According to reports, agricultural power use stands at about 20 per cent of India’s national consumption and is the third highest, after industry and household, as per the Power Ministry’s statistics for 2009-10. The proportion of the farm sector’s energy consumption has doubled since the 1970s while revenue realisation to the electricity utilities has declined, as the tariff for agriculture is well below the economic cost.
The average agricultural tariff has remained stagnant (or declined) over the last two decades whereas industrial and household tariffs have increased at an average 11 per cent per annum, forcing States to provide farmers with subsidies of about Rs 42,000 crore annually, considering that the average agriculture tariff is around Rs 0.50 per unit and the average cost of power to the utilities is around Rs 3.50 per unit. While a part of the subsidy burden is met by cross-subsidies from the high tariffs charged to commercial and industrial consumers, a large proportion is met out of State government Budgets, which, for 2009-was about Rs 35,000 crore. The annual losses of all the utilities for 2009-10 were Rs 34,0000 crore, after accounting for subsidy realised as per the PFC report, which is less than the actual subsidy bill raised.
Moreover, the farm sector also lags in terms of efficient use of groundwater internationally with the average extraction of water in India less than half that of China and about 1.8 per cent that of the US. In comparison with the countries in the Table, the inefficiencies lead to the highest numbers of ground water extraction pumps, estimated at around 20 million in India.
Two major causes for the continued use of inefficient pumps is the absence of incentives for efficiency due to heavily subsidised or free power being made available to farmers, unlike commercial and industrial consumers where high power tariffs make investments in efficiency attractive to reduce operational costs.
The second reason is the reluctance of state utilities, saddled with mounting financial losses and power shortages, to intervene, given the high transaction cost of service and low revenue realisation. Political expediency adds to the vicious cycle by preventing economic pricing of power — a situation unlikely to change in the near future.
However, identifying incentives for stakeholders other than farmers and applying innovative business models could stimulate large-scale investments in efficient pumps. It could attract private investments in pump replacement given that studies conducted by several agencies, including BEE, reveal a potential enhancement of efficiency by 100 per cent.
These studies show that the average efficiency levels of agricultural pumps is 20-30 per cent whereas the BEE STAR labelled agricultural pumps at the higher end provide efficiency levels of over 55 per cent. The net impact could be saving of subsidy by about Rs 21,000 crore with a positive impact on the overall losses of the State utilities, which at present are at Rs 40,000 crore annually. Such savings in consumption could help utilities service the needs of commercial and industrial consumers better and improving their financial position further.
The potential savings in subsidy could compensate the investment of replacing 20 million agricultural pumps estimated at Rs 50,000-60,000 crore — a simple payback over three years, given that the efficient pumps are priced at Rs 25,000 to Rs 30,000 per unit, depending on capacity. However, the poor finances of utilities prevents them from taking up such massive investments.
In order that a robust business model is developed and sustained, it is necessary that the benefits of energy savings are monitored and evaluated. In physical terms it requires dedicated electrical feeders that have adequate metering capabilities. Therefore, a gradual approach is needed by selecting States with very high agricultural consumption and which have the lead in segregation and bulk metering of agricultural feeders.
Some of the States in this category are Haryana, Punjab, Andhra Pradesh, Madhya Pradesh, Maharashtra and Gujarat.
A scheme under the oversight of the State Electricity Regulatory Commission (SERC), acting as an independent entity, that transparently apportions savings of subsidy in a manner that enables servicing of investments, could promote private investments in the sector.
An innovative project based on the above principles is under implementation in Solapur district of Maharashtra. The project, conceived by BEE, is replacing almost 3,000 agricultural pumps free of cost, on a PPP model. The private investor has been selected by a transparent competitive bidding process under the oversight of MERC and BEE. The project includes free maintenance of pumps for five years and the savings from using efficient pumps are being used to provide the return on investments.
The pilot project, though relatively small, in terms of investment of Rs 7 crore, has demonstrated the efficacy of the model in attracting private investment to a hitherto avoided sector. Similar pilots are underway in Gujarat, Punjab, Madhya Pradesh and Haryana. The need is now to evolve a national programme that could provide much-needed solutions to the issue of the financial ill-health of State power utilities.