India is structurally short of electricity. Power pricing is fundamentally disconnected, with retail tariffs significantly lower than the cost of production. Electricity losses, due to theft and illegal connections, account for more than 25% of power generated in India. Massive state electricity board bailouts have resulted in higher losses, mostly borne by public sector banks.
The government seeks to change this situation dramatically by easing the rules for power plant construction, arranging fuel supplies and reforming the way electricity is distributed and paid for. It seeks to construct a new bargain — regular electricity supplies for higher prices, with pilfering deterred by fines. State governments, long used to providing free electricity as a sop, will now have to consider the financial viability of their private and public generators and distributors.
There remain many pitfalls. Full power availability needs to consider the needs of the rural poor particularly in electricity pricing. Combating power pilferage and a tradition of politically-motivated free power will require changing social attitudes. A belief in markets, instead of deficits, needs to be fostered.
Coal is India’s short-term play for energy security, filling the gap until gas and renewables scale up. With marginal steps taken to build high-margin coal beneficiation plants (lowering ash content) and the utilisation of e-auction for high-margin coal sales, double-digit coal production growth will be hard to achieve. Coal India is too big to fail. It must be broken up into its constituent parts.
Consider Singareni Collieries, India’s second-largest coal producer. State ownership, as opposed to federal ownership, has helped it gain permissions and clearances quickly. Its local workforce has embraced mechanisation and an operational focus on growth. Coal India’s regional presence in Jharkhand, Orissa and West Bengal is hampered by state resistance to connecting railway lines and land acquisition. Far better to give states a stake in Coal India’s growth through outright ownership or equity stakes.
India’s electricity consumers are fed up of high price rises and cannot, in such middling economic circumstances, put up with continuing rises. No one doubts that coal should reflect the cost of production and pollution, with price escalation made over the coming years to shift power generation towards renewables and natural gas. But increased government royalties on production should be used to subsidise the price increase.
Unit electricity tariffs for industrial and corporate consumers are typically 30% lower than the cost of generation, excluding pilferage and political giveaways. Such tariffs should be rationalised, with firms graded according to their paying capacity. Dynamic pricing should be introduced, with industries and commercial institutions rightly facing market prices.
The reform plans seek to restructure state electricity boards (SEBs) with the right incentives. The power sector has over Rs 5 lakh crore in outstanding debt, which rises by Rs 60,000 crore annually. The previous bailout plan has failed. With low tariff increases, high pilferage rates, higher electricity purchase costs and crippling debt, SEBs are due for another bailout.
The State Electricity Distribution Responsibility Bill, mandated for adoption to enforce fiscal discipline, remains in abeyance. A comprehensive programme to address operational productivity, manpower skills, fiscal responsibility and state proclivity for election-related electricity giveaways is needed. The distribution should be opened up further to the private sector, with smart grid applications and billing systems encouraged.
Solar and off-grid power are increasingly being encouraged through fiscal incentives. The Renewable Purchase Obligation (RPO) remains key. By forcing large consumers and electricity boards to purchase renewable power, this mechanism creates a ready initial market for the renewables sector. Enforcement remains patchy. In 2013-14, not a single major state met its RPO targets. Any financial restructuring of SEBs and utilities must be conditioned on compliance with strictlydefined RPO targets. The clean energy cess, collected by Coal India, should be utilised for renewable investments.
Private investors are being encouraged to invest across the electricity value chain. Open access provision would allow major power consumers to choose among competing power companies over a common transmission and distribution grid. Power trading would lead to cheaper electricity and minimise disruption. Greater investments in transmission networks and a rationalisation of differential open access tariff structures across states would encourage this shift. With the government taking steps to address these concerns, regular 24-hour electricity may no longer be just a dream.