How to create a power crisis3 min read . Updated: 04 Sep 2014, 12:00 PM IST
All it takes is strict adherence to the policy of defying economic laws to serve the common good
An elite statesman plotting to undermine the economic interests of poor, low-skilled labourers can do it no better than by fixing a high minimum wage that would effectively prevent any employer from hiring them. That too, while appearing to be actively implementing a policy that is compassionate and “pro-poor". Just as the popular saying goes, the road to hell is paved with good intentions.
The truth of this saying holds no less true for the power situation in India, with five states facing the threat of immediate blackouts and more than half the country’s thermal plants running short on coal supplies. For a politician desiring to appear egalitarian, providing cheap (or even free) power to the poor while completely undermining their long term economic good, similar “pro-poor" policy options exist.
The policy often employed is fixing a low (or even no) price for power. This obviously pleases voters who rejoice at receiving a dole, but not power producers who cannot cover their costs. The result is the stoppage of production owing to losses. To mitigate this “market failure" (as if the producer must sell at the lowest price, if not for free), the government takes over power provision.
State-owned power distribution companies are constituted to perform the task of power distribution, while public power utilities are tasked with generating power. Private entry into power generation is highly regulated, and often restricted to a few chosen players. And to top it all, the domestic supply of coal to run power utilities is monopolized by a huge public sector unit called Coal India Ltd (CIL).
Also, all along the supply chain, prices are regulated by authorities. Above the fixing of the price paid for power by the consumer, the price at which coal is supplied to utilities and the price at which utilities supply power to distribution companies is fixed. In effect the entire supply chain is nationalized with token private participation from cronies while the price mechanism is completely distorted.
What ensues is the typical economic chaos that follows when an economic system is left without the guiding hands of the price system and private enterprise.
As with any public sector monopoly, the lack of private competition renders coal supply erratic. Thus, even as power demand has increased many-fold, supply has failed to keep pace. This leaves utilities with no option but to depend on imported coal to fuel power generation. This, however, may not be an insurmountable problem if only utilities were allowed to freely price power to justify costs.
Power utilities, though, will have to appeal to a regulatory body to charge higher prices. Often, such tariff revisions are slow to come by leading to frequent squabbles between power producers and distributors—eventually culminating in power blackouts. The fiscal cost of providing cheap power to consumers too is often extraordinarily large, but the burden is shifted to the books of public sector banks which are designed to further the populist agenda of the government.
In totality, the path paved with good intentions leads to a perverse system of price controls, entry barriers and subsidies that effectively cripple the system from coordinating supplies required to satisfy consumer demand. That is also how power crises in the country have been kept alive for years now.
There is always the alternative of relying on private competition and free prices. It is perhaps the only sane policy option that would ensure the demand for power is actually translated into robust supply, rather than tons of mineral deposits remaining unexplored while people go without power. But it does not promise power through good intentions, but only through the means of self-interest.