Power problems

Incomplete policy reform limits benefits from new projects

Shortages, outages, load shedding, poor-quality supply and transmission and distribution (T&D) losses continue to haunt India’s power sector. Despite these problems, India has now acquired the capacity and capability to add at least 15,000 Mw a year, having demonstrated the ability to add 12,000 Mw a year in the past five years. This still compares poorly with China’s ability to add 100,000 Mw every year. Clearly, the challenge of adding capacity remains a major problem for India’s power sector. Equally important is the challenge of making investment in power pay for itself and ensuring delivery of good- quality power for all consumers. Recent trends do provide some basis for optimism, though the past five years have been hugely disappointing as far as getting a forward-looking power policy in place is concerned. The sharp rise in private sector participation in generation, thanks to the landmark Electricity Act, 2003, has helped. Its contribution to incremental capacity addition during the 11th plan has been approximately 40 per cent and is expected to increase even further to 50 per cent during the 12th plan. Moreover, Bharat Heavy Electricals Limited, still the largest domestic supplier of power equipment, is expected to boost production from 15,000 Mw to 20,000 Mw by the end of FY12. Domestic production of power equipment will be augmented as output from a spate of joint ventures between Indian and foreign firms (L&T-Mitsubishi, BGR-Hitachi and Bharat Forge-Alstom) comes on stream within a year. These developments have engendered a well-founded optimism that India’s power deficit will decline to 3.8 per cent by 2013.

These successes, however noteworthy, should not be allowed to camouflage the serious structural problems that afflict the sector as a whole, ranging from the problems of land acquisition to the establishment of secure fuel linkages. Coal India’s inability to meet commitments has been compounded by regulations that restrict access to coal reserves in “no-go” areas and the belated realisation that many private sector players allotted mining rights do not have the required experience. While larger players in the power space have been aggressively acquiring assets abroad, these are second-best solutions, given the high transaction costs involved. Distribution continues to be the sector’s biggest bugbear! The stubborn resistance of state electricity boards (SEBs) to liberalise T&D segments has precluded any secondary reform. As a result, the collective losses of SEBs during FY11 were of the order of Rs 78,000 crore (approximately 1 per cent of GDP). An analysis of these losses identifies the following reasons: unacceptably high aggregate technical and commercial losses (28 per cent against a target of 15 per cent), inability to raise tariffs and cross-subsidies that are not compensated by the respective state governments. The upsurge in generation capacity risks being seriously undermined by bottlenecks in distribution. While the generation segment will continue to be the power sector’s star performer, especially as both private- and public-sector players internalise the experience gained from project execution in the 11th plan, policy reform in the distribution segment, including getting all consumers to pay, will remain a major challenge, limiting not just future investment but also the ability to derive the full benefits of existing investment in power.