Solution to power crisis lies in liberalisation

The present power crisis perfectly meets the vote winning strategies of fiercely competitive and totally unethical practices of our political class irrespective of the party. Every political party, right or left, communist or capitalist, liberal or conservative, promises to give free or low cost power to farmers and the poor. Even though farmers have learnt that these are hollow promises, such populist measures are perceived to work.

The latest World Energy Outlook released this month forecasts that India will be needing 3,52,000 mw of power generation capacity by 2020. This is an addition of about 1,88,000 mw capacity during the next 10 years. The Integrated Energy Plan prepared by the Planning Commission released in 2006 had projected even larger generating capacity requirements of 4,25,000 mw for 8 per cent GDP growth scenario for 2021-22 and 4,88,000 mw for 9 per cent GDP scenario. Some miracle has to take place for this to happen.

Between 2000 and 2008, India’s GDP grew by 7.3 per cent whereas electricity generation grew only by 5.3 per cent resulting in a ratio of 0.7. Usually in the case of any developing economy in early stages, ratio of power sector demand growth to GDP growth is more than 1.0. This is because as the poor make the switch to commercial energy from non-commercial energy and also start consuming more commercial energy with improved standard of living, power growth exceeds GDP growth. In the case of developed countries these ratios are less than 0.8.

While we can certainly applaud our performance in improving power consumption with respect to GDP, it should also be seen that it was because of non-inclusive growth. It is this aspect of energy supply/demand which has not been studied in depth.

Our successive five year plans have consistently failed to meet the projected target for generating capacity. During the first three years of 11th plan, total actual addition has been only about 21,000 mw when the plan target was 78,700 mw. We have carried out elaborate audits to study the reasons for our failure after each plan. But we have ignored the most obvious factor of the cashflow to support investment for new generating capacity.

When the state governments are unable to raise enough revenues even to meet the minimum budget needs, where can they find capital to invest in capital intensive power sector? Many of them cannot even find money to pay for the power they buy from central power sector. However every one of them is keen to sell power free or below cost to win elections. Until there is a radical change in the thinking of our political class, it will be impossible to find the needed capital to build enough generating capacity either in public or private sector.

It is not that the government has not been trying to bring about reform in power sector. In 1998, the government started to institute energy regulatory commissions to remove power sector pricing from the hands of the politicians. Even after 12 years of working, various state electricity commissions have not been able to achieve the main objectives for which they have been set up.

Technical and commercial loss

In 2001 the government of India initiated Accelerated Power Development and Reform Programme (APDRP) to motivate the state government to reduce the much discussed Aggregate Technical and Commercial (AT&C) losses. This has resulted in a small reduction of the overall AT&C loss from 38.9 per cent in 2001-02 to 34.54 per cent in 2005-06. This is mostly because the state governments have not been keen to implement APDRP since it may affect their vote banks.

In 2003, the parliament adapted the most ambitious The Electricity Act to bring about a ‘radical’ power sector reform. Licenses for generation projects were removed. Competition was encouraged in power sector for the first time. Renewed emphasis was placed on unbundling of SEBs.

Aims and objectives of the Act are far reaching and praiseworthy. They are: access to electricity to all in five years (was not achieved), demand to be met fully by 2012 (unlikely to happen at the rate at which generation capacity is added), per capita availability to be increased to 1000 kwh by 2012 (impossible to achieve from the current level of about 800 kwh) and commercial viability of SEBs (this will remain a pipe dream).

The over arching problem of the power sector is the financial losses by SEBs. While the prime minister says the power sector losses are around Rs 40,000 crore per year, there are other published reports claiming them to be around 4 per cent of GDP. These mind-boggling losses are absorbed mostly by the SEBs. The SEBs for most part are insolvent.

Power sector can learn an important lesson from two comparable sectors — telecom and cable TV. How were these two sectors able to meet the consumer needs in a short time? This happened because both these sectors were liberalised and investors were allowed to make profit with no political interference.

The government has to completely liberalise, specially the distribution part of the power sector, and allow the private capital to invest. It is not a surprise that because of competitive politics, power sector is one of the worst performing sectors in India.

Even under the liberalised environment, the government can continue to subsidise the poor and farmers by directly paying them for the power they have consumed or some lumpsum as energy subsidy instead of supplying them unmetered power as today. In short unless we improve the financial conditions of SEBs, we will never be able to solve the power crisis.