything that they can to get themselves and their benefactors to the other end of spectrum, either by creating sufficient loopholes in the system or by simply breaking the laws. Carl Marx famously said that “governments have been and will continue to be an executive committee of the vested interest in the society”. Sadly, he has been proven right.
A shining example of the political class trying to please the masses and going a step further by enacting a law is the Electricity Act 2003. It encourages competition by giving every consumer of electricity the right to also become a producer of electricity, if he chooses to do so. The guiding principle behind this is to increase competition and bring down tariffs in the long run. Therefore, the Government of India (GoI) was lauded when they enacted this Act, and rightly so.
The Act also gives every consumer (consuming more than 1 MW) the right to Open Access (OA). In concept, OA is very simple to understand. A generator is allowed to use the existing electrical grid to supply electricity to any eligible consumer at a mutually agreed price. All he has to do is pay “wheeling charges” to the owner of the grid. It is very similar to a car owner paying toll to the entity that has built the road and is maintaining it. OA is absolutely crucial for competition. But do you think MSEDCL will allow any company to use OA and supply electricity to its top 2,500 consumers who contribute 41% of their revenues? If you think the answer to that question is a “yes”, then you are living in a fool’s paradise. MSEDCL will never allow a third party to supply electricity to any of its top 2,500 consumers. Heck, they won’t even allow the consumers themselves to setup the power plants! Unless of course, the people in power want, and therefore allow, this to happen. You can call this “discriminatory OA” which happens every once in a while. A few people have got OA in the past and a few will get in the future as well, but only if they go through “the proper channels” and make “the proper deals”, if you know what I mean. Non-discriminatory OA just does not happen in Maharashtra!
And it will never happen unless cross-subsidy is reduced, which is what the Electricity Act 2003 advocates. It says that the cross-subsidy should not exceed 20%. What that means is this: if MSEDCL’s average cost of supply is say Rs.5, then all the tariffs must be between Rs.4 and Rs.6. Maharashtra is probably farthest from achieving this goal since the highest tariff is close Rs.20 (for advertisers and hoardings) while the lowest is close to Rs.2 (for agricultural consumers and the poor people in urban slums). None of the other states have achieved it either, although the disparity might not be as great as in Maharashtra. And needless to say, complete elimination of cross-subsidies, in today’s scenario, looks simply impossible!
In the next article, I will talk about the problems, solutions, and the challenges.
Writer, Publisher, Entrepreneur