Indian government is planning a package of reforms for the power sector

• The power sector roughly constitutes 20% of all the bad loans on the balance sheets of Indian banks.
  
• While the resolution of stressed power assets is an urgent priority, the government is also preparing reforms to ensure the long-term viability of the sector.
  
• These include the implementation of a direct benefit transfer scheme for consumer subsidies and the separation of production and distribution operations of power companies.
  

Much has been made of the growing pile of non-performing assets emanating from India’s power sector. A number of power companies such as Jindal India Thermal Power and Lanco Anpara are expected to be referred to insolvency courts following the expiry of a deadline for the resolution of ₹1.7 trillion worth of bad loans from the sector. This is roughly 20% of all the bad loans on the balance sheets of India’s banks.

Recognising the problems that are unique to the power sector - like a liquidity crunch and a dearth of power-purchase agreements - and the need to ensure these coal-fuelled projects don’t undergo liquidation, the Indian government is planning to establish an asset reconstruction company (ARC) to resolve stressed power assets. Under its Pariwartan scheme, the state-owned Rural Electrification Corp will set up the ARC to clean up the sector in anticipation of a future revival in demand.

Bigger reforms in the works

However, the power sector’s problems go well beyond bad loans. While the resolution of bad loans is an urgent priority, the Indian government is also planning to implement a series of reforms to ensure the long-term viability of the sector and its participants.

A number of amendments to the Electricity Act of 2003 are in the works. First, the government is looking to establish a direct benefit transfer (DBT) scheme for the targeted distribution of subsidies. The reason power producers and distribution companies are racking up so much debt is because state governments aren’t being able to allocate subsidies to consumers efficiently. A DBT will see the subsidy amount deposited in the bank account of a consumer.

Second, the government is also looking to mandate the separation of production and supply operations of power companies, which means that power producers will not supply the electricity they generate. This reduces the complexity of operations and also gives consumers greater choice.

Third, it also plans to exempt renewable energy producers from licensing requirements in order to encourage thermal power generators to diversify their operations. Finally, payments security protocols are being devised for agreements between producers and distributors to prevent non-payment of dues.

The reforms will be a much-needed step. In order to prevent any future pile-up in bad loans, the government needs to improve the supporting infrastructure and legislation for the power sector so that projects are capable of generating revenue.