Two generations of Indians have grown up with the word “power cut” firmly in their daily vocabulary. With India’s aspiration to be considered a global power, it is only fair to ask how many more generations will need to use this term.
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China recently overtook the US as the largest producer of electricity. China’s annual electricity production now exceeds 4,500 Terawatt hour (TWh) against 4,100 TWh for the US. India ranks fifth in the world, behind these two countries, Russia and Japan. India’s capacity growth has averaged a little less than 6% or 8-9 Gigawatt (Gw) a year during the 11th Plan. Despite having started from a deficit situation, electricity generation capacity has under grown GDP growth by 1-3% a year. The immediate future looks bleak.
So what ails the Indian power sector? India has consistently failed to meet its power sector targets. On average only about 50-60% of annual goals for electricity generation are being met. Distressingly, in the last few years, achievement is closer to the 50% mark. The inter-regional transmission capacity is a pathetic 20Gw (13% of installed capacity). Transmission and distribution (T&D) losses average 35-40% in many states. For the 10th Plan, the Planning Commission identified various reasons for slippage in generation capacity including shortage of equipment, fuel shortage, delays in financial closure and inadequate preparedness of project plans. Some progress was made during the 10th Plan including the enactment of the Electricity Act (2003) which brought several reforms to the power sector. Generation was delincensed and captive generation freely permitted, private licensees permitted for transmission (to allow competition against state monopoly) and stringent penalties for theft of electricity Many states restructured and corporatized their electricity sector and unbundled their boards into separate entities for generation, transmission and distribution. Twenty five states have constituted State Electricity Regulatory Commissions (SERCs) that were made mandatory under the Electricity Regulatory Commission Act (1998). And then everything hit a wall around 2007 or 2008. Nobody seems to know exactly why. Theories abound— reform fatigue, low hanging fruit exhausted and an ineffective Union minister since 2009.
Can it be fixed?
A working group for the 12th Plan headed by the power secretary was constituted in April and will look back at the causes of failure and attempt to plug the gaps that caused the shortfall. It will recommend steps to be taken over the five years of the next Plan. This top-down central planning method with a Soviet-era methodology is obsolete. Too much of the supply chain in electricity is in the hands of the Union and state governments. Over 80% of the generation of power is done by Union and state utilities. The working group will need to take a radically new approach.
Here is my five step proposal to accelerate the growth of the electricity sector in India.
Step 1: Accept that 50-75% of new generation capacity should and will come from the private sector. Remove hurdles and design policies to incentivize this. The most important support that the government can offer the private sector is on fuel linkages.
Step 2: A new impetus on tariffs and tariff reform is again called for. The apparatus to establish tariffs at the Union and state levels has already been established. It needs to be kick-started into action to address the chronic deficit between purchase and sale price of electricity.
Step 3: Triple the inter-regional distribution capacity in the next five years to 60Gw. While the entire sector is under-resourced, distribution capacity is a major weak link. An explicit plan to augment inter-regional distribution needs to be undertaken in a PPP model.
Step 4: Adopt market measures for funding new and existing power utilities and for risk management of large plants. This will have to be phased in since credit ratings of state utilities are extremely poor. Add to this a thrust to create a vibrant and deep corporate bond market for power sector bonds. Market measures for trading power already exist, but they need to be strengthened, and alternatives prohibited, so liquidity and depth of these markets increase.
Step 5: Halt the subsidy, mitigate the theft: The root cause of much that ails the power sector is free power to the agricultural sector. Sacred cows such as the cooking gas and petroleum subsidies are now being discussed and gradually dismantled. We should add farm power to the list of subsidies that must eventually go. T&D losses can be brought under control by aggressively attacking power theft, even if our ability to limit technical losses is low.
All this is only about the “quantity” of power. The quality of power (voltage and frequency fluctuation) is abysmal. Even if the word power cut fades from public memory it will be a generation or two before we can run an accurate electric clock. PS: “What is a soul? It’s like electricity— we don’t really know what it is, but it’s a force that can light a room”—Soul singer Ray Charles.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at firstname.lastname@example.org