Operate commercially, deliver quality

A variety of factors - rain, workers’ strike in coal mines, Telangana stir, depleted fuel stocks, rising fuel costs and inability of the policy makers/administrators to take bold decisions to improve health of the sector – came together leading to a blackout situation in many parts of the country. The situation threatens to spoil the festival of lights next week though it seems to have improved over last week.

This did not come as a surprise to those who have been following the Indian energy sector. Could we have avoided it? In my view we could not have. Our energy sector, including power sector, is so distorted that unless the fundamentals are set right, we will not have any long term solution. Till that happens, any other solutions will be stop gap. For example, our efforts to reduce dependence on non-fossil fuels and increasing supply from other sources of energy will not sustain and we will find ourselves in the same situation.

We also need to realise that given our huge power demand, renewable as well nuclear sources will not be sufficient to meet that demand and will remain marginal supply at least in the foreseeable future. What ails our power sector? In my view there are two fundamental issues which need to be addressed immediately:

The first one is functioning of our utilities as commercial entities. They have been forced by successive governments to take up populist measures for political benefits e.g. cheap/free power to certain sections. The regulatory framework has not fulfilled the expectation that it will work independent of the political set up. The utilities have been forced to purchase expensive power during election without being duly compensated for it. The basic obligation of supplying quality power to customers has been forgotten by both the utilities (as they have no incentive) as well as the regulators (who have failed to implement it).

These are just a few examples. Having been exposed to this on a sustained basis, our utilities have not only been driven into a financial mess but they also will need a lot of time to come out of the mind-set and operate commercially. First and foremost a commercial entity understands that to remain in business, it needs to meet customers’ demand for quality product and at the same time it needs to generate sufficient returns on capital invested for its shareholders. Majority of our utilities haven’t imbibed (or they can’t imbibe) these principles.

Fuel sufficiency

The second issue is how do we get sufficient fuel. Let’s look at our two major domestic fuel supply sources – natural gas and coal. These sectors are in equally bad if not worse situation. Government belief that being owner of the natural resources, it MUST regulate the price (read provide cheap fuel) of these resources has meant that there is no incentive for producers (whether public sector or private sector companies) to produce natural gas and domestic coal. The result is not very surprising – no investments in both these sectors over long term.

This means we don’t know how much natural gas we have and despite knowing how much coal we have, we can’t produce it. We have tried various so called innovative structures to bring this resource out of ground but failed miserably. In my view the basic reason for that failure is our inability to accept the power of free market. In all these structures, we have maintained a strong government hand to regulate rather than leaving it to the invisible hand of the market. This has led to our increasing reliance on expensive imports. It’s time we accept this fundamental flaw in our market design and correct it. There are numerous examples of how competitive markets lead to cost effective service for consumers, some of them in our own country.

While I recognise that these are not the only challenges in the sector, I believe that if these two fundamental issues are corrected, the rest can be resolved far more easily.
Our efforts to diversify our energy sources are noteworthy and need to continue. However if we are seriously looking for a long term solution for our power/energy sector, the solution lies in making our power/energy sector (including its supply chain) operate on a commercial and competitive basis.

(The writer is Managing Director of  ICF International, India.)

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