Improving state finances by reducing power losses
India’s total energy losses are significantly more than international norms—wastage that state budgets cannot afford
Inadequate and poor-quality power supply means frequent interruptions, poor voltage levels, and dissatisfied consumers across much of the country. Adding up all the losses in the system—including the losses due to energy dissipated in conductors, transformers and other equipment, along with pilferage by those who bypass meters, and losses from failure to recover the amount billed to consumers—India’s total energy losses came to 24% in 2015-16, significantly more than international norms.
This, however, is an improvement on 2003-04 when the losses were 38%. Progress was made because of national- and state-level reforms.
New research asks how India can get its energy systems away from vicious cycles that are still prevalent. Gaurav Bhatiani, chief operating officer, IL&FS, and his colleagues Bhawna Tyagi and Sonali Chowdhry were commissioned by Tata Trusts and the Copenhagen Consensus for the India Consensus project to look at state-level solutions for Andhra Pradesh and Rajasthan.
The research is part of the proposition that no state has resources to do everything. It is crucial to identify where decision makers can achieve the most good, in policy areas ranging from education to agricultural performance and power sector reform.
The India Consensus’ prioritization projects utilize the Copenhagen Consensus approach to improve global and regional spending priorities, adapted to reflect the diversity and size of India. They unite academic research, employing cost-benefit analysis, with sector expert input, broad and inclusive stakeholder engagement, and extensive policy outreach to evaluate and prioritize the smartest interventions.
The researchers looking at power distribution zeroed in on the agriculture sector, one of the most inefficient electricity users. In the 1960s, the rural electrification programme was introduced to enhance agricultural output using groundwater for irrigation.
Due to un-metered supply and the flat-rate electricity tariff provided for irrigation, the number of pump sets increased substantially—and unregulated and free water has contributed to over-exploitation of groundwater resources. Subsidized power intended to benefit farmers allowed problems such as pilferage and theft, and disguised losses from the utilities, which degraded their finances. The ultimate burden of losses is on the state governments, which collectively spent ₹36,758 crore in FY14, ₹45,584 crore in FY15 and ₹55,283 crore in FY16 (annual growth of 23%) on subsidizing utilities for supplying low-cost electricity for irrigation.
One of the major reasons for the high losses was the adoption of a low tension (LT) distribution network spread over long distances to serve dispersed, small, individual agriculture connections. This resulted not only in high technical losses, but also in theft facilitated by un-metered supply and the flat tariff.
The degradation of the utilities’ finances has adversely affected farmers by making the supply and quality of power unpredictable and by providing it mainly during the night hours. This resulted in frequent failure of pump sets, forcing farmers to use inefficient motors, and keep the pump sets constantly on, wasting energy and causing overexploitation of groundwater.
This is a vicious cycle in which farmers, distribution companies and state governments alike face ever-increasing losses.
The researchers propose two solutions. The first is to introduce a high-voltage distribution system (HVDS), by upgrading the network and replacing transformers.
Andhra Pradesh (AP), which has already made a strong start on conversion of its LT network to HVDS, managing to reduce losses to 12%, has demonstrated that this approach works. Completing the upgrade would cost ₹7,147 crore in AP, while in Rajasthan it would cost ₹19,655 crore. The biggest saving would come from the fact that pump sets wouldn’t fail so often. That alone would be worth ₹18,944 crore in AP and ₹37,300 crore in Rajasthan.
Factoring in carbon savings, energy savings and the reduction in transformer failure, the total benefits for these states would come to ₹20,028 crore and ₹45,350 crore, respectively.
In short, each rupee invested would generate a return worth more than ₹2 in both states.
The second solution proposed by the researchers—replacing inefficient pump sets with energy efficient ones—further enhances the return on investment.
The total costs would be almost twice as high, because we would need not only the high-voltage distribution system to be set up, but also to replace all existing pumps. Yet, the total benefits would grow even more, allowing each rupee to generate ₹3 of social benefits through lower pump breakage along with energy savings and carbon savings. These interventions will enable reduction in the subsidy by governments for irrigation amounting to at least ₹3,000 crore in AP and about ₹7,000 crore in Rajasthan, which could be redirected to other spending.
This research is complemented by another study from the same project by Anandajit Goswami of the Teri School of Advanced Studies, and Kaushik Ranjan Bandyopadhyay of the Indian Institute of Management, Lucknow. They examine rising energy demand in buildings, accompanied by a rise in electricity use, leading to a rapid increase in carbon emissions and aggravating power shortages. They show the benefits of using water- or salt-based thermal energy storage in buildings, and find the investment would have a return worth more than ₹2 for every rupee spent in each of the states studied.
This research highlights the lasting challenges that can result from well-meaning decisions such as the low-tension distribution network. But it also highlights the opportunities that exist to reduce losses in India’s power sector.
Bjorn Lomborg and Manorama Bakshi are, respectively, president of the Copenhagen Consensus Center and senior adviser to the India Consensus project.
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