On June 3, 2011, the National Advisory Council (NAC) posted the draft of the National Food Security Bill on its website and has asked for public feed back on the Bill by June 12, 2011. Key Features of the Draft National Food Security Bill, 2011 - Every person shall have the right of access to sufficient and safe food either directly or by purchasing the food. - The central and state government shall share the financial cost of procuring, storing and distributing food grains to the population entitled to it. - There are special provisions for pregnant and lactating mothers, children in the 0-6 age group, destitute persons, homeless persons and disaster affected persons. The appropriate government shall take immediate steps to provide relief to persons living in starvation. - The state government shall provide all children upto class 8 freshly cooked meal in all schools run by local bodies and the government. It shall also provide mid-day meals to children who are admitted under the 25% quota for children belonging to disadvantaged groups in unaided private schools - Each household shall be categorised into priority and general in rural and urban areas. - Each individual in the priority group households shall be entitled to at least 7kg of grain every month at a maximum price of Rs 3/kg for rice, Rs 2/kg for wheat and Rs 1/kg for millets. - Each individual in the general group households shall be entitled to 4kg of grain per month at 50 per cent of the Minimum Support Price for paddy, wheat and millet. - The state government can exclude certain persons who fulfil the exclusion criteria in rural and urban areas. However, it has to cover at least 90% of the population in rural areas and 50% of the population in urban areas. - The Bill lays down norms for procurement, storage and distribution of food grains under the Public Distribution System. It also gives detailed norms for Fair Price Shops, ration cards, and monitoring the system. - It seeks to set up a National Food Commission and State Food Commission in each state. The Commission shall inquire into complaints on denial of entitlement, advise central and state governments and monitor the schemes. Each district shall have a District Grievance Redressal Officer. - The Bill includes penalties for dereliction of duty by public servants, which includes deduction of penalty from the salary of the public servant. - Any person deprived of his entitlement to food shall be entitled to compensation from the appropriate government. - The Gram Sabhas should conduct social audits of all schemes under this Act. The Back Story to the Bill The Right to Food Campaign In April 2001, the People’s Union for Civil Liberties (PUCL) Rajasthan had filed a writ petition in the Supreme Court against the Government of India, Food Corporation of India, and six state governments. The petition contended that the right to food was a fundamental right under “the right to life” provided by Article 21 of the Constitution of India. Although no final judgment has been given, the Supreme Court has issued several interim orders in the case. Among the most significant of theses is the conversion of eight centrally sponsored schemes into legal entitlements, including the Public Distribution System (PDS), Antyodaya Anna Yojana (AAY), National Programme of Nutritional Support to Primary Education, also known as “Mid-Day Meals scheme”, and Integrated Child Development Services (ICDS), among others. Some orders by the Court in the area of food security include:
On May 8, 2002, the Supreme Court appointed two Commissioners for the purpose of monitoring the implementation of the interim orders. The Commissioners have submitted a number of reports highlighting the issues of concern on the implementation of the interim orders and making detailed recommendations. Government Initiatives One of the key commitments made by both UPA I and UPA II was on food security whereby it proposed to enact a legislation that would entitle every BPL family in both rural and urban areas to 25 kg of rice or wheat per month at Rs 3 per kg. However, the Sonia Gandhi-led NAC has differences with the central government on the contours of the legislation. The basic issues on which there are divergent views include (a) coverage under the Bill; (b) method to be adopted to ensure food security; (c) the amount of food grain required; and (d) the impact on the food subsidy burden. On October 23, 2010, the NAC made certain recommendations on the National Food Security Bill. The Bill seeks to address nutritional deficiencies in the population. Some of its key recommendations are:
In response, the Prime Minister set up an Expert Committee under Dr C. Rangarajan to examine the Bill and make recommendations. The Rangarajan Committee submitted its report in January 2011. It stated that it would not be possible to implement the NAC recommendations because of lack of availability of food grains and huge subsidy implications. It was in favour of restricting entitlements of Rs 2/kg for wheat and Rs 3/kg for rice to households falling below the Tendulkar Committee poverty line plus 10 per cent of the BPL population. This is equivalent to 48 per cent of the rural and 28 per cent of the urban population, which is about the same as the NAC categorisation for priority households. The NAC however criticised the Rangarajan Committee’s stand and proceeded with the task of drafting an appropriate legislation. It finally posted the draft of the National Food Security Bill on its website and has asked for public feedback. Divergent Perspectives The draft has been critiqued by various experts. A group of distinguished economists wrote an open letter to Mrs Sonia Gandhi opposing the NAC’s draft on the grounds that it legalises the PDS even though there is a large body of evidence of the inefficiency of the system (see Wadhwa Committee reports and Planning Commission report). The economists contended that in addition to reforming the PDS, other alternate models of subsidy delivery should be examined such as direct cash transfers or food stamps. The system of direct cash transfer through food coupons was also outlined in the Economic Survey of 2009-10. It stated that the system would be less prone to corruption since it would cut down government’s involvement in procuring, storing and distributing food grains. However, there are divergent views on direct cash transfer too. Some experts such as the economist and member of NAC, Prof Jean Dreze contend that food entitlement is better because it is inflation proof and it gets consumed more wisely than cash which can be easily misspent. Others are of the view that cash transfer has the potential for providing economic and food security to the poor. The ball is now in the government’s court. According to news reports, the government may finalise the Bill soon and introduce it in the forthcoming monsoon session of Parliament.
The central government has enforced a nation-wide lockdown between March 25 and May 3 as part of its measures to contain the spread of COVID-19. During the lockdown, several restrictions have been placed on the movement of individuals and economic activities have come to a halt barring the activities related to essential goods and services. The restrictions are being relaxed in less affected areas in a limited manner since April 20. In this blog, we look at how the lockdown has impacted the demand and supply of electricity and what possible repercussions its prolonged effect may have on the power sector.
Power supply saw a decrease of 25% during the lockdown (year-on-year)
As electricity cannot be stored in large amount, the power generation and supply for a given day are planned based on the forecast for demand. The months of January and February in 2020 had seen an increase of 3% and 7% in power supply, respectively as compared to 2019 (year-on-year). In comparison, the power supply saw a decrease of 3% between March 1 and March 24. During the lockdown between March 24 and April 19, the total power supply saw a decrease of about 25% (year-on-year).
Figure 1: % change in power supply position between March 1 and April 19 (Y-o-Y from 2019 to 2020)
Sources: Daily Reports; POSOCO; PRS.
If we look at the consumption pattern by consumer category, in 2018-19, 41% of total electricity consumption was for industrial purposes, followed by 25% for domestic and 18% for agricultural purposes. As the lockdown has severely reduced the industrial and commercial activities in the country, these segments would have seen a considerable decline in demand for electricity. However, note that the domestic demand may have seen an uptick as people are staying indoors.
Figure 2: Power consumption by consumer segment in 2018-19
Sources: Central Electricity Authority; PRS.
Electricity demand may continue to be subdued over the next few months. At this point, it is unclear that when lockdown restrictions are eased, how soon will economic activities return to pre COVID-19 levels. India’s growth projections also highlight a slowdown in the economy in 2020 which will further impact the demand for electricity. On April 16, the International Monetary Fund has slashed its projection for India’s GDP growth in 2020 from 5.8% to 1.9%.
A nominal increase in energy and peak deficit levels
As power sector related operations have been classified as essential services, the plant operations and availability of fuel (primarily coal) have not been significantly constrained. This can be observed with the energy deficit and peak deficit levels during the lockdown period which have remained at a nominal level. Energy deficit indicates the shortfall in energy supply against the demand during the day. The average energy deficit between March 25 and April 19 has been 0.42% while the corresponding figure was 0.33% between March 1 and March 24. Similarly, the average peak deficit between March 25 and April 19 has been 0.56% as compared to 0.41% between March 1 and March 24. Peak deficit indicates the shortfall in supply against demand during highest consumption period in a day.
Figure 3: Energy deficit and peak deficit between March 1, 2020 and April 19, 2020 (in %)
Sources: Daily Reports; POSOCO; PRS.
Coal stock with power plants increases
Coal is the primary source of power generation in the country (~71% in March 2020). During the lockdown period, the coal stock with coal power plants has seen an increase. As of April 19, total coal-stock with the power plants in the country (in days) has risen to 29 days as compared to 24 days on March 24. This indicates that the supply of coal has not been constrained during the lockdown, at least to the extent of meeting the requirements of power plants.
Energy mix changes during the lockdown, power generation from coal impacted
During the lockdown, power generation has been adjusted to compensate for reduced consumption, Most of this reduction in consumption has been adjusted by reduced coal power generation. As can be seen in Table 1, coal power generation reduced from an average of 2,511 MU between March 1 and March 24 to 1,873 MU between March 25 and April 19 (about 25%). As a result, the contribution of coal in total power generation reduced from an average of 72.5% to 65.6% between these two periods.
Table 1: Energy Mix during March 1-April 19, 2020
Sources: Daily Reports; POSOCO; PRS.
This shift may be happening due to various reasons including: (i) renewable energy sources (solar, wind, and small hydro) have MUST RUN status, i.e., the power generated by them has to be given the highest priority by distribution companies, and (ii) running cost of renewable power plants is lower as compared to thermal power plants.
This suggests that if growth in electricity demand were to remain weak, the adverse impact on the coal power plants could be more as compared to other power generation sources. This will also translate into weak demand for coal in the country as almost 87% of the domestic coal production is used by the power sector. Note that the plant load factor (PLF) of the thermal power plants has seen a considerable decline over the years, decreasing from 77.5% in 2009-10 to 56.4% in 2019-20. Low PLF implies that coal plants have been lying idle. Coal power plants require significant fixed costs, and they incur such costs even when the plant is lying idle. The declining capacity utilisation augmented by a weaker demand will undermine the financial viability of these plants further.
Figure 4: Power generation from coal between March 1, 2020 and April 19, 2020 (in MU)
Sources: Daily Reports; POSOCO; PRS.
Finances of the power sector to be severely impacted
Power distribution companies (discoms) buy power from generation companies and supply it to consumers. In India, most of the discoms are state-owned utilities. One of the key concerns in the Indian power sector has been the poor financial health of its discoms. The discoms have had high levels of debt and have been running losses. The debt problem was partly addressed under the UDAY scheme as state governments took over 75% of the debt of state-run discoms (around 2.1 lakh crore in two years 2015-16 and 2016-17). However, discoms have continued to register losses owing to underpricing of electricity tariff for some consumer segments, and other forms of technical and commercial losses. Outstanding dues of discoms towards power generation companies have also been increasing, indicating financial stress in some discoms. At the end of February 2020, the total outstanding dues of discoms to generation companies stood at Rs 92,602 crore.
Due to the lockdown and its further impact in the near term, the financial situation of discoms is likely to be aggravated. This will also impact other entities in the value chain including generation companies and their fuel suppliers. This may lead to reduced availability of working capital for these entities and an increase in the risk of NPAs in the sector. Note that, as of February 2020, the power sector has the largest share in the deployment of domestic bank credit among industries (Rs 5.4 lakh crore, 19.3% of total).
Following are some of the factors which have impacted the financial situation during the lockdown:
Reduced cross-subsidy: In most states, the electricity tariff for domestic and agriculture consumers is lower than the actual cost of supply. Along with the subsidy by the state governments, this gap in revenue is partly compensated by charging industrial and commercial consumers at a higher rate. Hence, industrial and commercial segments cross-subsidise the power consumption by domestic and agricultural consumers.
The lockdown has led to a halt on commercial and industrial activities while people are staying indoors. This has led to a situation where the demand from the consumer segments who cross-subsidise has decreased while the demand from consumer segments who are cross-subsidised has increased. Due to this, the gap between revenue realised by discoms and cost of supply will widen, leading to further losses for discoms. States may choose to bridge this gap by providing a higher subsidy.
Moratorium to consumers: To mitigate the financial hardship of citizens due to COVID-19, some states such as Rajasthan, Uttar Pradesh, and Goa, among others, have provided consumers with a moratorium for payment of electricity bills. At the same time, the discoms are required to continue supplying electricity. This will mean that the return for the supply made in March and April will be delayed, leading to lesser cash in hand for discoms.
Some state governments such as Bihar also announced a reduction in tariff for domestic and agricultural consumers. Although, the reduction in tariff will be compensated to discoms by government subsidy.
Constraints with government finances: The revenue collection of states has been severely impacted as economic activities have come to a halt. Further, the state governments are directing their resources for funding relief measures such as food distribution, direct cash transfers, and healthcare. This may adversely affect or delay the subsidy transfer to discoms.
The UDAY scheme also requires states to progressively fund greater share in losses of discoms from their budgetary resources (10% in 2018-19, 25% in 2019-20, and 50% in 2020-21). As losses of discoms may widen due to the above-mentioned factors, the state government’s financial burden is likely to increase.
Capacity addition may be adversely impacted
As per the National Electricity Plan, India’s total capacity addition target is around 176 GW for 2017-2022. This comprises of 118 GW from renewable sources, 6.8 GW from hydro sources, and 6.4 GW from coal (apart from 47.8 GW of coal-based power projects already in various stages of production as of January 2018).
India has set a goal of installing 175 GW of Renewable Power Capacity by 2022 as part of its climate change commitments (86 GW has been installed as of January 2020). In January 2020, the Parliamentary Standing Committee on Energy observed that India could only install 82% and 55% of its annual renewable energy capacity addition targets in 2017-18 and 2018-19. As of January 2020, 67% of the target has been achieved for 2019-20.
Due to the impact of COVID-19, the capacity addition targets for various sources is likely to be adversely impacted in the short run as:
construction activities were stopped during the lockdown and will take some time to return to normal,
disruption in the global supply chain may lead to difficulties with the availability of key components leading to delay in execution of projects, for instance, for solar power plants, solar PV modules are mainly imported from China, and
reduced revenue for companies due to weak demand will leave companies with less capacity left for capital expenditure.
Key reforms likely to be delayed
Following are some of the important reforms anticipated in 2020-21 which may get delayed due to the developing situation:
The real-time market for electricity: The real-time market for electricity was to be operationalised from April 1, 2020. However, the lockdown has led to delay in completion of testing and trial runs. The revised date for implementation is now June 1, 2020.
UDAY 2.0/ADITYA: A new scheme for the financial turnaround of discoms was likely to come this year. The scheme would have provided for the installation of smart meters and incentives for rationalisation of the tariff, among other things. It remains to be seen what this scheme would be like since the situation with government finances is also going to worsen due to anticipated economic slowdown.
Auction of coal blocks for commercial mining: The Coal Ministry has been considering auction of coal mines for commercial mining this year. 100% FDI has been allowed in the coal mining activity for commercial sale of coal to attract foreign players. However, the global economic slowdown may mean that the auctions may not generate enough interest from foreign as well as domestic players.
For a detailed analysis of the Indian Power Sector, please see here. For details on the number of daily COVID-19 cases in the country and across states, please see here. For details on the major COVID-19 related notifications released by the centre and the states, please see here.
