India's electricity reforms (not going too well)
ITS organisers are calling it a victory for people power. They even invoke the name of Mahatma Gandhi, icon of India's independence struggle. For economic reformers, however, it is a depressing defeat: by making a huge fuss and refusing to pay their bills in full, Delhi's middle class last month persuaded the local government to withdraw an increase—of about 10%—in the residential electricity tariff.
The protesters alleged they were being robbed by rigged meters and forced to pay exorbitant first-world prices for an unimproved, erratic third-world service. They had a point. But if not even well-off citizens in the capital will pay an economic rate for their power, what hope is there for the rest of the country, where politicians habitually offer free power to farmers in the hope of winning their votes? And while electricity boards continue to rack up huge losses, what chance is there of finding the money so desperately needed for investment in new generating equipment? More fundamentally, where will the fuel come from?
Power cuts are a way of life in India, at least in parts of the country lucky enough to regard them as an interruption rather than the norm. There is a worsening shortage. Over the past decade, electricity generation has grown at a compound annual rate of 5.5%, but demand has grown even faster. Peak demand exceeded supply by 11.3% in 1998 and by 12.1% in the last financial year (ending this March).
That, moreover, is to define demand in the narrowest of senses. The countryside, where more than two-thirds of India's people live, accounts for no more than 13% of electricity consumption. India's 1.1 billion people use on average just 526 units (kilowatt-hours) of electricity a year, compared with 1,247 units in China. Where electricity is available it is often only for a couple of hours a day, unusable for industry and of such poor quality that power surges routinely wreck equipment.
Yet India wants electricity to reach every village by 2008—demanding the electrification of 110,000 villages—and every household by 2012. At present, 56% of India's households, and just 44% of those in rural areas, have connections to the grid. Meanwhile, it is hoped that India's economy, already growing at an average of more than 6% for the past 15 years, will expand even faster, meaning more electricity-intensive manufacturing and air-conditioned shopping malls. The government talks of adding 100,000 megawatts (MW) of new generating capacity over the next ten years—a virtual doubling.
Indian industry, long used to the failings of the national grid, has survived by building its own “captive” generating plants. Azim Premji, chairman of Wipro, one of India's information-technology stars, senses that the electricity shortage is “coming to enough of a crisis now that we have to fix it, like we fixed telecoms.”
T.L. Sankar, an energy expert at the Administrative Staff College of India in Hyderabad, likewise draws succour from past successes in other fields, such as the near-doubling of food production in India during the “green revolution” of the late 1960s and 1970s. Something similar, he argues, is needed now.
“Crisis” may be the wrong word for such a long-standing shortage, with its origins in every link in the electricity supply-chain, from fuel through generation, transmission and distribution. But crisis is how it has sometimes felt during the last few months, because of a combination of factors. Manmohan Singh, the prime minister, has often spoken of the seriousness of the needs, and has set up a committee to tackle them. This summer, too, the oil price has soared and worries have mounted about a shortage of coal, which fuels about 60% of India's electricity, compared with about 26% from hydro-electricity and 11% from oil and gas.
A.P.J. Abdul Kalam, India's president and a much-respected scientist in a largely ceremonial post, has put the electricity shortage into the broader context of insufficient supplies of energy. In his speech on the eve of Independence Day on August 15th he called for efforts to make “energy independence” “our nation's first and highest priority”.
Always the worst season for power-cuts—air-conditioning provides respite from the sweltering heat—this summer has been particularly bad in some places, notably Maharashtra, India's wealthiest and second most populous state. Meanwhile, the row in Delhi has highlighted the mess that is India's electricity distribution.
Lost in transmission
Delhi had been held up as a model of successful power-sector reform. An Electricity Act in 2003 had achieved little, perhaps because it was so ambitious. Part of the difficulty lies in India's federal system, under which electricity is a “concurrent” subject, where both the central government and the 29 states have a role.
Except in a few cities that remained exempt, distribution was monopolised by state electricity boards (SEBs). The act called for the “unbundling” of generation from transmission and distribution, which was to be opened to private competition. Independent regulators would adjudicate tariffs, and the cross-subsidies that penalise industry to the benefit of the domestic consumer and farmer were to be removed. At present less than 42% of electricity is sold to industrial and commercial users, but that yields more than 70% of the SEBs' annual revenues.
Only two states—Orissa, in the poor east, and Delhi—have privatised distribution. The Delhi government claims that privatisation has brought big benefits. The two private firms involved, affiliates of the big national conglomerates, Reliance and Tata, succeeded in cutting losses to theft from about 50% of supply to about 40%—the national average. The government claims electricity was on its way to being “self-sustaining”.
This picture of healthy progress, however, does not match popular perceptions. Reliance, in particular, is accused of having behaved badly. Much suspicion has centred on new digital meters. Reliance denies they run too fast, arguing they are more sensitive than the old mechanical ones. So electricity bills would have risen sharply anyway.
Degenerating
The timing of the furore in Delhi is unfortunate. Electricity reforms have stalled, and may slip into reverse. Communist parties, on whose votes the government led by Mr Singh's Congress Party relies for a parliamentary majority, want to water down the 2003 Electricity Act. Jealously protective of the interests of public-sector workers, they oppose unbundling and privatisation, and support cross-subsidies.
Already, Congress-led state governments have been among the worst offenders in using electricity to buy votes and popularity. Some of Maharashtra's troubles, for example, can be traced to elections held last year, when the government offered farmers free power for irrigation pumps. Maharashtra was forced to remove the sop this June, but other Congress-led governments, most recently in Punjab, have offered the same handout.
One consequence of failing to fix the SEBs is fiscal. Their average tariff has risen by 20% since 2000, compared with a rise in the cost of their supplies of just 4%. But still, tariffs, on average, are just three-quarters of supply costs. Some estimates suggest that the SEBs lost 10 trillion rupees ($215 billion) over the past decade. This has damaged their ability to add distribution capacity, and even to carry out basic maintenance. The Planning Commission has pointed out that more than 90% of the investment in the power sector goes into generation and transmission rather than distribution, akin, it argues, “to building a superstructure without a foundation”. Still, the money needed for new generating capacity is huge—estimates range between $10 billion and $15 billion a year.
Efforts to attract private investment, including from abroad, into power generation have been largely unsuccessful. The most spectacular failure was the impressively modern 2,200MW Dabhol power project in Maharashtra, which started operation in 1999, only to shut in 2001 after a row between its promoter, Enron, a collapsed American energy giant, and the SEB. Years of legal wrangling have ensued, with damaging effects all round. Many Indian observers drew the lesson that privatisation and foreign investment in power did not work and meant high prices. Foreign firms wondered whether power-purchase commitments signed by bankrupt SEBs were worth anything. Only now is the project restarting, having, in effect, been nationalised. It will be at least a year before it is producing electricity.
Despite Dabhol and a huge gas-fired plant that Reliance is building in Uttar Pradesh, a northern state, coal is expected to remain India's “mainstay” fuel for decades to come. Its proven reserves, of 92.4 billion tonnes, are just over 10% of the global total. But it is of low quality, with a high ash content and low calorific value. It is also, by international standards, expensive (perhaps twice the cost of South African coal), and production is not growing fast enough. Rajiv Sharma, a senior official in the Ministry of Coal, blames this on underinvestment in the 1990s, when coal became a “condemned fuel”, because of its polluting effects and contribution to global warming.
Coal India, the state's near-monopoly, was unprepared when demand took off in 2003. So India has been importing more coal—nearly 11m tonnes last year. Vipul Tuli, of McKinsey's, a consultancy, predicts a “massive” shortage of 100m tonnes by 2011-12. Domestic coal usage is constrained and made more costly by an inadequate rail network. Imports are hampered by a lack of capacity at the ports.
Recent months have seen a scramble by India to secure fuel supplies. There is talk of pipelines to bring gas from countries such as Turkmenistan, Bangladesh, Myanmar and, most controversially, Iran. Meanwhile ONGC, a state-owned oil exploration and production company, has teamed up with Lakshmi Mittal, a steel tycoon, to bid for foreign oil assets.
India's nuclear industry, which at present supplies about 2% of electricity, received a big boost in July, when Mr Singh went to Washington, DC, and secured an American offer of help for it. Despite having nuclear weapons, which it tested in 1998, India has never signed the international non-proliferation treaty. So this was a diplomatic coup. Mr Singh has suggested India could have 30,000 to 40,000MW of nuclear capacity for the next 20-30 years. But that optimistic figure is still a fraction of requirements.
There may be more potential in hydro-electricity, which already produces a quarter of India's needs, in renewable forms of energy, and in moderating demand by enhancing energy-efficiency. India has an estimated 120,000MW of untapped hydro-electric potential. Big dams are controversial, but much of this could be realised through small, run-of-the-river projects. It is hoped to increase hydro's share in production to 40%. The “most significant” strategic goal set by Mr Kalam in his Independence Day speech, however, was to increase the share of renewable energy in generation from around 5% now to 20-25%. Wind power already accounts for about 2%. Solar power is negligible now, partly because of the high capital cost of solar plants, but the president was optimistic that new technology would soon bring the cost down. He estimated, moreover, that 30m hectares of wasteland in India are available for the cultivation of “bio-fuels”, such as Jatropha, an oil-producing shrub.
An obsession with “energy security” may not be wise in a world where, in Mr Singh's words, borders are becoming less relevant. But it must make sense to look at options other than coal and imported hydrocarbons. The impediments to meeting India's needs through increases in thermal-power generation seem likely to dog the country's progress for years. They lie not just in the present shortages of fuel and capacity, but in the structure of an industry too long governed by political rather than economic concerns. They are not insuperable. But they are so complex and daunting that one leading industrialist privately argues that the only solution is for electricity to be declared a national emergency. That way, the general recognition of the scale of the challenge might actually turn into action.
http://economist.com/research/articlesBySubject/displayStory.cfm?story_id=4423894&subjectid=348879
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