In most Indian cities, being middle class means owning your own power company. As summer temperatures approach 40 degrees Celsius, energy demand from electric fans and air conditioners is putting stretched utilities under stress. Against a peak demand of 104,000 megawatts (MW) last month, supply was 90,000MW. That’s a shortfall of 14%.
Rationing of power, which goes on throughout the year, becomes unbearable in summer months. People resign themselves to blackouts that sometimes last all day, even longer if overburdened cables burn or ageing transformers collapse. Households and businesses create their own electricity by burning diesel in noisy, inefficient, polluting generator sets. Those who can’t afford to be power producers buy inverters: chargeable batteries that store utility power for later use.
Businesses have it worse. An survey of small enterprises in 2002 cited power shortage as one of the top reasons for industrial sickness, ahead of labour strife or mismanagement.
Why has India allowed itself to get into this mess? At the end of last year, China had a generation capacity of 622,000MW. A fifth of this—almost equal to India’s total capacity built up over decades—was added in 2006 alone. Why does India not invest more in energy, which is emerging as a major bottleneck for sustaining the current pace of 9% economic growth?
The seed of India’s power crisis was sown in 1977. That’s when politicians first came up with the idea of subsidized electricity for farmers to win their votes. Then free power for agriculture became the norm, pushing state-run electricity boards into financial ruin.
The link between electrical and political power goes beyond farmers. In cities such as Mumbai and New Delhi, where private operators—Reliance Energy Ltd and Tata Power Co.—are in charge of distribution, squatters steal power with impunity because politicians need their votes.
Every third Reliance Energy customer in Mumbai lives in a shanty town where, according to the company’s own regulatory submission, pilferage ranges from 15% to 70%. No one denies that the poor must get electricity, and perhaps for free. But this isn’t the way to provide it. Every year, there are reports of electrical short-circuits in illegal wiring causing fires in unauthorized slums. It won’t be any different this year.
India has to adopt a multi-pronged strategy to end its power drought. The country has to make better use of the 10,000MW of idle generation capacity. Half of it is lying unutilized largely because of feedstock unavailability. Natural-gas prices have tripled in the past five years. At $7.80 (Rs320) per million British thermal units, they are double what Indian gas-fired power plants can afford, given limits on how much consumers can be charged for electricity.
Pending a meaningful reduction in subsidies, more expensive power must still be produced, but its cost must be passed on to those who can bear it.
Reliance Energy has imposed a “reliability charge” on all users in Mumbai consuming more than 300 units, or kilowatt-hours, of electricity in a month. This levy is meant to compensate the distributor for the higher cost of procuring energy, and to minimize disruptions in an extremely tight supply situation. These measures, however, won’t be sufficient to take care of future demand. For that, the solution is quite simple: India has to produce more electricity at affordable rates. And it has to do it rapidly.
A blueprint for that is finally in place. State-controlled Power Finance Corp. is creating shell companies. The government is offering them coal supplies for 4,000MW plants. The idea is that once they have obtained regulatory approval, tied up debt financing and lined up customers, these shell companies will be auctioned off. Many of the execution risks—the delays that plague large power projects— will be eliminated.
Tata Power bagged one such shell company by bidding a tariff of Rs2.26 a unit. That compares favourably with the ridiculous Rs4.25 that the now-defunct energy trader Enron Corp. was charging for power from its Indian plant, which had to be shuttered.
On efficiency grounds, non-state companies must lead the fight against India’s energy shortage. Generation units owned by the private sector, operating at 97% of their rated capacity last month, are much more efficient than government- owned plants.
As Stanford University economist Frank Wolak puts it: “Until retail prices can be increased to cover total production costs, further investment in new generation capacity using government funds seems imprudent.”
The power situation in India will improve. Apart from everything else, there’s the big promise of civilian nuclear energy under an agreement that India is negotiating with the US. None of this, however, is for the short term. For at least another five years, the middle class will be its own electricity producer of last resort.