Power Sector Crisis in India: The interdependence between Government, Business and Society

We did the above project as part of our class assignment. Following is the transcript. Samita did a good job to finish it within 10 minutes.

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The power sector in India since independence reflected the state-centered approach to development and nation building. It was considered to be central to the agenda of industrialization and improving the living standards of the impoverished masses. The challenge of constructing and operating a huge power infrastructure, where none existed, was enormous. Government was the only entity capable of mobilizing resources for this task. As a result the power sector became dominated by vertically integrated monopolies in generation, transmission and distribution.

Huge power projects involving big public investment soon turned into nation building exercises. Nehru termed them as ‘the temples of modern India’. An unwritten social contract had developed in which state became the guarantor of provision of electricity and citizens accepted its roles unquestioningly. Power was a public good now. The Keynesian arguments for an activist role by the government were accepted.

Economic concerns such as profitability, competition, environmental constraints and governance issues such as public participation, accountability and transparency were put to back burner.

But the promises were not delivered and by 1990s the sector was beset with multiple problems including over dependence on coal, erratic and unexploited hydro-power resources, loss making State Electricity Boards, organizational problems in power sector structure spread over different states and subject to different political influences, lack of capability to finance new projects, lack of domestic equipment manufacturers and technology, high Transmission and Distribution losses and clamor for subsidies by different consumers which further added to the monetary losses.

It was in such a climate that the power generation was opened up for investment.  The primary goal was to generate power at any cost. The slogan went that ‘power at any cost is preferable to no power’. Government tried to attract investment with clauses of minimum guaranteed return, tax holidays, guaranteed payments and generous land. These initiatives reflected the emerging neoliberal agenda of privatization, deregulation, inviting foreign capital and putting environmental concerns on the back burner. But despite all the hysteria the results on ground were disappointing. Many of the projects failed to take off beyond MoUs. Others, like Enron ran into troubles over the expensive electricity generated.

Perennial problems like under recoveries, lower agricultural tariffs and high T&D losses blocked any progress. It was realized that without any comprehensive reform in Transmission and Distribution it would be tough to revitalize power sector. In such scenario Electricity Act was passed in 2003.

Its primary aim was to unbundle the SEB’s, make generating companies financially secure from defaulting SEBs, giving them freedom to sell directly to industrial consumers, allowing captive power generation and opening up access to Transmission and Distribution system.   However, political favoritism forced the government to continue providing cheap power to agriculture and domestic consumers. In the period between 2006-07 and 2008-09 the average cost of supply increased from 2.76 to 3.54 Rupees/unit but the average revenue realized increased by just 0.35 Rupees/Unit.  

 As of fiscal 2011-12 financial sector’s exposure to sector is nearly Rs 2,00,000 crore while the accumulated losses of State Electricity Boards are expected to cross Rs 1,00,000 crore. All scheduled banks have an exposure of 6.1% of their loans with a high probability of default on them. As per the Central Electricity Authority tariffs are required to be increased by 15-20% on year on basis for sustaining the sector.

Generation has been constrained by lack of fuel. Due to environmental concerns the coal mining is unable to satisfy demand from power sector. The ambitious Ultra Mega Power Projects are either behind schedule or lying idle for the want of fuel. With payment defaults, high raw material costs and environmental activism the power sector has become unviable for participants.

The power sector crisis has widespread implications for social and economic development of India. Due to this GDP has been constrained by 2% industrial sector growth is hit.  

There exists a strong correlation between availability of electricity and the level of social human development. In 2002, UN set a limit of 1000KwH per capita electricity consumption for a society to experience medium level of human development. The macroeconomic implications of a supply shock-induced energy crisis are large, because energy is the resource used to exploit all other resources.  If there is an energy crisis, industry faces closure and economic growth rate is hampered. According to a very recent Asia Development bank survey-“Losses arising from power and gas shortages held down GDP growth by 3–4 percentage points in FY2011 and FY2012”. On social front, job opportunities are lost and because of power cuts, people come out in protest against the government and destroy public and private property. This ultimately leads to declining popularity of the government.

Political and resource constraints were directly responsible for the massive blackout on 31^st July and then again on 1^st August which affected 600 million people in 21 states. Transport, industry, businesses, services, railways and essential services came to a screeching halt. Over drawl from national grid by power deficient northern states was immediately blamed. Regional Load Dispatch Centers are responsible for maintaining grid discipline and supervising optimum scheduling and delivery of electricity in their regions. The country has five RLDCs—for the northern, eastern, north-eastern, western and southern regions—and one national load dispatch centre. Two of these-Northern and North Eastern-collapsed in this crisis.

Political pressure ensures that no disciplinary action is taken against errant states. As the blame game continues it is the society and the business who suffer. Political considerations allow high thefts and high agricultural subsidies. The lax attitude of political class is shocking given the fact that they are elected representatives who are supposed to provide basics of life to masses.

What is apparent that the society and business need power to prosper, which cannot happen easily without getting the financial and technical resources of the private sector. This government has to provide a stable and secure business and regulatory environment for this to happen. The needs and objectives of the business, government and society cannot be met without bringing about a convergence in their agendas. And convincing the political class about the utility of such a convergence. Until such a realization happens India will continue to grope about in dark alleys. '