Ajay Shankar: The odd conundrum of India's power sector

When electricity has been available, there have been no buyers distribution companies simply haven?t the money to buy more power

India’s power sector today presents a truly paradoxical situation. The country experienced a paradigm shift when, in 2011-12, it added new capacity of over 20,000 Mw. This capacity addition is of the same order as India used to achieve in a whole Plan period over the last few Five-Year Plans. Over the coming months, this capacity would stabilise and be ready for commercial operation.

This should be cause for celebration, as one should expect a substantial reduction in power shortages and easing of the power supply position. A major constraint for small and medium enterprises would be mitigated. Use of captive diesel generation should fall sharply.

Unfortunately, those who follow the power sector do not expect this to happen, and regrettably, they are right.

In the same year 2011-12, when record capacity addition was taking place, the largest power company — the National Thermal Power Corporation of India — reported a decline in its plant load factor, or PLF, from 92 per cent to 85 per cent. While there have been difficulties with coal supply, the real reason for the decline in PLF has been lack of dispatch.

This means that at the margin, when electricity has been available, there have been no buyers. As India has a national grid where all the states are interconnected, this means that there have been usually no buyers across the entire country. There have been no buyers because the distribution companies which supply electricity to consumers cannot afford to buy more electricity — because they do not earn enough to pay for what they have been buying.

In 2009-10, for the country as a whole, they took Rs 30,000 crore as subsidy from state governments — and still had losses of Rs 27,000 crore. At their tariff levels they lose money at the margin, so they need to restrict purchase and supply. This was dramatically highlighted in the front-page stories last week on power cuts in the sweltering heat in areas around Delhi even as power was actually available on the grid — and that too at prices which were not too high.

Here is the real irony. In electricity the distribution business is regulated to take care of the consumer and to protect him; the supply of electricity being a natural monopoly. From state regulation, India went in for independent Regulatory Commissions with great hopes as a part of power sector reforms.

But the dominant populist mindset nurtured over a generation whose natural response is that prices/user charges must not be raised — and that accounting, linguistic ingenuity, or diktats can somehow generate a “free lunch” (or free electricity, in this case) — has led to a situation in which the poor consumer cannot get the electricity that is available, and that too at fairly reasonable rates, but must suffer power cuts.

Instead, the consumer is forced to spend far more for back-up personal arrangements through captive highly polluting and noisy diesel generation — or, more likely, to suffer the sweltering heat. India’s small and medium enterprises, the natural engines of growth and employment generation, are unthinkingly prevented from achieving their full potential and put to great competitive disadvantage. In the guise of protection, the consumer is actually denied choice.

The writer is Member-Secretary of the National Manufacturing Competitiveness Council and a former secretary of the Department of Industrial Products and Promotion. These views are personal