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Resource centre on India's rural distress
 
 

Reforms, competition in distribution and end to coal monopoly only antidotes to power failures-Arvind Panagariya
-The Economic Times

The power failure in India on July 30-31 was big news in US media. When the radio and TV stations began calling with the question whether this spelt the end to India's claims to global-power status, my first reaction was to remind them that a similar failure of the grid in 2003 had drowned the entire Northeast and Midwest in the US and Ontario in Canada into darkness.

But, alas, the similarity between the failures in North America and India ended there. In the US, ageing equipment and poor management by local distribution companies result in outages that can sometimes last for days. But residential and industrial customers can generally count on regular flow of electricity.

In my 38 years in the country, not once have I experienced scheduled power cuts. Nor do most customers maintain backup generators. Except when a storm knocks down power lines, electricity flows continuously at a steady voltage.

In contrast, the blackout in India is but one manifestation of fundamental weaknesses in the electricity sector. As per 2011 census, one-third of Indian households still do not use electricity.

The vast majority of the remaining two-thirds are subject to planned power cuts. And those able to afford financially-costly and environmentally-damaging backup systems maintain them. Industry either pays high tariffs or relies on even costlier captive generation of its own.

It did not have to be this way. Electricity reform had gathered momentum under the National Democratic Alliance (NDA) government. Had that been maintained, considerable respite would have come, just as has been the case in telecommunications.

But whereas telecommunications reform was completed during the NDA tenure, at its exit in 2004, electricity reform remained work-in-progress. Unfortunately, the successor United Progressive Alliance (UPA) government turned indifferent towards the reform.

Until 1975, electricity sector was a vertically-integrated monopoly in each state, with the state electricity board (SEB) managing all three components of electricity supply: generation, transmission and distribution.

Electricity generation was opened to the central government in 1975 and to private operators, both domestic and foreign, in 1991. While centrally-owned National Thermal Power Corporation (NTPC) soon emerged as a major player in generation, the private sector was slow to oblige.

SEBs had monopoly over distribution and were, therefore, the sole buyers of electricity. But since they were also financially bankrupt due to years of losses, potential private entrants into generation did not see them as credible buyers, as is illustrated by the sordid episode of Enron.

The reforms initiated in the late 1990s sought to introduce transparency by unbundling the SEBs into three separate companies entrusted with generation, transmission and distribution.

A central objective of subsequent reforms, initiated through the landmark Electricity Act of 2003, was to restore the financial health of distribution companies, which could serve as credible buyers of electricity.

To this end, the Act provided for several measures. They included possible privatisation of state distribution company and licence to additional distribution companies in any given area.

Large customers were to be given open access to the distribution grid so that they could buy electricity from the seller of their choice. Each state was to also appoint an independent State Electricity Regulatory Commission (SERC) empowered to set the electricity price.

Cross-subsidy from commercial buyers to households was to be ended in a time-bound fashion. To cut losses, the Act provided for metering of all customers, made stealing electricity a criminal offence and required regular energy audits with the view to cut losses.

Unfortunately, these reforms have been implemented sporadically. In most states, regulators are ex-bureaucrats with little independence and, under political pressure, set tariffs at levels too low to cover the costs of distribution companies.

Periodic announcements of free electricity to farmers by politicians add to the latter's losses. Saddled with gigantic losses, distribution companies are unable to buy enough electricity despite high customer demand. That inability led NTPC to reduce its capacity utilisation to 85% in 2011-12 from 92% in 2010-11.

The recent outage resulted in large measure from this mismatch of demand and supply. To combat water shortage due to failure of rains, farmers began to overwork electric pumps to draw groundwater, pulling more electricity than their distribution companies had planned for. With the government lacking the nerve to chop off the extra demand, grid failure was the result.

Adding to these woes is India's coal policy that hampers electricity generation. As a part of her socialist agenda, Prime Minister Indira Gandhi nationalised coal mines, establishing the monopoly of Coal India over all coal mining in 1975.

India has over 13% of proven coal reserves worldwide and, yet, Coal India fails to adequately supply coal to power plants, forcing some to import it from Australia and Indonesia. In one case, at a 660-MW unit set up by CLP Holdings of Hong Kong, production was delayed by months because Coal India could not keep its commitments.

If India is to bring uninterrupted electricity supply 24 hours a day and seven days a week to all its citizens, including the one-third who still rely on other energy sources tolight their houses, there is no alternative to reforms.

Distribution companies must be turned into commercial entities subject to usual market pressures and the governmentmonopoly on coal mines must be ended.