Debating India

The continuing power crisis in India

Friday 17 June 2005, by SRINIVASAN*M.R.

We should encourage public sector companies to build power-generating units. But asine qua nonis that they should be given technical, managerial and financial autonomy, and distanced from political interference.

IN RECENT times, Maharashtra has been experiencing a severe power crisis. For many decades, it had a reputation for reliable supply and recorded good progress both in industry and agriculture. But because of little or no addition to generation capacity for almost a decade, many parts of Maharashtra are now subject to power cuts for six-ten hours a day. Ironically, the 1,700-MW Enron-Dhabol project came in the way of Maharashtra planning for a new generation capacity for over a decade. Even if the Dhabol plant returns to operation, the distress in the State will not disappear while there will be some needed relief. For, demands have grown substantially in the interim.

A fundamental change took place in the early 1990s when P.V. Narasimha Rao became Prime Minister; it envisaged future growth of power generation with private sector funding. Until then, most of the expansion in generation, as well as in transmission and distribution, took place through the State Electricity Boards and Centrally-owned companies (NTPC, NHPC, NPCIL, PGCIL, etc.).

The World Bank advice at that time was the State and Central Governments fund social sector investments in health and education and reduce their role in infrastructure activities such as power. The policy-making elite largely persuaded themselves that private capital from overseas sources and within the country was ready for investment in power generation.

During the 1990s, there was a flurry of seminars and symposia by the Independent Power Producers Association (IPPA) to educate government functionaries about how the structure of the power supply industry should be changed to make it IPP-friendly. Notwithstanding the time and energy invested by civil servants and politicians, the growth in private sector generation over the past decade-and-a-half has been very modest and indeed dismal. The star of the private sector, Enron project, which has occupied media space extensively over the past decade, has been a real disaster for the country. Many power professionals warned the country of the glaring infirmities in the project. Yet politicians and civil servants with little or no professional expertise sold the project to the country. Hopefully the asset already created will be put to use, but the Indian financial institutions, publicly held, and hence the public will have to take a big beating in the process.

The basic weakness of the electric supply industry is non-viability of tariff. In 2001-02, the cost of supply was Rs.3.50 a unit while the realisation was only Rs.2.40. Free or highly subsidised supply for agriculture and subsidies to domestic consumers have resulted in uneconomic charges for industrial consumers. This policy has driven many industries to depend more and more on self-generation.

During 2002-03, while the utilities (SEBs, Central generators and private utility generators) produced 532 billion kWh, captive power plants generated 104 billion kWh (about 16 per cent of the total). While the larger industries may have efficient generating plants, many are small and medium diesel sets and inherently inefficient. They benefit from subsidies on diesel; but add to air and noise pollution.

Large, well-managed generating plants offer better economics and can be mandated to provide better pollution control features. Given the reality of growth in captive generation, the Electricity Act 2003 provides for supply from captive generators to other consumers. Recently, the Power Minister said 5000 MW would be added through captive generation, overturning the classical wisdom of the power supply industry, which favours generation by utilities.

A second weakness of the Indian situation is under investment in transmission and distribution relative to generation. Reports of the Planning Commission for three or four decades have expressed concern at this situation but political decision making at the level of States consistently continued to deploy the resources, when available in favour of generation.

This is the root cause of the chronic high T and D losses. Additionally extended supply to agricultural and rural consumers results in provision of relatively small amounts of energy over long distances, leading to higher losses. Theft of electricity has become a well-organised industry backed by musclepower. By the late 1990s, in a number of States, the distribution losses were 35-50 per cent, up from 22-24 per cent reported earlier.

The very high distribution losses are sought to be controlled through `unbundling’, that is separating generation, transmission and distribution into distinct activities. This has been a key recommendation of the World Bank to the SEBs receiving its assistance for reforms. The Electricity Act 2003 has unfortunately made it the centrepiece of reforms and all States were required to complete the unbundling process by June 1, 2005 (there was a one-year extension from June 1, 2004). A further extension till December-end was granted recently.

Maharashtra and Tamil Nadu are facing opposition from trade unions, which fear that unbundling is the first step to privatisation. So long as distribution is done profitably, unlike as at present, the logic that it should be a stand-alone business will not be compelling. If generation, transmission and distribution are part of an integrated business, surpluses from one activity could fund another segment of the business. Since there is pressure in Parliament to revisit the Electricity Act 2003, the mandatory provision on unbundling needs to be reviewed.

In defence of the Act, it has been stated competition will be introduced in greater measure in the electricity business. This capital-intensive business is inherently a monopoly either owned publicly, privately or jointly. What is important is that generation plants run at high capacity factors with low running costs, transmission and distribution losses are minimised, and all energy supplied is metered and paid for promptly. While deciding on new generation capacity, a proper techno-economic evaluation of alternative fuels (coal, natural gas or LNG) must be made allowing for escalation factors over time. In the Indian context, the choice is limited to one of these thermal options, in addition to nuclear and hydro. Wind generators are a useful supplement wherever good sites are available.

One of the consequences of the reforms is the setting up of the Central Electricity Regulatory Commission and the State Electricity Regulatory Commissions. But in many cases, the Regulatory Commissions are headed by retired civil servants who ran the same department or SEBs earlier. They cannot be termed independent, nor are they professionals from the power industry who have spent their entire lives building and managing it.

The Regulatory Commissions are under pressure from consumer interests to reduce tariffs or deny legitimate increases (due to rising input costs) from the supplying entities, which are mostly public entities - SEBs or state-owned companies spun off from the SEBs. More often than not, regulators choose the populist path and deny the supplier the opportunity to set up a viable business. We must ensure that in future, the regulators are drawn from power engineers and technologists and economists and bankers familiar with this business.

Sharing the burden

We should add 10,000-12,000 MW every year for the next 10 years and at an even higher rate thereafter. Much of this addition and associated transmission and distribution systems will be under public ownership. With maximum encouragement and support, the private sector could contribute 10-15 per cent of this growth. So the bulk of the effort would fall on the SEBs or entities spun off from them, NTPC, NHPC, NPCIL, PGCIL and other such bodies.

We should also encourage other PSUs such as ONGC, GAIL, IOC and BPC to build generating units in adjustment to their operations. But a sine qua non is that all these PSUs should be given technical, managerial and financial autonomy and should be distanced from political and bureaucratic interference. Their boards should have experts in the relevant technology so that sound and speedy decisions are taken.

We must re-establish a leadership role in the Central Government, the Planning Commission and the CEA so that the benefits of standardisation of equipment and production of nearly all equipment, meeting quality and reliability requirements, are ensured. The Central and State Governments cannot abdicate their responsibility of providing adequate electricity for the economic development and well-being of our people.

See online : The Hindu

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